The Future of Finance The Williams Companies Finance

The Future of Finance The Williams Companies Finance Forum June 20 -21, 2001/Tulsa Jonathan B. Schiff Consulting Group jschiff@schiffconsulting. com Copyrignt, Schiff Consulting, 2001

Predictions about the Future n n Science Digest, August 1948: “Landing and moving on the moon offer so many serious problems for human beings that it may take science another 200 years to lick them. ” Thomas Edison on electricity in the home… “Just as certain as death, (George) Westinghouse will kill a customer within six months after he puts in a system of any size. ” Copyrignt, Schiff Consulting, 2001

Predictions about the Future n n Physicist and mathematician Lord Kelvin (1824 -1907), seemed to have a corner on the wrongheaded one-liners of his day… “X-rays are a hoax. ” “Aircraft flight is impossible. ” “Radio has no future. ” Copyrignt, Schiff Consulting, 2001

Signs That Your Company Has Gone Too Far With Cost Cutting… n n n The head of purchasing goes to employees’ homes and steals back office supplies. Water coolers are coin operated. To get paid company life insurance, you have to sell ten policies to relatives. You have to call in sick on a 900 number. Company blood drives are now considered a profit center! Copyrignt, Schiff Consulting, 2001

Today’s Agenda Where are we headed? n Winning the New Cost Wars n Performance Management for the CFO Community n Actionable recommendations n Copyrignt, Schiff Consulting, 2001

Dr. Gary Hamel, Harvard Business School Futurist n n Earnings pressure is here to stay. Earnings management practices are running out of steam. Diminishing returns from industry consolidation, typical efficiency programs, and share-buy backs. M&A is the last breadth of traditional cost cutting! If recent trends of heightened M&A activity continue in 7 years, we will end up with one company! Copyrignt, Schiff Consulting, 2001

How will we add value in this New Economy? n From Stewardship to Entrepreneurship Nothing happened on my watch! n n End of incrementalism New search for value creation Exponential (quantum) change Role models: Enron, GE Capital, Virgin Atlantic, Shell Oil, Southwest, & Kohl’s. Copyrignt, Schiff Consulting, 2001

Evidence of Exponential Change n n n Spending on children has increased by 300% during the last 5 years. Wireless messaging services are changing social patterns. MN-based Kohl’s comes out of nowhere to revolutionize retail using counterintuitive innovation. Copyrignt, Schiff Consulting, 2001

How do we do it? Old Capital n n n Structural Capital Intellectual Capital Driven by incremental thinkers. New Capital n n n Imagination Capital Entrepreneurial Capital Driven by seers, heretics, and activists. Copyrignt, Schiff Consulting, 2001

What’s Needed n n From Best Practice to New Practice From market share to share of wealth creation From unbalanced incremental scorecards and low hurdle rate based EVA to measures that drive innovation E. g. Company market value/Industry market value Copyrignt, Schiff Consulting, 2001

What questions should be asked? n What opportunities are being missed? Where are we blind? What are we missing? n e is not enough! n n IT spending has doubled over that last year (’ 99 -’ 00) with no new competitive advantage produced for most! What we need is less follow and more differentiation for distinctive results! Copyrignt, Schiff Consulting, 2001

Reality Check n n n Most wealth comes from non-linear, discontinuous innovation. Innovation and entrepreneurship needs to be a company-wide capability across the value chain. …And we certainly don’t want to be The Weakest Link! Copyrignt, Schiff Consulting, 2001

What Financial Leaders Should Do… n n n Begin to introduce wealth creation metrics IT spending should challenged to create unique competitive advantage Push for a portion of capital spending for “radical” project. Radical does not necessarily equal high risk. New portfolio of experimental capital projects are generally, under $100 K each at Enron. Copyrignt, Schiff Consulting, 2001

What Financial Leaders Should Do… n n n Remove inhibiting business practices and activities that are toxic to innovation, reengineer processes between ideas and wealth creation. At Shell Oil, experimental capital project approval takes just 5 days! Keep the Good-Grow the Great! Copyrignt, Schiff Consulting, 2001

Are You Ready to Win the New Cost Wars? Replay or Fast Forward? Copyrignt, Schiff Consulting, 2001

Winning the New Cost Wars… Impact of the Current Business Environment on the CFO n Increased expectation to do more with less. n CFO community and leaders are expected to deliver ideas, innovations, and solutions. n Traditional standards of integrity and technical acumen are a given. n CFO community is expected to align its skills set with the dynamic needs of the business. n Increased competition from within and… Copyrignt, Schiff Consulting, 2001

Winning the New Cost Wars What has not worked. . . n Fragmented, piecemeal approach. n Finance and accounting technical focus. n Key elements of value-chain scoped out. n Top management strategic focus shift. n Not walking the talk. n Attitude: “The new system will fix everything. ” Copyrignt, Schiff Consulting, 2001

Winning the New Cost Wars Symptoms that lead to failure. . . n Cost shifting n Don Quixote-type leader n n n New information system dependency Consultant engagement model dysfunction Disconnect with top management vision and strategy Over intellectualization Report production fixation, not results focused Gratuitous complexity Copyrignt, Schiff Consulting, 2001

The New Cost Wars Where we fallen short. . . n Global computer maker/No learning legacy, limited to pockets of excellence. n Leading cell phone manufacturer/High-profile n cheerleading, modest wins and low crossfunctional interest. Health insurance giant/Finance-driven initiative, great reports, but actions limited to very low-impact areas. Copyrignt, Schiff Consulting, 2001

Winning the New Cost Wars n New Harvard Business School Case: Mi. CRUS: Activity-Based Management for Business Turnaround, a collaboration between Bob Kaplan and Jonathan Schiff n The Mi. CRUS Case was published as Harvard Business Case # N 9 -101 -070 on March 5, 2001 by Harvard Business School Publishing, Boston, MA. Copyrignt, Schiff Consulting, 2001

Insights from the Mi. CRUS Case Overview n n Cross-functional, enterprise-wide application. ABCM is a key element of an inclusive incentive compensation program to support an aggressive business strategy. Industry is all about change. Performance and Open-book management integration. Copyrignt, Schiff Consulting, 2001

Mi. CRUS Corporation Case background n Extremely competitive industry. n History of failed initiative sloganeering. n Leadership role. n The “burning platform” for change. n A unique holistic approach. Copyrignt, Schiff Consulting, 2001

Mi. CRUS Corporation The Problem n n New joint venture initiative and new business model -the virtual fab. Expectations are great. Legacy IBM management practices not in alignment with current needs-Selective amnesia required. Global competition heating up, primarily from Taiwan and Korea. Industry benchmarks for yield and cost readily available. You can run, but you can’t hide! Copyrignt, Schiff Consulting, 2001

Mi. CRUS Corporation The Solution n n Establish “stretch” (non-incremental), but attainable cost and yield (quality) targets. Initiate incentive compensation program for all employees tied to making the new numbers. Train all employees on development and use of activity accounting information for process improvement and costing—their power tool. All functions and processes covered-12 teams Monthly team progress briefings with the CEO. Copyrignt, Schiff Consulting, 2001

Mi. CRUS Corporation Results n n Mi. CRUS won “Fab of the Year” industry award in 1999. Mi. CRUS is now a global leader in low cost and high quality. Mi. CRUS instituted a variety of process innovations resulting from this initiative. Mi. CRUS associates have met and exceeded their stretch goals in 1997 -2000! Copyrignt, Schiff Consulting, 2001 Show Me the Money!

Mi. CRUS Case Summary ABM Information Inclusive Incentive Compensation Mi. CRUS Corporation Open Book Management On-going Leadership Commitment Copyrignt, Schiff Consulting, 2001

Winning the New Cost Wars—First Steps… n n Need—Cross-functional, top-to-bottom cost leadership, Need skills, and information readiness assessment. Reality—Most managers do not understand cost, beyond Reality a very simplistic level, a result of the generational legacy of the Raging Bull Market. Goal—For cost leadership to take hold culturally, it needs Goal a passionate and consistent leadership commitment similar to that often found in diversity, integrity, and in new product development. Linkage-If not aligned to strategic goals it’s DOA! If you can’t demonstrate the WIIFMs, don’t start until you can! Copyrignt, Schiff Consulting, 2001

What About Performance Management for Finance? n n n “We chain our best people to their desks and watch their enthusiasm die. ” “I hire MBA/CPAs, throw them into the deep end of the pool and see if they can swim. ” “I have two ulcers to show for it and I’ll be damned if I help those young S. O. B. s learn any faster or better than I did. ” Copyrignt, Schiff Consulting, 2001

Leadership Voices from the Field n “The Hackett Group told us that we are in the top quartile—but many of our internal customers still think we’re jerks. ”—Jim D. , Corporate Controller, Auto and Truck Maker. Schiff Consulting Group Solutions for Corporate Effectiveness Copyrignt, Schiff Consulting, 2001

Leadership Voices from the Field n “Our business in changing daily, if the finance community is not fully aligned with the business, we’re out of business. ”— Dennis C. , Senior VP-Finance, Telecom Giant. Schiff Consulting Group Solutions for Corporate Effectiveness Copyrignt, Schiff Consulting, 2001

Leadership Voices from the Field n “Business unit leaders told us that our finance staff was not invited to team meetings until they had 7 -8 years experience with the company. ”—C. J. , CFO, Global Pharmaceutical Maker. Schiff Consulting Group Solutions for Corporate Effectiveness Copyrignt, Schiff Consulting, 2001

Embracing Change? The June, 2001 issue of the Journal of Accountancy on page 22 reported that a survey* of more than 3, 000 business executives asked: Which departments hindered change the most? n 4 th-Human Resources (7%) n 3 rd-IT (9%) n 2 nd-Legal (16%) n 1 st-Finance (23%) *The survey was conducted by the Net Future Institute Copyrignt, Schiff Consulting, 2001

Why Now? — Contemporary Effects Technology potential not fully realized. n Need to attract, develop, and retain top people— future leaders. n Role transformation from transaction processing to business decision support. n The new competitive reality… n Copyrignt, Schiff Consulting, 2001

The New Competitive Reality “Taxes. Internal Audit. Finance and Accounting. There must be a reason many of your competitors don’t do them anymore. ” -Text of full page Arthur Andersen advertisement appearing in Fortune, Business Week, and Forbes magazines. Copyrignt, Schiff Consulting, 2001

What Hasn’t Worked and Why? n n n Massive headcount cuts in Finance. Working longer hours. New systems that will “fix everything. ” Sloganeering. Blaming IT and HR! Copyrignt, Schiff Consulting, 2001

You are sent by the CEO to evaluate a business unit, in which we invested $25 MM, with lagging productivity and performance problems. In your review, you find that the general manager, Jim, does not maintain, upgrade, or improve the fixed investment in-line with customer expectations, nor does he demonstrate effective stewardship over these assets. You are asked to rate Jim’s performance from 1 (low) to 4 (high). What is your rating of Jim’s performance? , Why? Copyrignt, Schiff Consulting, 2001

Accelerating Finance Leadership Development What is the only “economic asset” “owned/managed” by the CFO? n n It’s not the system. It’s not the recessed, ambient overhead lighting new, speedy computers. thick pile carpeting. stylish, ergonomic office furniture. It’s the people! Copyrignt, Schiff Consulting, 2001

How Leading Companies are Responding to this Challenge § A m g e n § G l § J o h n s o n & J o • Microsoft • Rapid Tech Copyrignt, Schiff Consulting, 2001

New Skills for the New Finance Microsoft Finance’s Transformation Microsoft Finance Transformation from Remedial Scorekeepers to An Engine of Innovation Enabled by Systematic Skills Management. n Situation Analysis: The Problem, Solution, Result, and Enabler. n Copyrignt, Schiff Consulting, 2001

Situation Analysis: Microsoft. Problem n n n Finance is a business partner wannabee! From an activity analysis standpoint, over 80% of their time is spent in transaction processing. It ain’t fun and work quality is a key in hi-pot staff retention and development. More Copyrignt, Schiff Consulting, 2001

Situation Analysis: Microsoft. Problem n n Frustration grows in not being viewed as a value-added service. Distractions abound as Company stock options increase in value. Copyrignt, Schiff Consulting, 2001

Situation Analysis: Microsoft. Solution n n Bill’s Edict-Go paperless or else! Force Finance to “eat our own dog food” to create solutions. Improve leverage derived from SAP implementation. Seek and find “partners. ” Organization learning approach. Copyrignt, Schiff Consulting, 2001

Situation Analysis: Microsoft. Results n n n Microsoft Finance now spends more than 70% its time in decision support activities. Microsoft Finance has increased in external customer focus through its innovations to make SAP more user-friendly, reducing cycle times and defects, and improving compliance levels using Fin. Web. The Finance work is becoming almost as interesting as their stock price! Copyrignt, Schiff Consulting, 2001

Situation Analysis: Microsoft. Enabler The key enabler was a detailed skills dictionary with application to job families. This provided new insights into: n Key skill inventories; n Job content in terms of skills; n Improved matching assignments to people; & n Identifying training priorities. Systematic Skills Management Enabled Bill G. ’s Vision to Come to Fruition Copyrignt, Schiff Consulting, 2001

Rapid Tech, Inc. A CFO Organization Performance Management Case Study Adapted from actual practice Copyrignt, Schiff Consulting, 2001

Background n n n $2 Billion global manufacturing company in the transportation industry Industry consolidation heating up the competitive environment New CFO from outside the company Copyrignt, Schiff Consulting, 2001

Business Problem Finance Workforce Not Meeting the Challenges of the New Economy Chronic Symptoms: n n Finance “not at the table” with business leaders during key decision making Financial analysts known for finding reasons not to pursue new ideas Finance working harder – not smarter Financial analysts complain that it takes days to extract data that internal clients expect within hours. Copyrignt, Schiff Consulting, 2001

Underlying Problems & Cost Drivers n n n They spend to train and educate, but most often not on the skills required. Fewer than half the new hires really “work out well. ” High-potential finance managers regularly leave the company. Copyrignt, Schiff Consulting, 2001

Business Solution n n “Retool” finance workforce to meet the new challenges of industry consolidation Target limited training & development resources using a competency model/skills management approach Copyrignt, Schiff Consulting, 2001

Approach 1. 2. 3. Set a new standard for competence Assess the current state of competence “Retool” to close gaps Copyrignt, Schiff Consulting, 2001

Approach 1. Set a new standard Created a detailed Finance competency model: n n n Tops-down input to balance and align with vision of future Bottoms-up input to supply job-level detail and create employee buy-in Customer input to link to business strategy Copyrignt, Schiff Consulting, 2001

Approach 2. Assess the status quo Captured employee self-assessments: n n n Launched a communication campaign to maximize employee participation Used a software tool with friendly interfaces for employees Provided clear definitions of competencies at four levels Copyrignt, Schiff Consulting, 2001

Finance. Achieve Personal Skills Profile for: John Q. Employee Current Level Required Level Expert Advanced 13 Nov 00 Expert 20 Apr 01 Communication Skills Proficient Advanced 13 Nov 00 Management Competencies Proficient Advanced 13 Nov 00 Business/Industry Acumen Conceptual Proficient 05 Dec 99 Software Knowledge No Skill Advanced 13 Nov 00 Skill Financial Analysis Techniques Cost Mgmt. Knowledge Spreadsheet Applications Copyrignt, Schiff Consulting, 2001 Gap C-R Assess Date

Approach 3. Retool Analyzed and acted on skill gaps: n n n Reached consensus on gaps and created buy-in for actions Offered training quickly to close easy gaps and create early “wins” Restructured hiring and promotion practices to address longer term gaps Copyrignt, Schiff Consulting, 2001

Finance. Achieve SKILL GAP ANALYSIS REPORT Rank Skill Name Total Gap # Employees w/ Gap 1 Industry Acumen -378 216 2 3 4 5 6 7 8 9 Company Info. Systems Knowledge Selling Skills Presentation Skills Business Process Reengineering -314 242 -283 231 -277 229 -216 177 Internet/Intranet Skills Database/Data Query Applications -199 145 -135 96 Change Management Coaching and Teaching Business Development Skills -112 94 -101 82 -97 97 10 Copyrignt, Schiff Consulting, 2001

Finance. Achieve Individual Development Plan for: John Q. Employee This plan is for the period from 14 Sept 2000 to 14 Sept 2001 Skills Skill Gap: Improve Software Knowledge from No Skill to Proficient Activity: Attend in Company Systems Seminars Series I & II Skill Gap: Improve Communication Skills from Proficient to Advanced Activity: Join local Toastmasters chapter Skill Gap: Improve Industry Acumen from Conceptual to Proficient Activity: Read Transportation World newsletter weekly Skill Gap: Improve Industry Acumen from Conceptual to Proficient Activity: Assign to Manufacturing Departmentor Skill Gap: Improve Management Competency from Proficient to Adv. Activity: Attend Advanced Supervisory Skills Course Copyrignt, Schiff Consulting, 2001

Results: Finance Perspective n n n Identified critical training needs that had gone unrecognized Got across the board buy-in on training & development priorities and funding Created more career opportunities and better matches between people and jobs Copyrignt, Schiff Consulting, 2001 AND

Results: Customer Perspective n n n Finance gained industry acumen and customer respect Finance recognized and eliminated outdated “silo thinking” Finance brought new value to the decision making table Copyrignt, Schiff Consulting, 2001

Finance. Achieve ROI New Skills for the New Finance 250% 150% Yr. 2 Yr. 4 Copyrignt, Schiff Consulting, 2001

Situation Analysis: SNET The Problem: n Baby Bell under pressure in the Northeast. n Dramatic change rumbling through the industry. n Difficulty in attracting and keeping talented managers in Finance. n Motivation and morale are issues. n Low CFO organization productivity. Copyrignt, Schiff Consulting, 2001

Situation Analysis: SNET Solution-A root cause approach: n Developed a detailed finance competency model for use in new career pathing software system. n The model design was supported with significant customer input. n Opportunity availability and pathways available to all. Copyrignt, Schiff Consulting, 2001

Situation Analysis: SNET Results n n n Over 80% program participation. New cross-fertilization between traditional finance silos. Career planning discussions now use a common language of competencies tied to each job class. “Smoke-filled room” succession planning has been replaced by a more fact-based meritocracy. Roll-out strategy featured in FEI/IMA Financial Management Network, in CFO magazine, in The Connecticut Post, and in The Hartford Courant. And as they in the sports world, let’s go to the videotape… Copyrignt, Schiff Consulting, 2001

Thank You! Schiff Consulting Group Solutions for Corporate Effectiveness