The expertise of CFOs can play a major role in an organization’s decision to undergo a strategic business transformation. So, it is important to be fully informed on types of transformations, reasons to undergo them, and the pitfalls you may run into along the way. For this reason, we spoke to J. Stephen McNally, CPA, CMA, CFO of PTI Family of Companies in Toledo, Ohio, who gave us insight based on a career of spearheading such projects.

If you’d like, you can download this episode’s audio file. Additionally, you can follow us on iTunes, Google Play, or subscribe to our RSS feed.

View sponsorship and commercial opportunity details.

By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Discover more about the changing roles of corporate CFOs.

Podcast Transcript

What exactly is a business transformation? What are some of the reasons why an organization may choose to go through such a massive undertaking? And what are the pitfalls that CFOs and upper management need to avoid when going through a dramatic business shift? Today, we will get answers to these questions from Steve McNally, CFO of PTI Family of Companies in Toledo, Ohio.

How would you define the term business transformation?

[McNally] Typically based on my experience of these, transformations tend to be big, complex, expensive, time-consuming and you hope, at least theoretically, that they should have a significant positive impact. Put simply, in my opinion, transformations are all about trying to change the way you do business whether on a global enterprise wide-scale or one that is more limited.

When we talk about business transformation, what are some examples of transformations businesses can go through and need to be prepared for?

[McNally] Well, there are various types of business transformations. What typically comes to mind for folks would be an ERP or software-type implementation. For example, SAP. That said, that's just one type of business transformation. Also, you have keeping up with regulations whether Sarbanes-Oxley – I did a bit of work on SOX years back – revenue recognition standard, leasing standard implementations, as well as non-finance related regulations. Keeping up with regulations is a big driver. Also, personnel changes, CEO, CFO, or otherwise. Clearly, as your top leaders in an organization, whether it's through retirement or for whatever reason, depart the company, there's ripple effects to that and changes to that. Which often leads to business transformation.

Another driver or type of business transformation is in-house versus outsource services. For example, to be very specific, the decision to outsource janitorial services, for example, or it could be outsourcing of an outright function. For example, an IT help desk or even finance. We're seeing that more and more that chunks of finance, accounting, and services are being outsourced.

Another type of business transformation would be end-to-end process changes. For example, an engineering services company that's looking to optimize its project process flow, which really impacts every part of its organization.

Another driver or another type would be M&A, mergers and acquisitions. Clearly, whether you're on the acquiring side or you're the company or organization being acquired, when you merge these two organizations together, the cultural changes, policy and procedure changes, that's a big transformation.

Then lastly, and this is one we all hope for, that's keeping up with growth. Maybe you see it the most with a small entrepreneurial startup. As it really takes hold, takes root, and starts growing like gangbusters, now all of a sudden, because they're manufacturing, they need to keep up with the manufacturing. You need the employees, both operational and the support functions. And the financing, you need the money, the working capital, and otherwise. All these are different types of business transformations that could take place.

What are some of the reasons or benefits that a organization is going to get out of it that businesses may choose to engage in one of these transformations? Why do they do it?

[McNally] Why engage in a transformation? Assuming you've made the decision, the conscious decision to do so. Sometimes you just fall into it. But assuming you made the conscious decision, why would you engage in a transformation? Ultimately is to increase economic value and to stay in business. For better or for worse, things are in a constant flux. There's disruption around every corner. If you want to stay in business, if you want to increase economic value, you need to refine the way you do your work. Sometimes it's smaller, sometimes it's companywide, end-to-end. That said, I would say there's really four general reasons or four general buckets of reasons to engage in a transformation.

First, you need it from a macro level. Second, you need it at a micro level. Third, you want it, for example, to make a strategic shift in what you do. Then fourth, external influences may drive you. Let me talk about each of these a little bit further.

At the macro level, we've seen it. Markets continue to globalize. There's greater business complexity, there's new regulations and standards, whether you go back a few years of the rollout of Sarbanes-Oxley or more recently with revenue recognition and the lease standards. There's new regulations and requirements, evolving technology, other disruptions. At the macro level, you just may need to do things different.

At the micro level, it could be strong competition impacting your company, your organization. Could be weak leadership leading to CEO or CFO change. It could be shifting consumer demand. For example, maybe you're a CPG company that's historically supplied shelf stable products but consumers, they want fresh, they want organic products. And that might cause you to majorly change your product offering.

That third bucket is, you want it. Maybe there aren't any macro or micro reasons that you need to change, but you may want to go a new strategic direction. For example, from the perspective of finance and accounting. It may be historically you've done your finance and accounting work within each of the divisions or within each of the subsidiaries you have. Whereas maybe you want to change that and create a global services group. Maybe that global services group isn't just finance and accounting. Maybe it also encompasses human resources and supply chain and market research and IT as well. But that new strategic direction would drive you down the path of transformation.

That fourth bucket I mentioned is external influences. Whether it's Wall Street or consultants putting out their best practices, you may feel that need to change simply because these external folks are driving you to that decision. These are reasons that you would engage in a transformation. But again, at the end of the day, the ultimate goal is simply to increase economic value and stay in business.

If you're a CFO and either you're informed that your company's going to go through one of these business transformations or it just becomes clear to you through the process that you need to, what's the first thing you're going to want to do when you're informed? What are the initial steps?

[McNally] Actually, before going there, I would throw out or I would suggest that as CFOs, we are likely to be the ones who identified the need or the opportunity to transform our business, our company, our organization. Or, at a minimum as the CFO, we're going to be at the table when such decisions are made. All that said, once the decision is made to initiate a transformation, I'd call out three key things I'd want to focus on first. The first is determine the compelling business need. What is the problem we need to solve? What is the underlying root cause? Is it tough competition within our industry and we need to keep up with it? Have we delayed capital investments for many years for whatever reason, and we need to majorly upgrade our supply chain network? Are there new regulatory requirements such as revenue recognition or lease standards? What is the compelling business need that's driving us towards this transformation?

Second, what is the case for change? We, as the leader, we may have the vision or we may see the need for a change, but we can't get there alone. We need to have a core team working with us, helping us bring this transformation to life. Also, there's going to be various other stakeholders, whether it's cross functional partners or otherwise, who will need to be engaged and supportive of the initiative. There's going to be other champions within the company who will need to support us. Long story short, we need to win the hearts and minds of all those that will be impacted by this initiative, whether on the core team or otherwise. And therefore we need a case for change to help bring them on board, to have them support us.

The third thing is the project plan. We need to draft a project plan to clearly articulate and gain alignment on what is the project scope? What are the milestones? What are the timelines? What's the budget from a resourcing perspective? From a financial perspective? We need to get that project plan together. And clearly the project plan becomes the layout for which to follow and work through the transformation. But there's benefits to it. The solid project plan can be highly motivational for the project team and those directly involved. It helps us as we achieve certain milestones along the way. It enables us to know that we've hit those milestones and celebrate them as we go. And extremely importantly, that solid project plan helps us to quickly identify if and when we're going off track so we can address that issue.

All that said, with the project plan, you also need flexibility. At least from my perspective, if you're dealing with a larger, more complex type initiative, which most major business transformations are, there's going to be a central team that has oversight. However, there's going to be subteams that take accountability for different aspects of the project. I would suggest the project plan should be flexible in that, let those sub-teams manage their own details and you just pull into your overall project management, the highlights, the milestones. There should be go and no-go points along the way. I'd also suggest, especially for those longer projects, 12 months plus, that you probably want to only detail out the first phase or two and then flesh out those future phases as you get closer to them. Because, as you go, things are going to change.

Would you say there are any particular steps to be taken that could help along the road of making this a success?

[McNally] I'd call out seven steps that I'd focus on. The first is, and we touched on it already, drafting the project plan. Really clarifying the scope, the milestones, the timelines, the budgets to get you started. The second is to gain alignment. Once you have that project plan in place, gain alignment with the CEO and the other key stakeholders. Make sure that as a senior leadership team you're on the same page. Third is to clearly articulate the compelling business need and draft that case for change, which we talked about, because that compelling business need, that case for change, is what you're then going to use to go out and sell the initiative. First, to the core team, then ultimately throughout the organization.

The fifth thing is appoint the project team itself. Who are going to be those individuals dedicated, whether they're 100% dedicated or it's part of their ongoing role. But who's your core project team? Number six is to find your governance expectations. Who needs to be updated? When? How often? What are the decision rights? For example, if you've got a steering committee that includes various stakeholders, is it that steering committee that's making the decisions or is there a point person that's making the decisions? And also, what are your contingency plans? Define your governance expectations. And then number seven and most important, get going and get it done.

You had mentioned flexibility and that seems like what could be a quality of a successful transformation. Are there any other qualities of a successful transformation that organizations have to not only keep in mind, but have inherently?

[McNally] There's a few things I'd call out. And again, there's going to be some consistent themes here, but I think it's relevant to hit on them again. The first is have a clear vision. You’ve got to know where you're headed and why you're headed there, and you’ve got to be able to articulate that. Have a clear vision, have alignment. Have alignment amongst the senior leadership team and then ultimately have alignment throughout the organization as to what are the transformational goals and objectives. The third thing is, and we touched on it, effective change management and communication. The people are so important both in terms of being on board with where you're headed and once you're there, staying on board and being able to bring to life the new reality. Effective change management throughout the process and communication is critical.

The fourth quality is trust. When you're undergoing a significant transformation, there's going to be a lot of change. There's going to be a lot not known. There's going to be a lot of “leap of faith” type moments, and therefore you really need to have that trust among the core members of the team, with your stakeholders, and ultimately throughout the organization if you're going to be successful. The next key quality is having a highly engaged team, a group that is really bought in 110% of where you're headed and they're going to help you get there. They're going to do what it takes.

Then the last quality I would call out is having a continuous improvement mind-set. That is where that flexibility fits in as well. But understanding you have that vision of where you're going to go, you've developed your project plan, you're working on it, but even when you get there, even when you go live with this change, the world doesn't stand still. What's that next disruption around the corner? How are you going to be ready for that? Having this continuous improvement mind-set. They're the qualities I'd call out for, if you want a successful transformation, you have to keep these things in mind.

You've been through this process several times. Are there specific lessons you've learned over time that could help people find themselves going through it with their companies?

[McNally] As you know, I have led various transformational initiatives throughout my career, including the implementation of SAP and other systems, rolling out a new trade-spend strategy, new product launches, as well as leading my company's original SaaS compliance team, creating a new improved control center of excellence, outsourcing in officer and supply-chain finance activities. I've really touched major initiatives and transformations from a number of different perspectives. Based on these experiences, I would share several lessons learned from the trenches.

Again, there's going to be some consistent themes here, but number one, compelling business need. Make sure you know what you're doing, why you're doing it, what problem are you trying to solve? Therefore, is it the right solution? Do you know the root cause? Is it the right solution?

Number two is the project plan. The more time and effort you invest upfront to really plan out what you're going to do, how you're going to do it, define the resources, define the milestones, the more likely you're going to be able to stay on course and deliver it timely.

The third is that case for change. Again, you've got to win the hearts and minds of the senior management, the key stakeholders, and, ultimately, the organization overall.

The fourth is project management. It's great that you've got that great project plan, but now you need to make sure that project plan is managed effectively and, as things occur, whether it's the unexpected, how you're going to deal with it or just keeping things on task.

Number four is risk management. You really need to focus on risk management so that you got to understand what your objectives are, what could prevent you from achieving those objectives, and then managing through it.

Number four is consultants. Consultants can play a key role in major transformations, whether it's providing thoughts on what direction to go, giving you insight on best practices and or being another set of arms and legs, but you own the outcome and therefore you're accountable whether you're leveraging consultants or internal resources. You've got to own it at the end of the day.

The next is communication. We talked about it a lot, but you need to sell people upfront and you need to keep people on board throughout. Then once you go live, you need to ensure people are prepared to live into the new reality. Communication, all channels of communication, plays a role there.

Next is sustainability. You've got this great plan, you execute it effectively, now you go live. Well, then what? You need to ensure that you continue to train people because there's going to be change in the resources. People are going to move on, take new jobs, new individuals will take on new roles. Your system may need to be upgraded and the business environment is going to change and the needs are going to change. You need to ensure whatever that transformation was, you sustain it as additional disruptions and needs come along.

Then lastly, and it's tied to all the above, but I think it's the most important of all, and that is change management. When you're talking change and change and change, at some point, if you're not careful, people will burn out. They'll shut down. But through effective change management, you ensure that you keep people on board and they'll be able to live into the new reality. There's some of the things I learned in the trenches, hopefully that makes sense to folks.

What do you think are the largest potential pitfalls for CFOs and other personnel when they're going through this process for the first time?

[McNally] I'd call out five potential pitfalls that could impede the success of an effective transformation. The first is neglecting people. As we talked about so much, people are either going to be for or against what you're trying to do. You need to win their hearts and minds. You need to ensure they're for what you're doing. That they're supporting the initiative. Whether that’s core team, key stakeholders, or those that are more on the periphery, you need to make sure that the people are with you.

Second, there could be bigger challenges than anticipated. That could come from poor planning, It could come from scope creep. One or two little, minor differences and changes in scope are fine, but when you've got 50 or 100 little changes, all of a sudden they're a big change. You do have to be careful of scope creep.

Then lastly there could be and there will be unanticipated business changes. When that happens, you need to work that into your transformational initiative, into your project.

The third pitfall is unexpected roadblocks. One could be you've got this core team of awesome individuals and then one could leave it whether they leave for an internal role somewhere else or they leave the company or organization. The team member leaving is a roadblock, obviously. Or you could have an issue whereby you've clearly defined your needs for a software developer and then they come back and tell you, "Oh, we can't deliver what you need." What are you going to do? That's an unexpected roadblock. Or there could be a new business need. Again, we're in an environment that's just constantly changing, disruptions around every corner. You have these unexpected roadblocks you'll need to address.

The fourth pitfall is the inability to execute. You might have the greatest plan for the greatest reasons and great resources, but maybe you don't have enough resources or maybe you have the wrong resources. Or maybe you have poor leadership. For whatever reason, you might not be able to execute that excellent plan you have.

The fifth pitfall, we touched on it before, is the sustainability challenge. You have this great project team, you get to go live, it's a big success, but then people leave or you need to upgrade the software or there's new requirements. You need to address that sustainability challenge.

We've been going through this and I feel like we've been pretty comprehensive, but when you think about it, is there anything that we haven't discussed that people should really keep in mind to make sure their business transformations are successful?

[McNally] I think we covered it pretty well, but what does come to mind, I actually wrote an article about a year ago. It was in the November issue of Strategic Finance and it was called “Business Transformation: No Pain, No Gain.” People might want to check that out. I'm pretty sure it's available online. But the key is effective planning, change management, project execution, and strong leadership can help you limit the team of a business transformation and achieve success.