Prescriptive Financial Transformation—What Every CFO Should Know

Date01 January 2018
Published date01 January 2018
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22322
Prescriptive Financial
Transformation—What Every
CFO Should Know
Brian Higgins
Today, many
organizations – both
private and public
alike – are under
pressure from owners,
executive manage-
ment, and activist
investors to improve
tional performance
neces sary to either
maintain their com-
petitive leadership or
to address financial
challenges posed by
today’s economy.
When any of the
following occur, the
organization can ben-
efit from a prescriptive review
of their operations:
Changes in the business
environment due to eco-
nomic downturns, loss of
market share, product/
service ma turity, merg ers
and acquisitions, deregu-
lation, etc., that impact
Growing costs without a
similar growth in revenues.
Increased demands for per-
formance accompanied by
budgetary constraints.
Revisions to strategies that
require redeployment of
effort towards more mis-
sion-critical practices.
Lack of knowledge regard-
ing the true cost and
profitability of
products, ser-
vices, and market
Declines in
employee engage-
ment and/or
customer loyalty
affecting competi-
tive perfor mance.
Overlap, duplica-
tion, and non-
effort expended
on activities
across functional
bounda ries, gen-
erating excessive
and avoidable
When you need
to grow the busi-
ness, but cannot
afford to do so.
Desire to establish or main-
tain a leadership position in
a highly competitive market.
When organizations are
faced with such financial chal-
lenges, the CFO is often looked
upon as the “go-to” person
Activity Value Management® (AVM®), the method
described in this article, provides the linkages
necessary to achieve outstanding and often break-
through improvements in financial and operational
performance by linking data elements that previ-
ously have not been fused for the purpose of
improving performance. Unique features of AVM®
include, but are not limited to, a revolutionary
method of accurately costing and measuring the
financial performance of products and services
that includes both cost and effort, inclusion of
stakeholder experiential data linked to the work
processes for the purpose of defining value, and
an assemblage of specifically designed tools that
can be applied to produce breakthrough improve-
ment in financial and operational performance.
© 2018 Wiley Periodicals, Inc.
The Journal of Corporate Accounting & Finance / January 2018 13
© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf
expected to provide leadership
that will navigate the organiza-
tion through troubled waters.
Unfortunately, many execu-
tives having this responsibility
may not have the authority nor
the wherewithal to succeed in
times of crisis and often pay a
personal price if not success-
ful, resulting in a comparatively
short shelf-life. There are
numerous programs and meth-
odologies designed to enhance
performance aimed at cost
reduction, revenue improve-
ment, customer satisfaction,
employee engagement, etc.,
but these techniques often are
void of critical information
that might tie these programs
together to achieve overall
performance objectives. These
programs often compete for
resources while having conflict-
ing goals and objectives.
A critical component to
effective financial and opera-
tional performance improve-
ment is accurate data on which
to base decisions – informed
decisions grounded on height-
ened understanding of the
relationship between customer
loyalty, employee engagement,
costs, and overall financial
performance. That said, most
financially-based performance
methodologies omit, or fail to
connect, critical information that
plays a key role in enhancing
financial and operational excel-
lence. A missing component to
most operational performance-
improvement endeavors is the
inclusion of stakeholder infor-
mation necessary to identify
areas of sub-optimized value.
In addition to linking critical
information required to achieve
breakthrough improvements in
performance, executives need
tools to understand the true
cost and profitability of their
products and services. Tools
that enhance outcomes that
include lower costs, enhanced
revenues, engaged employees,
and enhancements in overall cus-
tomer satisfaction and loyalty.
Expectations associated
with many C-level executives
are typically related to their
functional responsibilities. For
example, the chief information
officer (CIO) has direct author-
ity and responsibility over the
informational needs of the orga-
nization. Similar to the CIO, the
chief technical officer (CTO)
oversees the technical aspects
of the organization, while the
chief marketing officer (CMO)
provides leadership regarding
marketing efforts and the results
that those efforts have in pro-
moting the organization’s out-
puts—all having both authority
and responsibility. However,
the expectations associated
with the chief financial officer
(CFO) may not all be directly
associated with their functional
responsibilities—in some areas,
they may have responsibility but
little, if any, authority.
Let’s first define the role
of the CFO. At a high level,
one can think of the CFO’s
responsibilities in terms of time
frames in which they operate:
Past. In the past, the CFO’s
role was that of a book-
keeper or accountant. How-
ever, today their historical
role is normally associ-
ated with controllership
responsibilities. The CFO
is ultimately responsible for
reporting historical finan-
cial and operational perfor-
mance. These responsibili-
ties are a major fiduciary
duty to the stakeholders
such management, inves-
tors, analysts, and govern-
mental reporting agencies.
Present. These responsi-
bilities pertain to admin-
istering the day-to-day
financial operations such
as accounting, treasury,
and adherence to regula-
tory requirements such as
Sarbanes-Oxley, ASC 606,
and so on.
Clearly, the first two time
frames are extremely important
and perhaps represent the major
responsibilities of the CFO. The
last time frame is the subject of
this article and is emerging as
one the most important with
regard to the future of the orga-
nization as well as the career
trajectory for the CFO:
Future. The CFO is respon-
sible for leadership and
partnership along with
other C-level peers for the
financial and operational
well-being of the organiza-
tion. The CFO has been spe-
cifically chartered with the
responsibility for identifying,
from a financial perspec-
tive, where the organization
is performing well, along
with identifying areas where
enhancements are required
to meet financial and other
organizational objectives.
This role is getting more
attention these days due
to more global competi-
tion and economic upturns
(opportunities) and down-
turns (crisis management).
Often, the CFO’s responsi-
bilities related to financial per-
formance enhancements have
been relegated to a financial
planning and analysis (FP&A)
team or taken on personally.
However, financial executives
may have neither the expertise,
tools, nor the systems necessary
to assess the value of what the
14 The Journal of Corporate Accounting & Finance / January 2018
DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.
organization does to create its
products and services. A survey
conducted by the American
Productivity and Quality Cen-
ter (APQC) polled a number
of CFOs regarding their most
vexing issues and barriers
related to improving the value
contribution of FP&A to their
organizations. The results of
the survey are both surprising
and stunning (Exhibit 1) see
Driscoll & Kaigh (2015).
One of the first steps nec-
essary by the CFO is to assess
the financial well-being of the
organization—which areas are
doing well and which areas
require financial interventions.
The assessment often taken is
the application of one of vari-
ous cost-accounting systems
designed to measure the cost
and profitability of products
and services.
Without accurate cost
and profitability data, CFOs
may come to false conclusions
about financial and operational
performance, and the wrong
conclusions often lead to the
wrong solutions.
Perhaps without exception,
conventional and even more
advanced cost-accounting sys-
tems rely on averages in their
computations when distribut-
ing and/or allocating costs to
products and services. By the
very nature of averages, targets
of such methods are either
over- or undercosted. Using
such cost-averaging systems
can be compared to the social
situation that many have expe-
rienced (Brown, 2016). When
a group of people decide to
“split the check” after dining,
those who made less expensive
choices will be subsidizing, or
covering, the cost of those who
made more expensive selections.
In business, organizations often
apply overhead/indirect costs in
a similar manner that “covers”
some lines of business (LOBs)
that are actually using more
overhead resources than others.
Typically, such systems fall into
the following categories.
Conventional Cost
Having its roots in the
1800s, where factories made a
single product and total operat-
ing costs were divided by total
production volume to arrive at
fully burdened unit costs, con-
ventional costing techniques
assign indirect and/or overhead
costs typically through applica-
tion of overhead rates. These
rates are, in turn, “allocated”
to the outputs of the organi-
zation. The manner in which
overhead costs are spread
across the various LOBs is to
attach such costs to an opera-
tional metric associated with
each LOB, such as direct labor
cost, machine hours, number
Barriers to Improved FP&A as Reported by CFOs
Exhibit 1

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