By Dada Adefolami
Added value is equivalent to the increase in value that a business creates by undertaking the production process. It is quite easy to think of some examples of how a production process can add value.
Adding value can be the difference between the price of the finished product/service and the cost of the inputs involved in making it.
The Theory of business, it’s a way to think about creating value and capturing value. There is a fundamental duality where creating value is an inherently cooperative process, capturing value is inherently competitive. To create value, people cannot act in isolation. They have to recognize their interdependence. To create value, a business needs to align itself with customers, suppliers, employees and many others. That is the way to develop new markets and expand existing ones.
In business, the difference between the sale price and the production cost of a product is the unit profit. In economics, the sum of the unit profit, the unit depreciation cost, and the unit labor cost is the unit value added.
The classic S, ’model, (strategy, structure, systems, skills, style, shared values and staff), used to analyze the environment and investigate if the company is achieving its intended objectives.
We can reduce these to five by incorporating ‘shared values’ into ‘style’, and ‘staff’ into ‘skills’, in order to simplify the model and to highlight the interdependencies of these elements. The five are defined as follows:
1. Strategy – the direction of finance and how it will add value in a competitive way
2. Structure – the division of responsibilities and reporting lines, and their complexity
3. Systems – the financial and potentially strategic planning and reporting systems and processes, both IT and non-IT
4. Skills – technical, commercial, strategic, communication, advisory, influencing and other interpersonal skills
5. Style – the behaviour, mindsets, beliefs and underlying values of staff.
Looking at each of these in more detail, we can see some of the typical shifts that you could consider when planning the modernization of your finance function.Illustrate these shifts using the ‘from-to’ convention.
Strategy
1. From transaction and reporting focus >To focus on improving performance
2. From numbers, with some description >To mainly graphs, pictures, interpretation
3. From existing performance taken as read >To creative challenge to highlight options to improve
4. From one big report a month >To monthly reporting plus many one-off reports
There might be other elements such as whether to have all services InHouse or to outsource some; how to brand the department; and how to define its role in relation to the business’s strategy regarding acquisitions, alliances, divestment, restructuring and turnaround. It may also be helpful to benchmark your new strategy against other leading companies.
Structure
1. From many levels, with four or five staff at each level > To fewer levels, with at least six reports at each
2. From tasks are all ongoing >To 50% ongoing tasks and 50% project work
3. From fixed job descriptions >To fluid roles with periodic rotations of responsibilities
4. From efficiency/accuracy-based measures >To balanced scorecard, including customer value
Change to structure is often one of the biggest hurdles to managing strategic change in the finance function, as staff in finance are often less flexible in mindset so are likely to be uncomfortable with significant change. But this nettle may need to be grasped.
Systems
1. From financial and reporting systems >To also strategic planning/control
2. From based purely on accounting profit >To also produce data on economic value added
3. From almost all outputs numerical >To automatically producing graphs, charts etc
4. From ‘dumb systems’ >To intelligent systems that automatically suggest issues
5. From requiring a lot of training familiarity >To user-friendly
6. From overly complex >To not overly complex yet does the job well
This may require some close work with the IT department.
Skills
1. From analytically orientated >To a balance of analytical, interpretative and creative
2. From historically orientated >To also able to look forward strategically
3. From weaker in helping do commercial deals >To enthused and capable of getting involved commercially
4. From scorekeeping >To decision support and business cases
Training in both hard and soft skills can close most gaps but there is often a need to recruit new people with the desired skills and style, as well as managing attrition.
Style
1. From senior meetings set on ‘soak-up’ >To attendees eager to contribute and even lead thinking
2. From only comfortable with financials >To comfortable also with discussions on broader business issues
3. From engages only with the end results >To keen to drill down to the root causes
4. From focus on the current/past >To more focused on the future and ‘the possible’
5. From retreating when challenged >To able to listen but can push back when challenged
Style shifts can be tricky as they are about culture, which can be a lot slower to change than, say, structure.
Businesses can add value by:
Building a brand – a reputation for quality, value etc that customers are prepared to pay for. even though the production costs per pair are probably pretty similar!
Delivering excellent service – high quality, attentive personal service can make the difference between achieving a high price or a medium one
Product features and benefits – for example, additional functionality in different versions of software can enable a software seller to charge higher prices; different models of motor vehicles are designed to achieve the same effect.
Offering convenience – customers will often pay a little more for a product that they can have straightaway, or which saves them time
Top 10 Focuses
There are 10 key interdependencies within the five Ss that an FD should consider aligning. These are:
1. Strategy and skills: what competences does finance need in order to deliver its strategy?
2. Strategy and structure: what structure gives the right cost base?
3. Strategy and systems: what systems are required to deliver the strategy of the finance function?
4. Strategy and style: what shifts in style are needed, too?
5. Structure and skills: how do these fit together?
6. Structure and style: how consistent are these? For example, flat structure for responsiveness
7. Structure and systems: are these well aligned?
8. Systems and style: if we are seeking to be responsive and value added, do the systems allow that?
9. Systems and skills: do we have systems good enough to help us to really perform a sharp, decision-support role?
10. Skills and style: if we do have the skills, is our mindset holding us back from using these to the full?
Page: 1 2