Seeking Elephants in the Finance Function

This is the first chapter of a business book. It could easily be subtitled,?Notes of a Consulting Interim CFO. Its main purpose is to interest and entertain finance directors and others who work in or with finance departments. We've worked on problems in many types of finance department and faced a variety of difficult situations or transition points. The situations in this story will be familiar to many in the business community. You can get the whole story in a hardback edition here.

By the way, the elephant is a metaphor, it crops up throughout the book. It represents one of those giant but invisible phenomena that consume resources and impede progress. It could be an idea, a process, a product, a priority, it can take many a form, but for one reason or another, it must go.

Seeking Elephants in the Finance Function

Chapter One: How To Recognise An Elephant

One hot summer,?during my early years as a consulting interim, I am invited to a grain farm in a thriving arable region. It is a long-established business, largely dependent on manual labour and is the mainstay of the local village; but productivity is down, the workforce is close to starving – and no one understands why. I have been brought in to get to the root of the problem and unravel the mystery. The deal on the table is clear. I will receive one year’s salary, but only once I have succeeded in my mission. As I walk through the outskirts of the village on my first day, I pay attention to everything that is going on around me.

It is early in the morning; the day is threatening to be warm but with a cool edge, and I can see many people tending the fields. They are working hard. The crops look abundant and I can see the early morning sun glinting on water. As I get nearer, I can hear the water running and see there are some intricate and apparently well-maintained irrigation channels. I also notice that many of the workers look thin. Few of them look up as I walk by and those who do, have gaunt faces. They look as if they are not eating enough, in spite of the abundance around them – and I wonder why.

I reach the centre of the village, which is organised around a circular area surrounded by market stalls. It is buzzing with activity, though only a few people appear to be buying anything. At a local café, I find a spot where I can sit outside in the cool shade of a vine that is growing into the canopy. I order a coffee and take some time to pause and look around me, taking in my new environment and thinking all the time about what I have just seen.

The crops appear to be growing healthily – so the people are not starving because the land is infertile. Those who are tending the fields are working hard – so it is not that the crops are being neglected. I had noticed an irrigation system, which suggests they are not simply tending the crops, they are cultivating them in a sophisticated and carefully organised way. They have productive capacity; they are well organised, the mood seems peaceful... and yet they are very thin. So that is a mystery.

After finishing my coffee, I make my way to the farm to meet my host, who is keen to show me around. He explains that the business is run as a collective and that all the grain is stored in a large free-standing grain store, located on the perimeter of the village, not far from the café where I had been sitting.

I now notice that people are walking from the fields with their crops ready to store them for threshing during winter. They come with full barrows, which are pushed up steep ramps, and tip their harvest through a door near the top. I think to myself, “This is not just a grain store. It is also their sole supply of income.”

Strolling across to take a closer look, I walk up one of the ramps to peer inside the building; the air is thick with grain chaff. But in the dusty gloom I notice something unmistakable. At the bottom of the grain store lies an elephant. It is so vast it must be obese. It is also very pale in colour and clearly has not moved for a very long time.

I then notice that it is feeding itself constantly. It is putting its trunk into the hopper, scooping up the grain, putting the grain into its mouth and then sticking its trunk back into the hopper.

Then I think to myself: “How extraordinary. There is an elephant in the grain store eating all their food. They are going to pay me to sort this out? How hard can it be?”

I say to my client: “I’ll tell you what we’re going to do. We’ll wait until this evening, and gather the whole village together. We’ll get some drums, some flares and some sticks and some dogs, and we’ll get all the children... and we’ll make the biggest, most riotous noise that we can possibly imagine.”

And my client says to me: “Well, why would you do that?” And I say: “Because we’re going to chase the elephant away.” And he replies: “Peter, which elephant is this?”

And I say: “Ah...” In my mind’s eye, I had already spent my year’s salary! I thought it would be a case of one day in the village; then home.

I reflect on my host’s response. “Which elephant is this?!” I want to shout: “It’s huge, it’s obvious, and it’s consuming ALL your resources!”

But instead, I say: “The huge elephant in your grain store that is eating all your food.”

And he says: “I can’t see any elephant, Peter. And I’m beginning to wonder whether we’ve hired the right person.”

Transition Points

Thought: “The key indicator that you have reached a transition point is the discovery that what was working yesterday is not working today.”

What is it that makes a fast growing business sustainable? Having worked with many businesses in different sectors and with all types of capital structures, I can honestly say that the answer is not obvious. What can be said is that key to a company’s continued success is its ability to recognise and respond to its Transition Point – either before it happens, or in recognition that something fundamental has changed.

"Key to a company’s continued success is its ability to recognise and respond to its Transition Point – either before it happens, or in recognition that something fundamental has changed."

For example, when a business suddenly outgrows its processes, systems and ways of working, it must first recognise that moment and then decide how best to respond. If management jumps too quickly into new ways and new systems, it could throw a spanner into exactly what was working so well in the first place. In contrast, a business that is loath to adopt new ways will languish in its tried and trusted comfort zones, while its systems creak or burst at the seams.

Hanging on too long to the old ways, jumping too quickly into new ways, simply picking up the wrong ways – all run the risk of failure. Classic symptoms often appear as overtrading, borrowing too much, or setting sales and delivery targets that are way beyond what other functions in an organisation can support.

So how do you tread the path between lost opportunity and possible failure? A rule of thumb is that when business is going well and everything fits together, there is no need for outside support. But if the business is running at top speed yet not moving forward, experience matters.

This is as true for an individual entrepreneur as it is for a board of directors. Successfully negotiating your way through a Transition Point usually takes a raft of incremental improvements. The challenge is to prioritise the sequence in which these improvements are introduced and then to implement them, measuring the effect of each one as it comes on stream.

It’s also true that there is an optimal time and an optimal set of circumstances to plan and implement a Shared Services Centre, a more powerful ERP system or an improved invoicing module.

The biggest challenge of all may lie in seeing what is already there – and what is already happening.

It is a balancing act. The secret is to recognise that you have reached a Transition Point and then to take measured steps. So what is a Transition Point? Simply put, it is when you know you are doing all the right things but the business is still not working. But another problem facing businesses when they reach a Transition Point is that they struggle to find good independent advice. Typically, they will be offered a plausible immediate solution; often it is from someone desperate to sell them something, or it is suggested by a corporate consultant more accustomed to offering ready-made solutions.

Having worked with many companies in different sectors and with all types of capital structures, you get to know that there really are no ready-made ‘solutions’. Any business must be approached at its Transition Point with a set of questions rather than a set of answers.

Transition Points can result from a relatively small change in your environment. An organisation may mismanage a transition, not recognise it is in transition, or choose to ignore it is in transition – and hold on to ways of working that have become inappropriate.

A Transition Point can occur in a very narrow turnover range or when accelerated growth is planned, which puts critical pressure on systems that have worked in symbiotic harmony up until that point.

The biggest challenge of all may lie in seeing what is already there – and what is already happening.