Drilling down to root causes. No matter what problem an organization faces, the finance function’s default answer is often to add a new system or data warehouse to deal with complexity and increase efficiency. While such moves may indeed help companies deal with difficult situations, they seldom tackle the real issues. The experience of one company in the services industry — let’s call it ServiceCo — illustrates the circuitous route that problem solving takes.
Everyone involved in budgeting at ServiceCo complained about the endless loops in the process and the poor quality of the data in budget proposals. Indeed, the first bottom-up proposals didn’t meet even fundamental quality checks, let alone the target budget goals. The process added so little value that some argued it was scarcely worth the effort.
Desperate for improvement, ServiceCo’s CFO first requested a new budgeting tool to streamline the process and a data warehouse to hold all relevant information. He also tried to enforce deadlines, to provide additional templates as a way of creating more structure, and to shorten the time frame for developing certain elements of the budget. While these moves did compress the schedule, quality remained low. Since the responsibility for different parts of the budget was poorly defined, reports still had to be circulated among various departments to align overlapping analyses. Also, ServiceCo’s approach to budgeting focused on the profit-and-loss statement of each function, business, and region, so the company got a fragmented view of the budget as each function translated the figures back into its own key performance indicator (KPI) using its own definitions.
To address these problems, ServiceCo’s managers agreed on a single budgeting language, which also clearly defined who was responsible for which parts of the budget — an added benefit. But focusing the budget dialogue on the KPIs still didn’t get to the root problem: middle management and the controller’s office received little direction from top management and were implicitly left to clarify the company’s strategic direction themselves. The result was a muddled strategy with no clear connection to the numbers in the budget. Instead of having each unit establish and define its own KPIs and only then aligning strategic plans, top management needed to link the KPIs to the company’s strategic direction from the beginning.
Getting to the root cause of so many problems earlier could have saved the company a lot of grief. Once ServiceCo’s board and middle management determined the right KPIs, the strategic direction and the budget assumptions were set in less than half a day, which enabled the controller’s office and middle management to specify the assumptions behind the budget quickly. The management team did spend more time discussing the company’s strategic direction, but that time was well spent. The result was a more streamlined process that reduced the much-despised loops in the process, established clear assumptions for the KPIs up front, and defined each function’s business solution space more tightly. The budget was finalized quickly.
It takes time to introduce lean-manufacturing principles to a finance function — four to six months to make them stick in individual units and two to three years on an organizational level. A new mind-set and new capabilities are needed as well, and the effort won’t be universally appreciated, at least in the beginning.
Integration tools can be borrowed: in particular, a value stream map can help managers document an entire accounting process end to end and thus illuminate various types of waste, much as it would in manufacturing. Every activity should be examined to see whether it truly contributes value — and to see how that value could be added in other ways. Checking the quality of data, for example, certainly adds value, but the real issue is generating relevant, high-quality data in the first place. The same kind of analysis can be applied to almost any process, including budgeting, the production of management reports, forecasting, and the preparation of tax statements. In our experience, such an analysis shows that controllers spend only a fraction of their time on activities that really add value.
The challenge in developing value stream maps, as one European company found, is striking a balance between including the degree of detail needed for high-level analysis and keeping the resulting process manual to a manageable length. Unlike a 6-page document of summaries or a 5,000-page tome, a complete desk-by-desk description of the process, with some high-level perspective, is useful. So too is a mind-set that challenges one assumption after another.
Ultimately, a leaner finance function will reduce costs, increase quality, and better align corporate responsibilities, both within the finance function and between finance and other departments. These steps can create a virtuous cycle of waste reduction.
About the Authors
Richard Dobbs is a partner in McKinsey’s London office, and Herbert Pohl is a partner in the Munich office, where Florian Wolff is an associate principal.