business profitability – Cooper Mann Consulting

Philosophy of Process Improvement: Today’s CFO Focusing on Operations

There are a great many methodologies and approaches to “making businesses better” through process improvement. From SixSigma to Continuous Process Improvement to Total Quality Management – all describe methods of measuring performance and outcomes to return intelligence oriented towards improvement. Many of these approaches are generally applied in manufacturing businesses, because in manufacturing it’s easier to see where processes may be flawed because the process works with tangible elements. Making corrections in a process can improve the performance of that process by reducing errors or increasing efficiency. The truth of the matter is that every business is like a manufacturing business, and applying measurements to the various processes the business performs can reveal the secrets to improving not only process performance and product quality, but resultant profitability.

A recent article on CFO.com titled Operations Take Center Stage, author David McCann discusses how some CFOs are improving business profitability and performance by delving deeper into operational areas of the business, and not remaining focused squarely on accounting and finance issues.

“Operations is the key to everything,” says Larry Litowitz, finance chief at SECNAP Network Security, a secure Internet-services provider. “That orientation is found most at manufacturers, but it should be at every company.”

Fiscal and financial matters are important to every business, but focusing on accounting for the end-result of business activities assumes that the work leading to the result is useful and effective. As more attention is paid to conservation of cash, reduction of expenses, and overall profit improvement, CFOs are necessarily moving deeper into the operational aspects of the business to uncover potential not previously addressed. In some cases, the move is more a function of self-defense and necessity than desire, as businesses increasingly compress spending on management, merging the functional roles of CIO, COO and CFO.

Increasingly, CFOs may find themselves taking on operational tasks whether they want to or not. At larger companies, the steady waning of the chief operating officer position has resulted in more operational responsibility for CFOs, recruiters say. In 2000, 47% of the 669 companies included in either the Fortune 500 or S&P 500 had COOs; in 2012, only 35% did, according to executive-recruiting firm Crist Kolder’s 2012 “Volatility Report of America’s Leading Companies.”

Some accounting professionals may believe that they don’t have the skills and experience to suggest changes in operational areas of their client businesses. I would suggest that logic and reason are generally the prevailing factors supporting process improvement – reasoning that is often developed through simple observation. Taking the time to understand what the business is doing at each level, and then actually observing those activities and accounting for their effectiveness and error rate, is how professionals can spend quality time in the business and uncover hidden profit potential.

Litowitz says CFOs can influence operations at a range of companies, including service-oriented businesses. “It’s really no different. The work is a set of activities,” he insists… “All these activities can be analyzed, controlled, and measured against a predetermined standard,” says Litowitz. And just as on a manufacturing floor, efficiency generates profit, justifying the CFO’s involvement.

Make Sense?

Turn Risk into Opportunity:

Focusing on Value and Supporting Profitability

Most businesses accept that they have “customers”, people who pay for the products and/or services that the business provides. However, the customer many businesses fail to recognize is the “internal” customer – the consumer of services delivered internally to the organization. These customers, most frequently recognized as co-workers and team members, depend upon the services delivered to them in order to do their jobs for the company. This dependency represents the value of the service, and every organization has a need to get as much value as possible for the cost they expend for these services. When the business approaches these internally delivered services as profit centers rather than pure cost centers, the impact to the business could highly beneficial as the application of resources gets focused on building strategic benefit for the company and not simply on supporting status quo.

Calling a part of the business a profit center doesn’t mean it’s going to sell services externally for money. Rather, it means that the activities of the department can have a direct and meaningful impact to business profitability, and are participants in the development and facilitation of business strategy. Profit centers can come in many flavors in a business, and may be identified as managers and owners reflect on areas of the business where changing conditions may introduce business risk. Risk often translates to opportunity at some level.

A fairly obvious example of this is in the placement of IT departments and services within an organization. If information technology is viewed purely as a cost-center and a “necessary evil” of doing business, it is more likely that IT services will have a perceived higher cost and lower level of value, as the technology is not considered a player in business strategy. When technology is leveraged more directly to realize the strategic vision of the business, and is applied in ways which assist in delivering higher levels of service at a reduced cost while providing a means for market differentiation, the positive impacts in efficiency and profitability can be great.

A not-so-obvious example of a cost center which could be re-oriented towards increasing strategic positioning while making a positive improvement in internal service delivery (resulting in increases in performance and profitability) is the area of sales tax compliance. Particularly with the emerging complexities introduced with cloud and Internet services, and with the lack of standards being the only consistency across the country, sales tax compliance is becoming a significant consideration and risk factor for businesses seeking to adopt cloud services and SaaS application solutions.

“Don’t just think of the tax department as a compliance shop,” says Waterfield. “It should also be considered a profit center. If given the proper resources, and access to information, it can provide the company the ability to become competitive in the marketplace either from assistance in calculating the proper price point or reducing overall tax expense on purchases.”
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Unless the tax compliance department is a direct participant in the consideration and adoption of cloud IT and other services, the business could end up with a significant liability and risk exposure that was not expected or allowed for. Rather than finding this out after the fact, reviewing these types of potential impacts should be part of that same process which considered the adoption of the solution in the first place.

Accounting and tax professionals can find additional value to deliver to their existing and prospective clients by placing focus on these very important aspects of operating and managing a business. As technology and globalization introduce more, and more complicated, issues relating to sales taxes and reporting compliance (which even the smallest of businesses must address) accounting and tax professionals should help their clients meet these changing requirements by offering proactive consultative guidance and support.

Make sense?