Role of the CFO in Quality Improvement
Source: Bank Accounting & Finance – June/July 2010
By: Ron Wince
Click here to download PDF
CFOs should not only evaluate but also lead and participate in business process improvement.
Strong senior leadership is the single biggest determinant of whether a quality improvement deployment is successful or not. For most of the past few decades, that leadership has come in the form of having a chief executive officer (CEO), chief operating officer (COO) or senior vice president (SVP) of operations leading the charge. The finance department was rarely involved at all, let alone positioned to lead the effort.
The first shift in that situation began when companies started calling on financial staff to advise teams on how to confirm or “certify” project results. But still, executive-level financial leaders were seldom involved because improvement was seen as an operational issue. They were, at best, silent partners in the effort.
Now, that perspective is changing. Having chief financial officers (CFOs) front and center in leading quality efforts is becoming more common. As a result, the people sometimes characterized as bean counters have expanded their role and contribute directly to increase effectiveness and efficiency.
CFOs Bring Broad Business Perspective
For years, quality improvement projects were chosen largely on the basis of perceived pain points in operations: a lockbox service was needed to reduce cycle time, a financial advising function was generating a lot of customer complaints. Those factors are still important, but now the choice of specific projects is often based on a broader financial analysis of opportunities.
That change has brought about a shift in how the CFO’s role is viewed and in where and how quality improvement is being deployed.
A CFO has the kind of perspective and information that lets a leadership team decide whether an operational issue is a priority or if, say, an investment in an information technology (IT) project would have a bigger impact because it would drive growth opportunities. That kind of broad view of the business as a whole is one reason CFOs should either lead an improvement deployment or be part of the leadership team that does.
CFO expertise is also needed to help an organization deal with the fact that sometimes a change that improves effectiveness or efficiency can have a negative impact in the traditional accounting sense. This is most obvious in manufacturing, where reducing inventory is critical to establishing fast, nimble, low-cost processes, but doing so can make the balance sheet look worse.
The same phenomenon can affect banks in terms of cash management and risk. For example, an explicit goal of some quality improvement methods is to remove unnecessary delays from processes, so process speed improves without harming quality. If you work for a bank that likes to accumulate cash so you can loan it to someone overnight, having efficient processes may mean that you no longer need to keep cash on hand, and, therefore, may lose out on investment opportunities.
CFOs have the responsibility to foresee the implications of process improvements and other gains on financial statements—for better or worse. They must then work with the leadership team to develop a plan for preparing the marketplace for a shift in a key metric that may look bad in the short term but better in the long term.
These factors explain why CFOs can be seen more often now out in front of a quality improvement deployment, determining the best hunting ground for potential improvement projects and having a big say in which projects get launched.
CFOs Improve Measurement
Another reason for bringing CFOs into the forefront is the discipline they can bring to answering one of the most contentious issues surrounding a quality improvement effort: who gets credit for what.
Modern quality improvement efforts have been around for three decades in this country. Since day one, everyone involved has been squabbling over how to quantify and report benefits: Just how much cost reduction can be traced to one particular project? Over what time frame do you count results: One month? Two? Six months? Longer? If a project done in one department generates benefits for a different department, how can you allocate the credit so the department that made the improvement isn’t penalized? These issues get even more contentious if bonuses or raises are at stake.
Questions like these reveal the need for a standard disciplined, structured approach to measure and report project benefits across the entire company. A CFO is in a good position to help establish corporate-wide guidelines that are fair to all. Also, the effort CFOs have already put into creating business intelligence systems can now pay off by providing the data needed to establish baseline performance and feed into project reporting systems.
At one automotive company, for example, it was the CFO who established a simple spreadsheet that tracked results and determined that gains measured 30 days and 90 days out would be credited to projects. The process improvement group didn’t have the authority to set up those systems or set the fiscal standards; it required someone with the CFO’s authority and responsibility to do that.
That spreadsheet and the 30/90 standards were used for all projects, which greatly simplified results tracking. In addition, having established definitions used for all projects made it easier for leadership to compare results from different areas.
CFOs Must Embrace Leadership
A CFO who becomes actively involved in leading a quality improvement deployment has to be aware that there’s more to the picture than simply offering financial advice or helping to set up standards and spreadsheets. He or she must be prepared to embrace all the responsibilities associated with leading an important strategic investment for their company:
- Being a strong communicator. No matter what form of quality improvement your company uses, your employees (and you) are going to be required to work and think differently, to adopt new mind-sets around using data and never being satisfied with the status quo. All leaders involved in the effort should be consistent in communicating the need for change, promoting results and reinforcing success at every opportunity.
- Balancing the drivers of value against the drivers of cost. Over the past year, many companies have cut staff in an effort to control cost. But the result has been such poor customer service that they’ve lost their sources of revenue. In the same vein, focusing improvement efforts only on cost reduction could actually do more harm than good if customer relationships are put at risk. Your responsibility as a leader is to make sure your company finds a good balance and that the application of improvement methods in your company will both add value and reduce costs.
- Establishing a robust pipeline of potential projects and portfolio of active projects. Companies experienced in quality improvement know the amount of return they see from their investment is determined by the effectiveness of their project selection process. They know that part of the secret to high returns is having a balance of different types of projects: quick projects to implement obvious fixes (often labeled “just-doit” projects); tactical projects that follow a formal process improvement methodology and use data to link causes and effects; research and development projects that require innovation techniques; projects that address term strategic opportunities.
As a leader of a quality deployment, you will be expected to help establish systems that will keep the idea pipeline full. You will also need to be active in helping to screen the ideas and select those with the best potential, as well as develop a portfolio that represents the right mix of project types for your company.
Quality Improvement for the Finance Function
For most of the past 30 years, it has been rare to see CFOs participate in improvement teams. Now companies are realizing that leading quality efforts is one thing but actively participating in projects is another. Direct experience can make an executive even better prepared to lead.
What can you do to gain direct experience? At a minimum, join or replace other executives in sponsoring projects. As a project sponsor, you will be responsible for determining the project charter (its scope, objectives and resources); allocating resources and budgets; and regularly monitoring progress.
That term “regularly” in the previous sentence is key: In the early years of quality improvement, sponsors thought they could attend a kickoff meeting at the beginning of a project and then do nothing until the team reported results. Experience has proven that that model doesn’t work. To make sure that projects get done on time and within budget—and generate the types of outcome the business requires—the project sponsor must stay in contact with the project leader, offer guidance that will keep the project focused on the business priorities and help the project leader overcome roadblocks.
Equally important, a sponsor must be prepared to cancel a project if it becomes clear that the charter or method is fatally fl awed. More often than you might think, the initial data that a team collects will show that the problem is either not as serious as thought or that will it take two or three times as much time and resources to accomplish the goal. Under such circumstances, the sponsor has a responsibility to the business to decide whether the project should continue as is; continue with modifications (to its charter, team membership, etc.); or be canceled.
If you’re willing, you may also want to participate in a project in your own department or offices. This isn’t quite the same thing as the UNDERCOVER BOSS TV show, but the principle is the same: Executives can gain a lot of insight into how to make their companies work better if they have direct experience with the front line—in this case, what it’s like to participate on an improvement project.
Changing Perspective from Auditor to Partner CFOs, and financial departments in general, have a reputation for wanting to move fast and for thinking that because they have the data, they have all the answers to where improvement should be launched. Especially in our current economic downturn, the pressure to produce results is greater than ever. They want to go fix things quickly: “We already know where the money is, where the productivity is weak. Let’s get started there.”
But any leader who proceeds without engaging the front line can create a situation where results suffer because no one directly involved has any ownership over the improvement project or the results. CFOs should give others time to digest data and insights that may seem obvious.
Another issue that arises is CFOs who see themselves as a cop or auditor instead of value-added partner. Playing the auditor’s role will alienate people trying to make the improvements. CFOs can be most effective—and increase the chance of seeing good results—if they act as mentors and coaches to project sponsors and project leaders beforehand. They need to become attuned to building competency in fiscal matters throughout the company.
Quality Improvement Creates Value
While CFOs bring value to quality improvement efforts, they also gain value. Being exposed to process improvement efforts makes CFOs more aware that fundamentally it is processes that feed into both sides of the net gains equation: How well your processes work determines product and service quality, which drives customer satisfaction and revenue. It also determines the amount of waste and inefficiency, which is a huge determinant of costs. Coming to this awareness is one incentive for a CFO to champion quality improvement.
For example, Randolph-Brooks Federal Credit Union started applying lean principles (used to remove process waste) just over two years ago. In its early projects, the credit union reduced the rate of call transfers from 50 percent to 20 percent and reduced inbound calls by 28 percent by eliminating issues that led customers to call.
“The savings over the last two and a half years of applying lean principles is approximately $1.6 million,” reported CEO Randy Smith. “We’ve saved some dollars and seen them drop right to our bottom line.” Jimmy Junkin, the credit union’s SVP/finance, has come to see the competitive advantage that quality improvement efforts afford because he’s been keeping an eye on the operating expense ratio. “Most credit unions saw an increase in that ratio and a decrease in earnings in 2009 for a variety of causes, some of which arose over the last two years. Although our ratio increased due to some of these same causes, it was partly offset by the results we achieved using lean principles. For example, our 2009 ratio increased less than that of our credit union peer group, helping us to achieve the highest net income in our history,” said Junkin.
Kathleen Turco, a CFO with the General Services Administration (GSA), has also become a supporter of improvement efforts. She recently wrote on her blog, “I see [Lean Six Sigma] as a tool that brings together the expertise of our knowledgeable staff and helps everyone to be involved with driving changes.” She added that “LSS provides [our] staff with a platform to challenge the status quo and empowers them to drive and take ownership of changes. … The worksheet adjustment team exceeded my expectations and identified several significant actions we could take to ensure adjustments were made earlier in the workflow. Most importantly, we achieved our overall goal— retaining our GSA FY 2009 clean opinion.”
Silent Partners No Longer
Today, every segment of the financial services sector is faced with pressing challenges to improve operations, reduce costs and avoid overspending on technology, while effectively delivering new and better services. Yet at the same time, we are in an “age of turbulence,” as Alan Greenspan calls it. Markets, operations and business priorities can shift without warning.
Because of this chaotic business environment, it is essential that companies develop the ability to make data-driven business decisions more quickly. That’s why it’s important that CFOs become leaders of improvement projects, working with other executives to shape deployments.
All contents © 2010 Bank Accounting & Finance. All Rights Reserved.
Related Links
Guidon Business Process Management Services
Financial Services Industry Solutions
Contact Guidon
Contact us or call us at 1.866.986.4414 or 480.986.4414 (for international callers) for more information regarding how a Guidon solution can help your organization.
RSS
Facebook
LinkedIn
Twitter