Wednesday, April 16, 2008

So What… Now What?

My last few posts have conjured up a few questions from my readers, mostly along the lines of; ok Don, now tell us how to fix it. How, about identify the various cultures in organizations and giving us solutions to resolve the issues in each. As much as I would like to produce an “If-Then” matrix for the marketplace it would be essentially useless. The reason for which, is that organizational cultures are the product of their leaders, and as human beings are very complex beings which cannot be explained in simple terms, the task becomes almost impossible; somewhat like quantifying what ‘normal’ is.

In the last couple of weeks I had the opportunity of meeting with several CFOs and Credit Managers from a few very large firms. My area of interest in these talks was, although collections, it more focused around reporting requirements. I found it truly amazing that, for the most part, firms run pretty much the same. They predominately manage their work in progress, they have a billing process, they create bills and they collect on them. Yet, they have a mind-boggling number of very diverse reporting requirements. How can that be? The have essentially the same quantities they are interested in, yet they report on them differently.

As it turns out, financial reporting is as much a quagmire as the differing collections methodologies seen in the professional services sphere. In reality, what is being exhibited in reporting is the same thing that is seen in the treasury and financial management infrastructure; it is all culturally driven. How can one firm honestly contend that their reporting infrastructure is vastly superior to others in the market place? The entities are the same, just viewed/reported on differently.

For many years my contention was that organizations got into the mode of ‘analysis-paralysis’. Through the intense gyrations of twisting, turning and bending the data somehow the user would be awaken by a hidden secret or some mystery would reveal itself. When in reality, that never happened. The secret contortion didn’t reveal the secret to the firm’s competitive advantage. This gets back to some of my earlier writings, regarding the continuance of identical repetitive tasks all the while expecting different results is a sign of insanity.

Today’s professional services firm has a plethora of reports that deal only with client investment. There are many levels of AR, WIP, and cash receipt reports that analyze the same data from hundreds of perspectives. Basically looking at the same apple from different angles! I will bet as you read this you may conclude, yes we have a few reports which look at the exact same data – differently. The most extreme organization I have ever met would produce a partner report book that was 480+ pages in length, EACH MONTH! Amazing when you consider the cost of its production for the firm’s several hundred partners!

How does one stop this treadmill of reporting frenzy? I believe the answer lies in an accounting concept that only auditors really hold dear. The concept is called materiality. In the accounting/finance world it is the materiality principle. The materiality principle can be summarized as: An item is material if there is a reasonable expectation that knowledge of it would influence the decisions of prudent users of the financial information.

Implementing the materiality principle in an organization becomes the gateway to relinquishing the bondage of excessive reporting. The firm, in its cultural wisdom, must define what deviation from expectation that would cause a user to take action in light of the variance. Once a firm can get to this point, the number of reports will rapidly dwindle to a few key indicators that will readily provide pulse of the operation. From there, management decisions can quickly be enacted to institute corrective change.

The first question you are now probably thinking, how can this be done in my organization? The answer follows from where we began – with culture. I do know several organizations that have been successful in implementing a truly strategic reporting model, yet they are few and it came with resistance. One firm, I know, took the bottom up approach. Where they simply dropped one report per month until management realized the report went missing. As it turns out, they went from 22 reports per month to three. Yes, there were only three critical reports that drove the organization!

A dear friend of mine shared her experiences of analysis-paralysis, from her junior days in a global accounting firm, through partnership and now in a global law firm. Her simple statement is “When looking at the numbers on a report, you are either driven to saying either - so what … or now what?” If your reports tend to invoke a lot of ‘so what’, do you really need all of them saying the same thing?

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