Better and Reinventing the CFO, A Surgeon’s Notes on Performance

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Better and Reinventing the CFO, A Surgeon’s Notes on Performance

In a rare move, we are today discussing two books, Better and Reinventing the CFO, each of which falls into our must-read category. Past must-read books were:

Inside the Tornado by Geoffrey A. Moore

Beyond Fear by Bruce Schneier

Taking Sex Differences Seriously by Steven E. Rhoads

All You Need Is Love, and Other Lies about Marriage by John W. Jacobs, M.D

With Winning in Mind by Lanny Bassham

In spirit and approach, both Better and Reinventing the CFO deal with the same subject: Doing things that increase customer value, and cutting out things that don’t.

Better: A Surgeon’s Notes on Performance

Atul Gawande

Metropolitan Books (Henry Holt)

ISBN: 0-8050-8211-5 288 pages $24.00

http://www.henryholt.com/metropolitanbooks.htm 1-646-307-5095

There are a number of areas in which we would ideally like everyone with whom we deal to be better than average, and where we hold them to a higher standard than we would in other areas. Medicine is one of these. Why should you read a book about how doctors can be better? Besides the fact that it is well written and tells a fascinating story, you should read it because much of what Gawande discusses in this book is globally applicable, and the implications for business are clear.

We would like our medical care, and that of our loved ones, to be the best possible. If it isn’t, and particularly if this causes harm (An average of 195,000 people in the USA died due to potentially preventable in-hospital medical errors in each of the years 2000, 2001 and 2002, according to a study of 37 million patient records by HealthGrades.), we would like the practitioner to be punished, or removed from the medical gene pool. This is a tricky area, because many procedures involve significant risk. As an example, this editor’s 90 years old father underwent a high-risk cervical laminectomy and died from a non-foreseeable spinal embolism the day before he was to be released. There was no thought of recourse because there was no fault. The sister of a friend had the same surgery, which was of lower risk because of her age (she was in her 40s) and good health, but died subsequently because of the aftercare. While in this case there was fault, her family took no action because of intimidation and threats of retribution from the hospital, but that is a different issue.

In less obvious cases than these, the balance of blame can be hard to place as emotions run high, but medical associations have estimated that up to five percent of medical malpractice suits are baseless. Simple arithmetic tells us that they are saying that ninety-five percent have merit.

In this book Dr. Gawande approaches the question of what, as a doctor and a surgeon, makes one better than average. He considers three factors:

• Diligence

• Doing right

• Ingenuity

Dr. Gawandy is a great proponent of both transparency and measurement. With these you can see how well doctors, hospitals, and specialized medical treatment groups are doing. You can then try to figure out why some groups, ostensibly doing the same things, are more successful than others. You may initially be measuring the wrong thing, but as long as you keep going you will be able to eliminate the meaningless measures and find those that help you become better.

The down side to this, of course, is the same as is faced any time you measure performance: While those who do well are rewarded, those who are below average or bad are penalized. Those who are penalized don’t like this, and will insist that what is being measured is not what should be measured. This holds true in all arenas, of course. As an example (taken from Reinventing the CFO), “The ratio of average CEO compensation to the pay of the average worker in the United States went from 41:1 to 411:1 between 1980 and 2001.” Some justify this by saying that it is hard to run a large corporation, and few people who can do it, so that any amount paid is worth it. And yet, ”In 2002 CEO annual compensation (salary plus bonus) rose by 10 percent, while total return as measured by the S&P 500 fell by 24 percent.” The book further quotes research which says, “Of the 1,435 companies that have appeared in the Fortune 500 from 1965 to 1995, he found that only eleven executives had transformed their companies from “good” to great.” In effect, we would be better off if these high paying jobs were outsourced to India or China, where an equally good CEO could probably be made available for $500 thousand a year, not $500 million!

Reinventing the CFO: How financial managers can transform their roles and add greater value

Jeremy Hope

Harvard Business School Press

ISBN: 1-59139-94509 272 pages $29.95

http://harvardbusinessonline.hbsp.harvard.edu/ 1- 617-783-7500 In many companies the CFO is little more than a fancy accountant, whose job is to manage the budgets and assure regulatory compliance. While this might have been appropriate in a brick-and-mortar world, Hope believes that the role is no longer appropriate in a world where seventy percent of a company’s assets are in its intellectual property, and where markets change long before a budget is finalized.

In Hope’s view, the function of the modern CFO is to be part of the management team and help guide financial decisions by being a financial risk manager, and to increase customer value, rather than merely being a cost center. The CFO is now supposed to make money for the corporation, not merely count it.

Hope starts by advocating decentralization of power, eliminating annual budgets in favor of rolling estimates that are actually helpful, and eliminating useless procedures. He notes that “Companies report an average of 132 metrics to senior management every month (83 financial and 49 operational). This is more than six times the number recommended by Kaplan and Norton for a balanced scorecard.” Unfortunately, “most measures focus on what can be easily measured (functions or activities) rather than what should  be measured (customer value).” Anyone who works in finance knows these things to be true, and that cutting down useless metrics will bring the workload of finance staff down to something approaching rational.

One problem noted by Hope was that much risk management addresses the letter, rather than the spirit of the law. This is something that we have seen in our role as developers of AML policy. Management generally doesn’t really care about money laundering: What they care about is compliance. As Hope accurately puts it, “the primary problems are not with documentation and audit trail. They have to do with the causes of excessive risk taking, malpractice, and greed.”

There is some lip service given to the value of cutting waste. Hope states that “one of the greatest services a CFO can perform for the organization is to wage a war on waste.” One CFO discusses dumping a thousand employees and moving operations abroad, which saved the company $100 million. While $100 million (and 1000 jobs) might seem like a lot of money (and jobs), it is roughly twice the remuneration of the top six senior managers. We would therefore guess that much of what is done in this area is more financial theatre than economic necessity.

Similarly, Hope discusses the importance of intellectual property. IPCI, however, is still little understood by senior managers, and its loss still accounts for too little to be of real interest. While loss of IPCI may cost the country $300 billion in a year and 7,500 jobs, that is a small portion of the U.S. GDP and employment, so it doesn’t really hit the radar screen, either. As one senior manager put it when discussing his firm’s level of concern over loss of IPCI, “So I lose $100 million and have to close a division. I’m a $35 billion company. Why would I care?”

As with Gawande, Hope is a big believer in transparency, which allows people to compare themselves not with budgets set either low enough to be meaningless or high enough to ensure fraud, but with the performance of their peers.

To a large extent we would say that Gawande’s belief in diligence, doing right, and ingenuity are closely aligned with Hope’s belief in diligence, doing right, and ingenuity. We, who are not CFOs and run small companies, found practical value in Reinventing the CFO, as we did in Better. For those of you in positions of responsibility in larger organization, the value should be even greater in real terms.

Both Better and Reinventing the CFO are must-read books, and we hope you will make time to actually read both of them.

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