Stepping Into the Unknown
Major change is afoot. With a political outsider set to enter the White House on 20th January and negotiations around the UK’s Brexit from the EU just around the corner, the stage is set for a new wave of policies and macroeconomic conditions that will define the way we do business.
The difficulty is that few people, if any, truly know what this change will bring. For instance, companies will be watching monetary and fiscal policies very closely under a new American government to see how they affect the US dollar and America’s trade deficit.
European businesses will also wonder what to expect with regards to currency values as the strength of the US dollar will have a significant impact on their trading strategies.
Some companies will need to undergo a complete strategic shift in this environment, but planning for a single version of the future is no longer effective. Change is the new norm, and businesses need to adapt continuously if they are to overcome shifting risks.
Change is the new norm, and businesses need to adapt continuously if they are to overcome shifting risks.
This is also the key to jumping on opportunity when it presents itself. After all, uncertainty breeds both challenges and rewards.
The first step in modernizing the business’ strategic planning processes is to decouple them from budgeting.
Finance: The new ‘champion’ for applied analytics
Traditional yearly planning is not designed to keep pace with today’s markets – one simply needs to look back at the events of 2016 for evidence of how quickly and dramatically outlooks can shift. It therefore follows that strategizing should be treated as a separate process from budgeting.
Companies also need to understand the distinction between a strategy and an ambition. The modern business needs to clearly define an approach to tackling its specific challenges, and simply encouraging employees to do so is not enough.
Around the time he released his seminal work, Good Strategy/Bad Strategy, UCLA Management Professor Richard Rumelt pointed out that a company cannot assess the quality of a strategy without first defining the obstacles it must overcome. Otherwise it has no basis upon which to improve a good approach or reject a poor one.
In Rumelt’s own words: “Like a quarterback whose only advice to his teammates is ‘let’s win,’ bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values.”
Companies therefore need a robust decision-making framework that both clarifies and constrains individual actions within the organization. Like the code for a computer program, this should act as a prescriptive set of rules that shapes what decisions should and should not be made when certain questions arise.
This “program” can then be applied across the company to ensure each line of business moves towards common goals while making the best possible decisions along the way.
The programming analogy does not end here. The approach described above is not just about making the right decision at the right time; it is about designing a company for the future. In other words, it is about designing a framework that evolves over time so that decisions can be made in an increasingly systematic way while still respecting the business’ guiding principles.
This requires a great deal of diagnosis and, like a computer program, it needs a designer to oversee and curate its operations. As the company’s data impresario who sits at the focal point of all LOB operations, it is the CFO who will step into this role.
As the company’s data impresario who sits at the focal point of all LOB operations, it is the CFO who will step into this role.
Finance leaders have already played a more strategic part with regards to business planning and modelling in recent years. The next phase for them will be to start using the data at their disposal to “design” the guiding principles that will shape their organization’s future actions.
The aim for any growth-oriented business is to discover and capitalize on opportunity. As such, a planning approach that is limited to traditional measurement can only take them so far.
Enrico Fermi, largely credited with creating the first atomic bomb, said that if an experiment confirms your hypothesis you’ve simply made a measurement, but when the data doesn’t match your assumptions you’ve made a genuine discovery.
If an experiment confirms your hypothesis you’ve simply made a measurement, but when the data doesn’t match your assumptions you’ve made a genuine
While Fermi’s discoveries have had a mixed impact on humanity to say the least, the point he makes is a powerful one. CFOs should help design the business in such a way that its people can make discoveries and jump on opportunity rather than just looking to confirm their preconceptions about the future.
This culture of discovery does not sit with the finance department alone, as each LOB will benefit immensely from the ability to uncover shortcomings and opportunities in their plans, but it will be finance leaders who spearhead this shift and help create a more responsive, change-ready business.