Uncertainty: The Elephant in the Room

Not long ago I was fortunate enough to have a conversation with two very fine gentlemen in the software business. They were part of an organization well-recognized for its leadership as a reseller and a developer providing an ERP (enterprise resource planning) solution for Tier 2 and upper-crust SMB firms.

As part of the conversation, I mentioned the fact that uncertainty is “the elephant in the room” throughout the IT (information technology) business.

What I meant by that is this: while the sales process is underway, it all too frequently happens that the two parties have differing views of the uncertainty involved in any project that might be undertaken as a result of their conversation. While they hold these differing views, however, they almost never speak openly and explicitly about the uncertainty itself.

My experience shows me that these two parties hold views of the uncertainty that take shape somewhat along these lines:

• The Client or, more correctly, at this stage in the process, “the prospect” may believe that there is very little uncertainty about which to be concerned. After all, he and his organization have tried to be forthcoming with the reseller. They have answered all the questions the resellers’ folks have raised from the first day they met, and they have done so as directly as possible.
  
  Because “the prospect” feels this way, the only “uncertainty” he may feel about any proposed agreement is whether the reseller is capable of delivering on all the promises he has made over the course of the negotiations.
  
  Also, since “the prospect” will hold the checkbook during the project execution, he feels pretty sure that he can force the reseller into assuming whatever uncertainty might remain in the anticipated project.
  
• The Reseller has been through this many, many times. He is well aware that every project is full of uncertainty. A short list of the uncertainties in the reseller’s mind might look like this:
  • Have we asked enough questions?
  • Have we asked the right questions?
  • What don’t we know that we should know about this company and how it works?
  • Can the modifications we anticipate be completed in the time we have estimated?
  • Will the prospect’s company allow this project to proceed in the time we have estimated, or will their inefficiencies, indecision or other operational problems cause us to incur unanticipated time and expenses?
    

Accidentally induced uncertainties

W. Edwards Deming once summed up very succinctly the uncertainty included in all human communications. Following a meeting between two parties, as one party was exiting the room, Deming turned to the manager he was consulting and said, “We know what we told him, but we don’t know what he heard.”

Communications between two human beings are full of such foibles. The fact that the reseller’s salesperson does not believe that he has made any “promises” upon which the reseller cannot readily deliver does not mean that the prospect has not heard “promises” that are very different from what was intended by the salesperson.

Under such circumstances, there is—more likely than not—no intention by the reseller’s sales team to mislead the prospect. Neither, most likely, is there any intent by the prospect (now, client) to somehow misconstrue what was said in order to take undue advantage of the reseller.

Nevertheless, such accidentally induced uncertainties too frequently lead to cost overruns, hard feelings between the reseller and the client, and—sometimes—even to failed projects.

Why don’t we talk about it?

My question is simple: When it comes to IT projects (or any kind of projects, for that matter), and whether it is a relationship between an external IT provider or an internal customer relationship, why do we so often ignore “the elephant in the room”?

Why are both the customer and the supplier both so reluctant to speak explicitly about the uncertainties that almost inevitably affect a project of any significance or size?

Let me know your thoughts. Thanks.

Business Intelligence, CPM and the Middle-Market

I want to take a moment to thank CFO Magazine for inviting me to be a part of the social media coverage for their 2011 Corporate Performance Management Conference in Dallas. It was, indeed, my pleasure and my privilege to be a part of this foray of theirs into social media connections with their audience, and I trust that they will continue to expand the application of social media in connection with their helpful events.

So, what did I learn while at this conference?

I learned much.

• I learned that there is a broad and increasing array of tools available for businesses to leverage as they begin or expand the business intelligence and corporate performance management efforts in their organizations.
  
• I learned that there is considerable confusion in the CPM (corporate performance management) marketplace over the application of various terms including “budgets” versus “forecasts”; the differences, similarities or where the line falls between “business intelligence” and “corporate performance management”; or even whether simply having a “budgeting” or “forecasting” system in place means that you are practicing “CPM”.
  
• I learned that many, many organizations in the small-to-mid-sized enterprise marketplace are increasingly sensible to the need for improved visibility and insights regarding their own businesses, the industries in which they participate, and the broader economics that affect them, their customers and their suppliers. Managers and executives are, therefore, turning to “business intelligence” to aid them in finding the answers they think they need.
  
• I learned that despite the tremendous interest in the middle-market for adventuring into business intelligence and CPM, most middle-market participants are still on the sidelines, mostly because they just don’t know where to start. At the same time, they are not yet convinced of an immediate ROI if they jump-in feet first.
  
• I learned that many organizations feel that they can do BI and CPM with Microsoft® Excel™ and/or Access™ and save “a ton of money” while still reaping the ROI rewards.
  
• I learned that most participants in major “forecast” and “budget” initiatives know that their processes are being undermined by “sandbagging” and “gaming,” but feel (more or less) helpless to stop these practices.
  
• I learned that when mandates are handed down from on-high (say, a parent company or corporate HQ for a division) saying, “We need you to do X next year,” that even the financial executives in the subsidiary company or division will “game the system” to satisfy the mandate—whether or not the “gaming” reflects reality.
  
• I learned that the vast majority of middle-market financial managers are still entrapped in cost-world thinking. Such executives and managers are far less likely to engage BI and CPM to discover ways to increase Throughput, and are far more likely to spend their time, energy and money in pursuit of the diminishing returns of cost-cutting.

Apart from the conference, my experience in working with an array of middle-market firms tells me that a great many executives and financial managers fall into one of two very large camps:

1. Those who feel they have no need for business intelligence or a comprehensive program of corporate performance management because they already know and understand all they need to know about their firm, how it operates, the industry(ies) in which they participate and the affects of the economy at large on their business.
   
2. Those who have set up some spreadsheets to analyze certain factors of their business and who, perhaps, actually create an annual budget. Many of these, therefore, feel like they are already doing “business intelligence” and “analytics” and “CPM.” Such folks generally have a sense that there is no significant ROI for them in doing more.

Given all of these different factors, I think it is good—an imperative, in fact—that organizations like CFO Magazine are sponsoring events and stimulating more conversation on these topics—especially in the middle market where most of the confusion appears to reside.

Let me hear your thoughts.

Implementing CPM in small business on a limited budget

Eric Lundberg’s presentation at CFO Magazine’s 2011 Corporate Performance Management Conference today was refreshing. Lundberg brought things back down from the stratosphere for the large number of small-to-mid-sized business finance people in attendance.

My sense is that many of the presentations thus far have set forward concepts of such a broad scope and relative complexity that they are far, far beyond the pale of immediate consideration by many of the firms represented at the conference. Many of the attendees with whom I have spoken are mere “beginners” in corporate performance management (CPM).

Now, do not get me wrong: I have done no scientific—or even non-scientific—polling on this subject. I say what I say based solely on conversations I have had with a relatively small handful of conference attendees.

Nevertheless, I believe that many of the folks in attendance came here really trying to find out answers to pretty basic questions about CPM. And, given the fact that Julia Homer presented—that 63 percent of CFOs surveyed are more pessimistic about the coming year than they were about last year—I would further surmise that most of them are looking for ways to implement some kind of business analytics and CPM with the smallest possible drain on their corporate cash-flow.

That is precisely why I found Eric Lundberg’s presentation so very refreshing. Lundberg introduced his remarks by saying that he wanted to present “practical applications of tools” that he and his team put in place at ALM. He went on to tell the crowd that, as CFO in a firm held by private equity, he is not in a position to "go out and spend $100,000" or more on sophisticated analytics tools. Therefore, he and his team have implemented substantial business analytics built mostly around “home-grown” applications—not the kind purchased from analytics application vendors.

Lundberg went on to describe—in considerable detail—a number of the analytics in use at ALM. Using these effective but relatively low-cost tools, Lundberg and his team have gained considerable insight into what makes—and keeps—their company profitable. They have already implemented rolling forecasts and have the facility to re-forecast every month. They also do a complete bottom-up forecast fresh every quarter.

I really believe that Lundberg’s presentation put a light at the end of the tunnel for many CFOs struggling with the question: “How can we begin gaining the advantages of business intelligence and analytics without ‘big bucks’ to invest in making it a reality?”

This is real innovation, and it is clear that the analytics Lundberg and his team have put in place at ALM are already making the firm more successful, even in the midst of the present economic doldrums. Sixty-three percent of CFOs today may be more pessimistic about the coming year than the year just past, but Lundberg has leveraged limited resources in a way that will make his firm far more likely to survive and even thrive.

Congratulations, Eric Lundberg! And thanks for giving more small businesses hope for embracing new management metrics and analytics despite severely constricted funds.

Forecasting Mistake Number 1: Forecasting to the Wall

In today’s session at CFO Magazine’s 2011 Corporate Performance Management Conference, speaker and author Steve Player, of The Player Group and North American Director of the Beyond Budgeting Round Table, brought out lots of valuable information about the need for organizations to move from a once-a-year, top-down “budgeting” process and into an ongoing process of rolling forecasts.

In doing so, he employed a striking analogy.

Player asked the attendees: Would you be happy with a new car, if, when you first bought it, the headlights gave you a good view of the road ahead—shining out maybe a 600 feet ahead of you. But after three months, the headlights only gave you visibility for 450 feet; and after owning for six months, the headlights only showed you 300 feet of the road before you?

Of course not! No one wants a car like that.

Nevertheless, that is precisely the kind of performance being actively supported with the function of traditional methods of budgeting and forecasting. First the company is looking forward a full twelve months. Three months later, the company is looking only nine months into the future. And, after another three months, their view into the future—their forecast or their budget—gives them only six months of guidance.

What is worse is the fact that the one-year forecast was likely put together from statistics collected and judgments made three to six months earlier. So, by the time the firm’s forward-looking view is obscured beyond six months, the six months they are seeing in the forecast is now nine to twelve months old and out-of-date.

Is it any wonder that such a firm’s “budget” is considered little more than a well-intentioned joke—or perhaps just something to satisfy the executives—by the workers who are all too frequently being measured against the budget?

Steve Player calls this approach “forecasting to the wall,” where no one has a clear vision beyond the 12-month “wall.” He also calls it, “Forecasting Mistake Number One.”

Forecasts, when used, ought be updated as often as necessary; and certainly every time there is a significant change in the mathematical, statistical or intuitive elements underlying the existing forecasts. Forecasts should also be rolled into the future far enough and frequently enough to allow the management changes they are intended to guide to take effect for driving ongoing improvement.

“Mistake Number One” – Think about it.

Heading to CFO Magazine’s 2011 Corporate Performance Management Conference

As I write this I am winging my way to Dallas, Texas, and the Hotel Fairmont for CFO Magazine’s 2011 Corporate Performance Management (CPM) Conference. CFO Magazine has asked me—given me the honor—of providing blog coverage of the event.
Two other outstanding gentlemen have been invited by CFO Magazine to blog (and Tweet) live from CPM2011. One is blogger, author and founder of CFOwise®, Ken Kaufman, and the other is Gary Cokins, who—while being Principal of Global Business Advisors at SAS—is also an author and blogger. I am much looking forward to meeting these fine writers and, frankly, I find myself humbled to be in the company of such accomplished executives.

The Speakers

As always, CFO Magazine has gathered a stellar array of speakers for this conference:

• Thomas H. Davenport – President’s Distinguished Professor of Information Technology and Management at Babson College and co-author of Competing on Analytics and Analytics at Work
• Dr. Kasthuri Henry – Professor and president of KasHenry, Inc.; Assistant Professor at Southern Illinois University; and Adjunct Professor at North Park University
• Eric Lundberg – Chief Financial Officer at ALM
• Wayne Eckerson – President of BI Leader Consulting and author of Performance Dashboards: Measuring, Monitoring, and Managing Your Business
• Christina Spade – Senior Vice-President of Affiliate Finance and Business Operations at Showtime Networks
• Christopher Poinsatte – Executive Vice-President and CFO of Dallas-Fort Worth (DFW) International Airport
• Roger Blanken – Director of Finance at International Flavors and Fragrances, Inc.
• Curtis Neumann – Associated Director of FP&A at AT&T
• Jay Thompson – Managing Director at Protiviti

Supplemental Workshops

• 102 Improved Performance Management through a Unique Analytical Scorecarding System presented by Forrest Breyfogle, President & CEO of Smarter Solutions Inc.
• 201 Aligning Resources through Integrated Business Planning presented by John O’Rourke, VP Product Marketing at Oracle Corporation
• 301 Beyond the Numbers: Improve Your Company’s Performance in 30 Days with Visual Analytics presented by Kurt Lueck, Practice Director at Analytics8
• 303 Driving CPM with BPM: Unlocking Critical Information through Business Process Management presented by Vince Tornillo, Global Solutions Consultant at Ricoh Solutions Group and Evan McDonnell, VP at Appian

As you can see, it should be a great few days and I will do my best to bring you the highlights and value of the information being presented at this great conference.
For those of you with a special interest in supply chain metrics, pay particular attention to Roger Blanken’s presentation. He’s going to be talking about applying corporate performance metrics in the extended supply chain. International Flavors and Fragrances buys product from almost every area of the world and is wholly reliant on an broad and greatly extended supply chain. It should be interesting to hear what he has to say on the matter.
Also, I have this sense that I will be the irreverent one here. I expect to ask some tough questions and seek real answers from the experts.
One of the things that has me curious, for example, is this:

Who’s guarding the hen-house? CPM initiatives can involve a huge investment in capital and lead to increased operating expenses on an ongoing basis. What are the metrics that tell an organization that making that investment will provide real ROI; and what are the metrics by which the CPM initiatives themselves are measured as to success or failure?

Stand by for the next report soon.

Avoiding a costly “metrics obsession”

This year, 2011, is the centennial anniversary of the publication of Frederick Winslow Taylor’s autograph work, The Principles of Scientific Management. According to Taylor, almost every challenge management faced could be solved through the application of science. This view has become the staple of business schools for the better part of the last century, as a result.

Most small businesses—which, by the way, constitute the majority of all businesses in the U.S.—found the application of “scientific management” to be unduly burdensome. Many entrepreneurs lacked the training in the application of statistics or the time and energy to conduct “time and motion” studies when they knew—by the proverbial “seat of their pants”—that they could make a profit if they took this action or that one.

By the middle of the 20th century, another great voice in “scientific management,” W. Edwards Deming, was beginning to clear the air on the subject, a bit. While Deming certainly believed in gathering data and analyzing statistics in order to improve operations, he was also unequivocal about the limitations of “metrics” in achieving business success.

It was Deming who pointed out, for example, that “The most important figures for management of any organization are unknown and unknowable.” (Emphasis added.)

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“The most important figures for management of any organization are unknown and unknowable.” – W. Edwards Deming

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However, in the 1980s, along came the introduction of the “Personal Computer” (PC) and a plethora of software that enabled small businesses to collect, analyze, store and recall hundreds of thousands or even millions of data points. With the growth of computing power and falling costs of computer hardware and software, the collection of volumes of business data was soon within the reach of even the smallest of small businesses.

Even before the dominance of the Internet as a means for sharing data and collaborating across huge distances, many small-to-mid-sized business executives and managers had become enamored with the ability of computers to store and retrieve data. Even if they were entirely unaware of the pronouncements of Frederick Winslow Taylor, these executive and managers came to believe something along the lines of: “If we can collect and access enough data about our operations, we will be able to manage flawlessly.” The obsession with metrics had, indeed, come of age.

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The mantra of the “Obsession with Metrics” crowd: “If we can collect and access enough data about our operations, we will be able to manage flawlessly.”

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Another all too frequently heard proverb from the metrics-obsessed crowd is this: “You can’t manage what you can’t measure.” This, of course, has a tincture of truth to it, but is misconceived. There are all manner of things in which management is involved in “managing” in some way or other that are not not subject to objective quantification.

Here is a (non-exhaustive) list for your consideration:

• Corporate culture
• Customer relationships (we even have software that is supposed to do this!)
• Employee relationships (we have both software—human resource management applications—and entire third-party firms that engage in this kind of “management”)
• Customer loyalty (some companies even have “teams” or “departments” engaged in “managing” this aspect)
• Creativity / innovation
• Leadership
• Ethics
• Supply chains (especially the ‘relationships’ that really make them work; not just the inventory ins-and-outs)

Now, let me very clear here: I do not oppose the application of sound scientific principles to business when the application of such principles is done in an environment where cause-and-effect can be reliably demonstrated.

The correct statement is this one: “If you cannot define the ‘process’ and the theory underlying the cause-and-effect relationships in the ‘process,’ then you cannot manage it.” More importantly, if your theory is wrong, you will not get the results you expect.

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“If you cannot define the ‘process’ and the theory underlying the cause-and-effect relationships within the ‘process,’ then you cannot manage it.”

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This clear and correct statement explains why some companies actually see significant improvements in their business results after implementing new supply chain “management” (SCM), customer relationship “management” (CRM) or human resource “management (HRM) applications” while the vast majority of companies see little or no improvement.

Understanding your existing business processes (hint: it is likely they are NOT what you think they are) and tying them to a theory that will help you understand the cause-and-effect within your processes is not as hard as it seems. Nevertheless, most businesses fail to do so simply because they don’t know they need to do so! They think they already understand them—but do not.

That’s why no matter how many “metrics” they throw at the problem and—sadly—no matter how much money they throw at “fixing” things, they typically see little or no improvement in the things that really matter—like making more money!

There is a better way!

Misaiming about metrics

In order to protect the guilty, my source for some the silly statements I read about business management will not be revealed. Recently, I read this statement in a book about business metrics.

“Measurement is the connecting fiber that can make all the parts work together [in a business or government enterprise]. Achieving this kind of coordination and alignment is impossible without exceptional performance measurement.”

Let’s consider the metaphor of a multi-movement mechanical watch. You know: the kind of watch that keeps time in minutes and seconds, tells you the day of the week, the day of the month, and the phases of moon.

Now, without a doubt, a huge number of measurements were made, formulas developed, and calculations made about the sizes of the gears, the number of teeth in each gear, their placement in relationship to one another and more. A watch is all about measurement. A watch’s whole purpose “measurement.” It only exists “to measure.”

Nevertheless, it is not the accuracy of the measurements that make the watch fulfill its functions properly. When you get right down to it, it is not even the accuracy of the calculations that went into the design of hundreds of moving parts. It is not the accuracy of its manufacture that—at the root—cause the timepiece to function as a “system” and do precisely what is expected of it.

It isn’t any of those things—at the root!

What, then, is at the root of a “system” that functions smoothly, efficiently and effectively? At the root of that highly effective watch’s ability to function is something entirely distinct from “measurement.”

What is that mysterious thing that all too frequently escapes the business intelligence fanatics? What lies at the very core, but is often overlooked by the “metrics maniacs”? What seems to conceal itself from those who seem to be convinced that if management could just get enough “information”—enough metrics—they could manage flawlessly?

The answer is—as W. Edwards Deming told us years ago—“theory.”

The people who designed all of the components of the multi-movement “watch” that does what it does so smoothly, efficiently and effectively had a “theory” about watchmaking long before they ever drew the first plans or began fabricating the first gear.



The business metrics book from which I got the quote at the opening of this article contained a diagram similar to that above. But this diagram is wrong in lots of ways. But, really, only two are critical.

Here’s what the diagram ought to look like:



The foundation of making a business that works—and stays working—is theory. And, more importantly, if the only “goal” of your “measurements” and “management” is a bunch of departments surrounded by a compensation system, then your business probably won’t last too long—except by “luck.”

The “goal” of your “system” should be—indeed, must be—profit. And, as W. Edwards Deming put it so well, “Information tells you nothing without theory.” Theory is the context by which information is interpreted and made the basis for action to change the outcomes.

[Cross-posted at Kinaxis Supply Chain Expert Community.]