- Key Principles of Effective Financial Planning and Analysis: https://www.imanet.org/insights-and-trends/planning-and-analysis/key-principles-of-effective-financial-planning-and-analysis
- The 12 Principles of Best Practice FP&A: https://sfmagazine.com/post-entry/november-2017-12-principles-of-best-practice-fpa/
- The People Side of FP&A: https://sfmagazine.com/post-entry/july-2019-the-people-side-of-fpa/
FULL EPISODE TRANSCRIPT
Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host Mitch Roshong. And today's conversation is between my co-host Adam Larson and our guest Larry Serven. Larry talked to Adam about strategy, execution, the role of the finance team, and creating long-term value and how companies can better align their strategy with their actions. So now here's episode 46 of count me in.
So, Larry, what is meant by strategy execution and why is it important for creating long-term value?
Well, you know, when you think about it, strategy execution is really about turning plans in a reality, making them happen. You know, actually doing what you said you were going to do. You know, I like to use analogies because you know, I personally find them helpful. So, I imagine I have a goal to lose 10 pounds. That's great. And I have a strategy and my strategy is to exercise more and eat less. That's a good strategy, you know, that's terrific. But what ultimately counts is whether or not I effectively execute that strategy in and lose the weight. Right? So personally, I would take a mediocre strategy that's been well executed over a great strategy, poorly executed, and I would do that any day of the week. And frankly, so will most investors. I started my career at Pepsi Cola international and that's a company that really prides itself on execution and they kind of have to the beverage industry is highly competitive and to survive you really need to be you know, you have to have a great strategy, but you also have to have world class execution. So, Pepsi actually paid a wall street firm to come in and determine the value of effective execution on the stock price. Now there's a whole back story to that I could go into if we had more time. But they concluded that predictability of earnings accounted for close to four points of the price earnings ratio. And that translates into about $50 billion in market cap. So, for Pepsi consistently executing strategy was worth about $50 billion. And since all the executives held stock in the company, you know, the value wasn't some abstraction. it was real money in your wallet. So, if you're a public company, then strategy execution is worth a whole lot. But you know, even if you're privately held, an effective strategy can be very valuable when meeting loan covenants, dealing with bankers. But I think even more to the point strategy execution means you're hitting your goals, achieving what you set out to achieve. And that's what every CEO and CFO wants. And it's, you know, what they get paid to do.
So of course, every company wants their strategy to be executed perfectly. But why do they typically fail?
Well, keep in mind the really four fundamental things necessary to execute a strategy assuming of course you have one to begin with. first people need to know what it is they need to do. Second, they need the proper resources to get it done. Third, they need some motivation to get them done. And finally, there needs to be transparency. Transparency in the goals and objectives, transparency and reporting, the actual results also transparency in the progress that's being made. So, for many organizations one or more, or sometimes all four of those fundamentals are missing. And you know that's obviously a problem or that's obviously a problem, but equally fundamental, there needs to be perfect alignment between all four, but more commonly they're disjointed. they all exist in some form, but they're not integrated in, they're not reinforcing. So, you know, for example the strategy calls for the company to focus on innovation to increase market share and revenue, but it never actually gets translated in concrete terms into an operating plan or the budget process. which is where the real allocation of resources happens. It doesn't actually reflect the strategy. You know, I had a CEO tell me you know, just last week about his frustration, you know, spending three days in an executive retreat that define the strategy and specific initiatives to execute it. He said, the session couldn't have gone any better. Everyone was really excited. You know, they had a real plan. But three months later when they were, you know, in the budgeting cycle, he was presented with a budget P and L and he has a seemingly very simple question where's the strategy and all this. And all he got was blank stares. People hadn't actually thought through what resources they needed to properly execute the strategic initiatives that they committed to, or in some cases they had, but it was done very quickly with the back of their left hand. And it wasn't worth the paper it was printed on and then, you know, you think about incentive compensation, you should be able to ask anyone what their goals are and see how they reflect the execution of the strategy. And I think we're going to be talking about a case study a little bit later on. And I think there's actually a good example there. But you know, for many companies you'd be hard pressed to see a clear line of sight between an individual's incentive comp and the strategy. You know, I could go on with, with other examples. But when you think about all four requirements being in place and actually well aligned, it's frankly not surprising that most companies struggle with strategy execution.
So, what if you're listening to this podcast and this is the first time you've heard these four elements mentioned at the same time and executing strategy, how would one go about identifying which one they're missing?
Oh, that is a great question. the practical advice here, and I'm big on practical advice, is map out today your processes from strategy, right through budgeting through the reporting of, of actuals your compensation. incentive compensation. We map it all out, put it down on paper, not the way you think it should exist in the future, but the way it actually exists today and those missing pieces of the puzzle, those disconnects are going to pop right off the page when you do that. So, the advice to get started is map it all out today and you're going to see where the disconnects are.
That's some great practical advice, Larry. So, what role does the CFO and FP&A have in general in general have in strategy execution?
Well, you know, what you think about it, a finances role is to co-create and then orchestrate the management system that takes you from strategy through execution. So if we go back to those four fundamentals, when we say people need to know what it is, is they need to do what it is they need to accomplish, well, that's all about planning, setting goals, developing plans to achieve them. Finance needs to co-create, manage an effective planning process. the second point, you know, we've said organizations need proper resources to get it done. Again, that's, that's part of the budget process. and that budget process is one that that finance typically orchestrates and managers we said organizations need proper motivation. And you know, frankly, that's more in the domain of HR and, you know, compensation analysts. But when we get to the case study, we'll actually see how finance played a very critical role in that and then finally, number four we talked about the need for transparency, transparency in the results, but also transparency and progress that's being made on various projects that are meant to execute the strategy. And when you think about that, that's all about reporting and analysis. and not just financial figures but operational metrics, key performance indicators. So, you know, frankly, I think we could do an hour just on this one topic, but if we take a step back, maybe take a wide angle view, finances role, you know, broadly speaking is to be a partner in the business, which means going beyond the mechanics of what I just outlined and really helping the business make better decisions. And that means providing decision support, business, you know, insight throughout the entire process. last point and it relates to decision support. Finance's role is to work with it to make sure that, you know, they, those folks in finance and the rest of the organization, that they have the right data and the right systems in place. And that means, you know, having the right reporting and analysis tools along with the right planning, budgeting, forecasting tools, preferably all on the same platform for seamless integration. It's up to finance to take a step back, assess the current systems and needs versus what's really required and then work to close the gap.
So then how can companies better align strategy and execution?
Well, I do think this is best answered with a case study which I know we're getting to, but you know, think through all the actual mechanisms to build the strategy through execution bridge. For example, let's say a company's strategy is built around innovation. That's the key to success. Well, that's great, but how are they going to measure innovation? You know, that measurement is the practical mechanism to begin to operationalize the strategy. So, let's say they come up with this measurement for innovation. You say innovations, the percent of sales coming from products introduced in the last two years. Okay. That's concrete. It's measurable. So, the next practical mechanism is to set a goal for that, both a long-term goal and one for next year. Of course, you know, you want to understand where they are today on that measure historically where they've been in order to establish the right targets. Finance can really provide some great decision support there. And then once the targets have been established, the next practical mechanism is to define strategic initiatives to achieve the long-term goals and more specific projects to be executed in the upcoming year. The next practical mechanism to define the resources, time and money to execute those projects and get those resources actually into the budget. you know, there, there's a lot more to it but, but notice how now we have practical mechanisms that actually link strategic planning all the way down to budgeting. And that's not the end. Of course, we still need to reflect, you know, execution of projects and their targets that they're intended to achieve and new incentive compensation. But notice that that connection is now easier to make and it's more concrete. It's easier to connect the dots. we also need to set up the right ongoing reporting mechanisms, including the, the progress report on key initiatives. So, we just don't wait until the end of the year to see if they happen or not. Now you might actually disagree with some of this, but don't lose sight of the bigger message, you know, whether these, you know, mechanisms are the ones that, that you want to put in place or you've got your own ideas, you need concrete. This is how each connection is going to be made. And if you can't define those mechanisms, I'll guarantee won't execute your strategy.
So now we've been mentioning case study throughout this whole conversation. Larry, could you give us some more details on how the case study might illuminate some of what we've already discussed?
Yup, happy to. The case study I'd like to cover relates to a leading waste and environmental services company in North America. And let me say at the outset of this deserves its own workshop, but I'll cover the highlights here. So, this company measured their financial results consistent with gap reporting, but they focused their attention on what they called the sales ratio, which is earnings before interest, taxes, amortization or EBDTA divided by sales. They call that the sales ratio. So long story short, they set a goal of doubling that key measure in five years. Everything they did to achieve that interest fee to begin with, they developed a strategy grounded in what isn't going to change over the next 10 years. incidentally, they're not alone in that Jeff Bezos credits Amazon's success in out executing their competition on those things that consumers will still want in the foreseeable future, like faster delivery or order accuracy. So, for this environment services company, one of the drivers of success is customer profitability, which is driven by cost to serve. So, they established a KPI or key performance indicator tree diagram, which broke down all their costs and what drove those costs. So, for example, they broke down maintenance costs per mile and a things like tire costs per mile. And then they set improvement targets for all those measures and end gave incentives up and down the organization to move those figures in the right direction. For example, the maintenance team figured out that proper air pressure could actually extend the life of tires and reduce tire replacement costs. So, they took it upon themselves to measure tire pressure every day and adjust as they need it. And I realize that might sound like a really small thing, but it's the front lines where strategy actually gets executed or fails to get executed. But I also so like that because it illustrates that the strategy and the goals were aligning top to bottom throughout the entire organization. And now here's where things really got interesting that the finance team did a study around customer density. In other words, how close or far apart the customers were. Now that matters because the closer the customers are, the less driving time is needed to serve them. Right? So, finance worked with operations on a linear programming project to identify the optimal routes and that project paid off big time, but then they did something that finance teams almost never do. Working together with the VP of sales, they looked at sales and how people were being compensated. It turns out there was no incentive to sell prospects that were already close to existing customers. So, salespeople were selling in a way that led to longer routes and higher cost per mile to serve, not intentionally, of course, they just didn't have the incentive to do it any other way. So, after careful analysis and study, the sales compensation plan was actually changed and it resulted in a much improved customer density, much lower costs per minute to serve. So, the result of everything I just talked about and a little bit more is that the company actually did achieve their goal of doubling the sales ratio. Only the achieved it two years early. So, you know, if you were paying attention, finance was part of all four pillars of strategy execution. And that's why I really liked this illustration.
I think that's a wonderful illustration. It's very practical. It illuminates the fact that strategy can't just happen in a board room. It can't just happen behind closed doors that you actually have to look at the front lines and look at all aspects of the business and how, and finance is a huge important part of all of those aspects as you go along.
Yeah, absolutely. And you know, sometimes the company's strategy will call for what I call, you know, big bang. You know, they're going to divest, you know, whole business units or you know, they're going to go on a acquisition a spree and, and that's fine. But you know, Wall Street investors tend to be focused more on organic growth and organic improvement. and you know, that's where what happens on the front lines every day really matters. And that's where your strategy is really being executed or, or you know, you're going to have a failure to execute. Larry, when you first started talking about the case study, you mentioned a workshop. Could you tell us a bit more about that? Yeah, it'd be happy to. So we have a workshop that helps companies sort of identify this whole strategy through execution bridge and some you know, practical steps that they can, they can take to improve strategy execution. and it covers, you know, a lot of what we were just talking about but in more detail. And if folks have an interest in that, they're, they're more than welcome to contact me.
This has been Count Me In,
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