The Future of Finance

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

2. Predictions about the Future • 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

3. Predictions about the Future • 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

4. Signs That Your Company Has Gone Too Far With Cost Cutting… • 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

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

6. Dr. Gary Hamel, Harvard Business School Futurist • 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

7. How will we add value in thisNew Economy? • From Stewardship to Entrepreneurship Nothing happened on my watch! • 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

8. Evidence of Exponential Change • 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 counter-intuitive innovation. Copyrignt, Schiff Consulting, 2001

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

10. What’s Needed • 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

11. What questions should be asked? • What opportunities are being missed? • Where are we blind? • What are we missing? • e is not enough! • 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

12. Reality Check • 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 TheWeakest Link! Copyrignt, Schiff Consulting, 2001

13. What Financial Leaders Should Do… • 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 $100K each at Enron. Copyrignt, Schiff Consulting, 2001

14. What Financial Leaders Should Do… • 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

15. Are You Ready to Win the New Cost Wars? Replay or Fast Forward?

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

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

18. Winning the New Cost Wars Symptoms that lead to failure... • Cost shifting • Don Quixote-type leader • 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

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

20. Winning the New Cost Wars • New Harvard Business School Case: MiCRUS: Activity-Based Management for Business Turnaround, a collaboration between Bob Kaplan and Jonathan Schiff • The MiCRUS Case was published as Harvard Business Case # N9-101-070 on March 5, 2001 by Harvard Business School Publishing, Boston, MA. Copyrignt, Schiff Consulting, 2001

21. Insights from the MiCRUS Case Overview • 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

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

23. MiCRUS Corporation The Problem • 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

24. MiCRUS Corporation The Solution • 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 employeeson 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

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

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

27. Winning the New Cost Wars—First Steps… • Need—Cross-functional, top-to-bottom cost leadership, skills, and information readiness assessment. • Reality—Most managers do not understand cost, beyond a very simplistic level, a result of the generational legacy of the RagingBull Market. • Goal—For cost leadership to take hold culturally, it needs 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

28. What About Performance Management for Finance? • “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

29. Leadership Voices from the Field • “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

30. Leadership Voices from the Field • “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

31. Leadership Voices from the Field • “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

32. 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? • 4th-Human Resources (7%) • 3rd-IT (9%) • 2nd-Legal (16%) • 1st-Finance (23%) *The survey was conducted by the Net Future Institute Copyrignt, Schiff Consulting, 2001

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

34. 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

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

36. You are sent by the CEO to evaluate a business unit, in which we invested $25MM, 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

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

38. How Leading Companies are Responding to this Challenge • Amgen • Glaxo-SfdfdfddmithKline • Home Depot • Intel • Johnson & Johnson arriott\ • Primedia • LibertyMutual • Microsoft • Rapid Tech Copyrignt, Schiff Consulting, 2001

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

40. Situation Analysis: Microsoft-Problem • 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

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

42. Situation Analysis: Microsoft-Solution • 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

43. Situation Analysis: Microsoft-Results • 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 FinWeb. • The Finance work is becoming almost as interesting as their stock price! Copyrignt, Schiff Consulting, 2001

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

45. Rapid Tech, Inc. A CFO Organization Performance Management Case Study Adapted from actual practice

46. Background • $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

47. Business ProblemFinance Workforce Not Meeting the Challenges of the New Economy Chronic Symptoms: • 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

48. Underlying Problems & Cost Drivers • 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

49. Business Solution • “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

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