Sixteen-hour work days aside, even the most passionate workers still need sleep. But waste never sleeps in a finance department and it manifests itself in so many forms: from endless reams of unread finance reports, to unused forecasts and slow and burdensome processes.
As corporations look to learn lessons from waste-reducing concepts applied in manufacturing, such as lean and Six Sigma, CFOs are now bringing those ideas to corporate finance. That means looking at the differences between cost accounting and cost management and tensions that emerge between the income and cash flow statements.
Recently, Business Finance sat down with Jamie Flinchbaugh, a founder and partner of the Lean Learning Center in Novi, Mich., and the co-author of “The Hitchhiker’s Guide to Lean: Lessons from the Road.”
Flinchbaugh shared his thoughts on lean strategies that can be applied to finance, what some of the obstacles organizations are finding, and why changing the thinking in finance departments is so much harder than in a manufacturing facility.
BF: You have said there’s a great deal of difference between bringing lean principles to accounting versus applying lean strategy to the broader finance department.
JF: It’s true. Fundamentally, a lot of lean accounting, if you will, is about how to collect the numbers in a way that’s more connected to the work stream, so that it’s not as abstract and more similar to activity-based costing, so that it’s more connected to what’s actually going on. But there’s been very little done around the strategic side of lean. It’s really an open question a lot of us have on how does a lean organization think about its capital budget differently than other organizations.
BF: We have heard different perspectives that refer to lean to finance and lean finance. How do you differentiate the two?
JF: Lean-to-finance suggests that within finance there are a number of processes. Like any process, there are opportunities to improve the structure, take waste out, and to improve the flow of those processes. It’s making that work more efficient and more effective. That’s lean to finance. Lean finance is how to think differently about capital allocation, how to think differently about the work, how to do it in different ways. Not just do it more efficiently, but change what the work is.
BF: Lean has been on the periphery of finance for decades now. How have you seen organizations take to it more recently?
JF: Over the last five years, it’s significantly grown in popularity. What’s led to that is a couple things. In general, as lean permeates more and more organizations to a deeper and deeper level, they’re not leaving any stone unturned. It kind of touches every department. We talk about lean in HR and lean in sales, so accounting was surely going to come along with it.
The second thing that’s driven it is how we do accounting affects decision-making. Organizations on a lean journey were finding that the accounting was getting in the way. That based on the lean lens, we know we should be going left. But the numbers, the way we account now, doesn’t really reflect that. We can’t really come to the same conclusion. So we have to change how we use those numbers, how we relate to the numbers, how we capture the numbers in ways that better support a truer end-to-end value stream on the work.
BF: What have been some of the primary obstacles or points of resistance organizations have found in adopting a lean finance department?
JF: Well, a lot of the initial resistance from organizations has diminished as people that are more pragmatists have come to adopt it. When zealots start to adopt something, it’s easy to dismiss. When pragmatists start to adopt it, you look at it differently.
Some of the resistance comes from a couple perspectives and it depends on how far you push it. One is that external reporting is essentially dictated to organizations about how they can account for things, how they measure things, what goes into what bucket. They don’t get to make those choices. At some point, the balance sheet represents the liquidation value of an organization much more than it represents the organization’s ongoing value. It was never designed fundamentally to be a management tool.
BF: What are some of the unanticipated reactions that finance goes through when it enters a lean transformation?
JF: I would also say that the skill sets of finance and accounting organizations is significantly shaken up in a lean transformation with a combination of lean and technology. With an extension of enterprise wide software systems that are primarily financially based—built on financial platforms like SAP—then the actual work of finance and accounting is made more efficient.
But with a lean organization then, that work starts to morph into doing more coaching, getting more involved with process improvements, trying to use that information for more situational analysis. You have to look past the reports to truly understand the cost structure of a decision. That puts a lot of people off. If I put 20 years in an organization having a transaction-based reporting skill set and now I’m meant to have an operationally-focused advising skill set, that’s a big shake up for an organization to go through. You can turn their worlds upside down. That’s certainly a barrier organizations are facing.
BF: With lean, the processes might be changed, but it still comes down to changing the way an organization thinks.
JF: It’s true. Fundamentally, a lean organization is attempting to adopt a long term mindset, a learning mind set, focused on experimentation. One thing leads to the next. But that can be an obstacle too for finance. Risk management and the public nature of annual reports and quarterly reports has made people deathly afraid of missing a single number. That becomes a barrier. When companies say they want to try something new, to alter their processes, they have to weigh it against the external world. That’s something we hear quite a bit.