Leadership

What Holds CFOs Back from Operational Roles?

Even at software and service companies, finance chiefs have a potentially big operational role to play. So why don’t they play it?
David McCannNovember 27, 2012

As a longtime partner with two CFO services providers, first Tatum and now the recently launched SCA Group, Larry Litowitz has had a bird’s-eye view of many different companies, all with different issues requiring different solutions. But there is one approach that yields great value, time and time again: getting deeply immersed in the client’s operations.

Operationally minded finance chiefs are almost surely most prevalent at manufacturing companies, and Litowitz has a background in that sector. But he’s also acted as CFO at a private-equity firm, where all the portfolio-company CFOs reported to him; he’s run finance for a number of software companies; and he spent 16 years in public accounting, a service industry. And he says operational savvy is equally important for CFOs at all kinds of companies.

The 7 Habits of Highly Effective CFOs

The 7 Habits of Highly Effective CFOs

Download our whitepaper to discover the technical and behavioral skills needed to lead your business forward.

“Operations is the key to everything,” says Litowitz, currently representing SCA as the finance chief for SECNAP Network Security, a provider of secure Internet services. “That orientation is found most at manufacturers, but it should be at every company.”

The reason it’s found most at manufacturers, says Litowitz, is that “it’s easy to see someone bending a bar or sewing a garment” and thereby perceive inefficiencies. “It’s more difficult to understand what someone is doing when pressing keys on a keyboard,” as in software programming.

But like producing, say, a new kind of blender  for which a designer creates initial specs, an artist draws the concept, engineers visualize how to make the blender to the specs, and manufacturing builds prototypes, cut molds, mixes dyes, and tests rigorously for consistency  developing software involves particular activities.

Say you’re creating software that will tell diners when their table is ready. The developer first must understand the process through which diners wind up at a table: they ask a receptionist for a table, the receptionist puts them on a list and crosses other people’s names off the list as they go to dine, and an employee in the back informs the hostess as tables become free. “Before programmers can begin to code, they have to understand that flow of information,” Litowitz says. “Then they produce specs for every piece of the flow, which is no different from creating specs for bending metal to make parts for a blender. Developing software is a set of activities, just like any other activities.”

Litowitz once ran finance for a maker of educational software. New releases tended to have too many bugs. He led an effort to find out why, which discovered that putting too many features into a new release often meant they couldn’t all be satisfactorily tested. So the company decided to concentrate not on the number of new features, but on a release date. Each feature was thoroughly tested before being included in the software. If 15 new features were planned but only 8 were fully tested by the release date, the other 7 were held for the later release.

“We changed the whole thinking of how to go about it,” says Litowitz. “And that led us into prioritization: What’s the most important thing we’re doing with this program? Fixing the bugs we had before, or putting in a new feature? For example, a particular bug may affect only 1 customer, while 300 others really need the new feature. So we’d rank each factor.”

But how does a CFO influence operations at a service company? “It’s really no different. The work is a set of activities,” Litowitz insists.

For example, for a financial audit, an accounting firm rigorously analyzes each section of the balance sheet and income statement to determine the audit team’s work-flow priorities. Then it’s determined how much time each portion of the work will take to complete. Tallying the time requirements allows the firm to create an estimate of the client’s audit costs. During the work, time records are kept to compare against the estimate in order to bill for extra work, if warranted, and learn how to improve the audit the following year.

“All these activities can be analyzed, controlled, and measured against a predetermined standard,” says Litowitz. And just as on a manufacturing floor, efficiency generates profit, justifying the CFO’s involvement.

A few years back, at a manufacturing company called Southern Metals, Litowitz got involved in a very visible way. Arriving at the company, he saw right away from the financials that it was costing the company more to make its window shutters and roofing products than it was selling them for. So he went to have a look at the factory floor.

“I was walking around the floor, which was about 50,000 square feet of huge brake presses and bending machines and fabrication machines,” Litowitz recalls. “There was a lot of noise. Everybody was very busy doing things, and stuff was constantly coming in one end of the floor and going out the other. I said to myself, there’s got to be a madness here that makes sense.”

And right then he got the idea to move his desk from his office to the middle of the factory floor. “They realized I was serious: the move was immediate and visible, and people responded to that,” he says. “And I went through each manufacturing process to see what was happening.”

A key problem for the company was a high return rate for some products. For example, part of the process for making one product involved cutting 20 foot bars into smaller pieces and punching regularly spaced holes in them. But when the bar was down to the last piece, it tended to move slightly as the hole puncher tried to do its work. Lots of pieces were created with holes that were off by more than the 1/16th inch of tolerance called for in the engineering specs. “You could be an inch and a half off, and no one had realized that or tested it,” Litowitz says.

The simple remedy was creating a jig: a template for metal products similar to a stencil for painting on a wall. In order to make a hole in a bar, it was necessary to punch through a corresponding hole in the jig. The number of returns dropped immediately and dramatically.

“Basically, there was no quality-assurance process,” Litowitz says. “Being on the floor, I saw immediately that the work wasn’t being checked.”