Look at Suppliers’ Input Prices with a New Lens

As commodity prices increase, suppliers come knocking, pushing through commensurate increases. But what happens when those same commodity prices fall? Too often, purchasers fail to get a break. Consider the situation of an aerospace and defense supplier. As key metal prices rose, the company grudgingly accepted its suppliers’ price increases for machined parts. Trouble is, the company lacked good tracking data on commodity indexes. So … [ Read more ]

Profit Mapping

A profit map, the core analytical tool of profitability management, displays the profitability and cost structure of every product in every customer in the company. Profit maps show exactly where profit is flowing and where it is lost.

A profit map is not especially difficult to develop, but it is completely different from the information developed for financial reporting. Many finance managers make the … [ Read more ]

Create a Telescopic Lens for Your Finance Function

Within any department there may be dozens of plans and forecasts, and they’re usually kept on desktop spreadsheets that don’t match up with one another. Our research finds that the connections between these various forward-looking activities are limited. Although companies are not completely uncoordinated, gaps routinely occur. (“Manufacturing never knows what promotions marketing is planning until it’s too late” is one common complaint.) The impacts … [ Read more ]

Start an Initiative to Kill Initiatives

Heike Bruch and Jochen I. Menges make a strong argument for starting an initiative to kill initiatives in their April 2010 Harvard Business Review article “The Acceleration Trap.” Far too many “walking dead” projects clog capacity in most organizations. Once superfluous activities have been cut, leaders can allocate resources according to the priority of the remaining projects and initiatives. This requires the application of a … [ Read more ]

Making Better Investment Decisions

Always ask people making an investment recommendation to present their second-best choice. It’s rarely better than the first. But both might actually be good, and both recommendations of another business unit might not be. Considering just one recommendation from every business unit will deprive you of many investment opportunities you’d get if you asked for two.

Taking a Realistic Approach to Budgeting

Executives at Norwegian oil and gas company Statoil were looking for ways to make it more nimble and more realistic about its goals. So they adopted a new approach to year-end budgeting, which breaks it out into three different sets of numbers. These included targets (“what we want to happen”), forecasting (“what we think will happen, whether we like what we see or not”), and … [ Read more ]

Adopt Simple Rules to Break the Resource Allocation Status Quo

Simple resource allocation decision rules can help minimize political infighting because they change the burden of proof from the typical default allocation (“what we did last year”) to one that makes it impossible to maintain the status quo. For example, a simple harvesting rule might involve putting a certain percentage of an organization’s portfolio up for sale each year to maintain vibrancy and to cull … [ Read more ]

Avoiding Decision Bias with “Next-Best” Ideas

A technique for avoiding decision bias is to request that managers show more of their cards: some companies, for instance, demand that investment recommendations include alternatives, or “next-best” ideas. This approach is useful not only to calibrate the level of a manager’s risk aversion but also to spot opportunities that a manager might otherwise consider insufficiently safe to present to senior management.

Ensuring Investment Discipline

Rio Tinto institutes checks and balances to manage internal lobbying. We have something called the Investment Committee, which approves sizable investments of any kind and consists of the CEO, CFO, the head of technology and innovation, and the head of business services. In other words, it does not contain any of the divisional heads. The plan is that this committee has enough data to have … [ Read more ]

Combine Strategy Development with Capital Allocation

When Halliburton Energy Services Group, a leading oil field services company, revamped its strategic planning process, senior managers decided that these two processes were in fact one and they designed their strategic planning accordingly. Halliburton now has one owner of strategy and capital allocation, with clear accountability for ensuring alignment between the two. This senior manager owns the corporate-wide strategic managing process and chairs a … [ Read more ]

Think Counter-cyclically with Customer Accounts

Keep competitors off guard by avoiding the obvious. For instance, the usual reaction in a downturn is to tighten customer payment terms and increase collection efforts in order to boost cash flow. Instead, consider giving your most profitable customers or target accounts more lenient payment terms in order to capture more of their business. Make terms stricter for less attractive accounts. You’ll likely find that … [ Read more ]