Wednesday, May 04, 2005

Aligning Finance and Operations – The key to long-term business success. (Part 1)

There is a huge rift in understanding and language between operations and finance people within an organization. Although both appear to deal with similar information the ability to communicate with each other is limited by common vocabulary, perspective, responsibility, and experience. This lack of commonality between these 2 groups leaves a very large gap in aligning corporate objectives. It leaves a major gap when it comes to evaluating and selecting IT solutions to help the organization achieve their objectives.

This problem exists in most companies, large and small. Best in class organizations have overcome this problem.

In my previous blog I talked about why clients often are disappointed with the results of their application solutions. Most companies still lack a cohesive solution architecture that provides integrated information flow, synchronized activity across the organization and collaboration with external partners. The IT solutions often mimic the siloed architecture of the organization making the integration and synchronization of the information network virtually impossible to maintain if it was ever a deliverable.

Compounding the situation is the inability of finance to meaningfully communicate with operations on the strategic goals of the organization and the inability of operations to explain the functions they are mandated to execute. Aggravating the communications is that operations operate at a functional level and most often don’t understand how their activity fits into the greater whole and its impact on the financial well being of the organization.

Is it realistic to expect that finance that views the organization through dollars and cents can communicate with operations that relates to organization through physical units?

A real (and repeatable) vignette sheds light on this reality. Outside of plant and equipment the 2 factors that make up the vast majority of the companies assets and expenses are inventory and people. Indeed whenever a company hits upon hard times the finance types immediately look to reduce inventory and head count. The solution to their immediate financial problem is obvious. There is almost an immediate improvement in the balance sheet and liquidity by converting inventory to cash. Head count reduction also improves the company’s income statement in the short term.

However, as important as these goals are in a crisis, they are always reactive, invoked by finance and are rarely strategic. Operations rarely have planned input and the resulting actions rarely provide long-term benefit to the organization.

In fact the decisions are almost always implemented to protect share value. This is true for both public and private companies. In the short-term these activities do deliver the expected results but rarely do they provide sustainable benefit.

If finance feels that reduction of inventory and headcount are so critical and important in a financial crisis and necessary to protect shareholder value why are these goals not strategic actionable objectives, day, after day, after day? Certainly it is not for lack of stating that optimal inventory levels and operational efficiencies are strategic goals.

In a financial crisis the lower levels of inventory and head count provide the necessary short-term cash results but are achieved at the risk of the long-term market interests of the organization. Finance’s objectives are the preservation of capital in the financial crisis not the strategic market positioning of the organization.

In best in class organizations the finance and operational groups have found ways to work together by constantly aligning the financial and operational goals to maximize the company’s long-term market and financial strength.

The critical element in aligning finance and operations is their ability to communicate and understand one another on each other’s specific goals and objectives. This ability to communicate and understand is equally critical between operational silos. The ability to communicate is based on a commonality in the language between the parties. This commonality of language within the business is based on intelligent information. Intelligent information is the enhancement of raw data into information that can be shared and understood and effectively acted upon. In order for the information to be supportive of intelligent decision-making it must be accurate, timely, and intelligible from the perspective of the person using the information.

IT solutions that don’t facilitate the communications between finance and operations fail to deliver the results that they are often expected to provide. Without proper communications between finance and operations it is virtually impossible for companies to align their short-term tactics with long-term strategy. IT solutions that are aligned provide useable information to all users in a manner that they can use to make informed decisions. However, too often this alignment in IT solutions fails because IT decisions are not made holistically. IT decisions are often driven by operational and financial silos without concern or thought on how the results may impact overall objectives. IT decisions made this way will almost inevitably lead to IT misalignment which in turn delivers misaligned information which in turn results in suboptimal communication and results.

Keeping process and information aligned is a serious problem. Business realities ultimately dictate business process. IT solutions that require companies to fit their business process to the software architecture compromise the ability of the business respond to their business realities. Maintaining alignment over time between disparate IT software and hardware solutions is probably the greatest challenge and cost to IT organizations as they constantly fight to align their IT infrastructure with the needs of the organization. (See Joshua Greenbaum’s article Software as Disservice, Managing Automation, April 2005)

Constantly aligning the business IT solutions to meet the changing business process requirements is vital to improving communications between operations and finance.

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