Chris Daniel, Mapping Advisor at Leading Edge Forum, outlines a mechanism that can help CFOs regain their correct position in the balance of power.
The CFO, without question, is always deemed to be one of the most important people in an organisation, sometimes even more powerful than the CEO, because they control the money. They act as financial stewards, ensuring that company resources are used in the best possible way. They decide which departments thrive, which projects are within the company’s budget and which are too expensive.
The CFO has the power to block projects, but if the project is in line with stakeholder expectations, should only do so with very good reasons. To prioritize projects accurately, CFOs need a deeper understanding of the business domain, relying on others to provide them with the right data, and working together to make the right judgements. Because part of the CFO role is to bridge numbers and value, the CFO that loses sight of value gives up control and can create a serious power imbalance, that may damage the relationship with the rest of the company.
Start with the basics
Classic project evaluation rules favour calculation of a Net Present Value (NPV) of any given project, to estimate how that project will contribute to the value of a company, expressed in today’s money. From a mathematical perspective, it is a fairly simple task that most people can easily do, and popular spreadsheets have built-in formulas supporting these calculations. The difficulty is not the arithmetic, but the ability to predict and evaluate the impact of a project, and express it as a financial measurement.
Imagine a situation where you are about to start competing with banks by delivering a particular service 30 percent cheaper. NPV, and indeed most analyses, would fail to acknowledge that the banks can – and would – fight back, and that the lifespan of your service would be limited.
It is the CFO’s responsibility to ensure that a project starts only after adequate analysis of delivered value. Inevitably, some of the key variables will not be known in advance, and therefore it is necessary to assume their value. It is vital to make those assumptions explicit for the sake of further project verification (to answer such questions as is it still on track? and has the environment changed?). The knowledge resulting from this analysis should be widely distributed among the project team, so each team member is equipped to raise a hand if something unexpected happens.
A short, correctly structured, meeting is enough to clarify what is known, what needs to be researched and what is unknown. It may turn out that the market has yet to be created (i.e., uncertainty is high), in which case there is no way of estimating the NPV, and the company has to accept this project as an experiment and be ready to lose all the investment.
Get uncertainty under control
No project can be totally predictable. When a completely new solution appears, it has no customers and nobody knows how to use it. It is highly uncertain. Well established solutions have well defined markets, but those markets prevent significant changes – consumers do not want to change unless absolutely necessary.
This creates a spectrum of anticipation – within a project, there are parts that are highly predictable, with assumptions that can be easily validated, and there are parts that are highly uncertain, with unremovable assumptions that can only be anticipated to be wrong.
There are four major categories, which reflect four stages along the component Evolution spectrum – from uncertain Genesis, through Custom-Built and Product/Rental, to end up in the Commodity/Utility space.
Each of these has different characteristics and associated risks, and should be handled in different ways, also from the financial standpoint. Enumerating the components, understanding their nature and expected behaviour not only allows for improving project handling, but also constitutes a shared understanding building exercise.
Situational awareness is critical
The previous section introduced a method of assessing project risks and potential rewards (through uncertainty-market maturity correlation). With that knowledge, it is possible to prioritize projects and cancel them early if they do not meet expectations. Visualizing the project through a range of tools such as value chain diagrams or Wardley Maps can help even more in breaking large projects into small, manageable parts and identifying the uncertainty associated with them. This process creates high situational awareness – you learn in the process what will be done, what is the cost structure and what are the key risks. That situational awareness helps different teams to take decisions, plan or test marketing campaigns, research relevant legal cases or even cancel the project if it does not build enough value.
The process of identifying key project stakeholders, making them identify components and their characteristics and exposing their assumptions, can and should be embedded into corporate culture.
The CFO, through a spend control mechanism, can ensure that key uncertainties and assumptions will be exposed before projects above a certain threshold are approved.
The CFO should exercise this power – it is in the company’s best interest, and in the best interest of the CFO, because it is a unique opportunity to understand the value of projects, not just their financial aspects.
Understanding gives the CFO power
Power stems from control over rare assets, regardless of what those assets are – finances, authority, knowledge. Not knowing or not understanding what is happening in your immediate environment is a big risk. It is not enough to be a financial expert, or any expert whatsoever, unless that expertise is put to work for the benefit of your organization. Indeed, the willingness to learn and to extract knowledge outside of our primary domain and outside of our comfort zone is one of the key aspects that makes us powerful enough to live up to our responsibilities.
You can learn about product categories and mapping techniques to support you as a CFO, by downloading the Leading Edge Forum practice paper “Restoring The Proper Balance of Power”.