Professional Recommendations – The Frustrated CFO

IBM Predictive Analytics, or Are We There Yet, Watson?

I have no clue what a Venn diagram for conjuction of this blog's readers and tennis fans would look like – probably unnoticeable to human eye, but whether you care about professional tennis or not, bear with me and I'll explain its relevance to the subject at hand.

Those who watched Australian Open during the last two weeks of January on ESPN2 (or any grand slam in the past few years) incidentally exposed themselves to various elements of IBM's "Let's Build a Smarter Planet" promotional campaign. IBM has been sponsoring ATP and WTA tours for years. They don't limit themselves to the ads that run during commercial breaks, but it's a good starting point for our topic.

The current versions of these TV spots are a lot of fun – very slick, very futuristic, very high-tech, very white-surface, and they feature Dominic Cooper (whom I first saw on stage [I cannot help myself, can I?] back in 2006 as Stuart Dakin in Alan Bennett's The History Boys)! Handsome, in the contemporary sense of the word, and serious, but tongue-in-cheek, British actor promotes IBM's cloud, smart day in the office, and… PREDICTIVE ANALYTICS.

Aha! Very interesting: Did IBM branch out into Astrology Charts and Crystal Balls? The advertisement's copywriters are appropriately non-specific and vague so not to bore an averagely challenged viewer, but let's look a bit closer at the core issue here.

Predictive Analytics belong to the realm of other popular concepts, such as business intelligence and performance assessment – none of them new ideas, by the way. Data warehousing may sound like a novelty, but collecting and organizing records in a particular order for easier access existed for centuries. The concept of information as a key to business success is millennia old. In ancient times tribal chiefs were estimating how many spearheads their craftsmen needed to make in order to win a battle.

Yet, in the past 10-15 years, the obsession with gauges, graphs, and all other forms of Key Performance Indicators (KPIs) have become pervasive to the point of silliness, especially in business, financial, and data-management spheres. Everyone and their mothers are absolutely convinced that they MUST have KPIs or they will be running a danger of failing, while analysts and software developers just know that they MUST provide KPI capabilities or their services will be deemed obsolete.

Truth be told, the escalation of urgency is totally understandable. The pace and
vulnerability of the business environment and entire human existence have increased exponentially. Today, more than ever, we need to have timely and valid data that has a power of springing us into immediate corrective actions.

Of course, as it always happens, the form obscures substance and common sense. In most cases, the procurers of reports with colorful dials, bars, and pyramids end up just staring at pretty pictures, nothing more.

Now, the Predictive Analytics are a very special brand of information manipulation because they claim that on the other side of chewing up and digesting tons of historical data they can poop out specific recommendations for WHAT NEEDS TO BE DONE IN ORDER TO SUCCEED, i.e. an action plan for a prosperous future.

And I have to say, when it comes to chomping massive inputs of data, while allowing flexible and customized outputs, various IBM Business Intelligence Suites, including Cognos, are probably the best performance analytics software out there in the land of information management - terribly expensive, of course, but awfully powerful in terms of the facts-and-figures consumption (imagine Coneheads at breakfast).

And as noted, IBM wants to take you a step further on the road to the future of business intelligence. In 2009 the computing giant bought SPSS, which stands for Statistical Package for the Social Science, a software product that was created in 1970 to deal specifically with the analysis of what I personally call “data with a psychological twist.” In other word, it digests information that doesn’t necessarily have dollar signs or volume units attached to it. It was widely used in sociology, marketing, health care, education, and government.

In its current developmental stage SPSS has become an integral part of IBM's predictive analytics solutions, which presumably can be applied in any field. According to IBM’s own description, the SPSS’s mission is “to help organizations to predict what will happen next, so that they can make smarter decisions to improve business outcomes."

Are they succeeding in this futuristic endeavor? It’s hard to tell, because there is not enough readily available feedback: everyone’s KPIs are proprietary. Even public companies will not disclose how IBM’s predictive analytics compare to the actual results. Fortunately, there is one application of IBM’s analytical intelligence that is very public. Here's where tennis comes back into the picture, offering us an opportunity to look at the system’s predictive aptitude.

Nowadays, IBM's sponsorship of the Grand Slams also includes the powering of the websites of individual tournaments, including the Wimbledon, Australian, French, and US Opens. And so, if you go on one of these sites’ home page you will see right there, in the top-right corner: Smarter Analytics by IBM.

Well, right now it says “Completed Matches” above it because we are still almost 7 months away from the US Open 2015, but if you were to track a live match during a tournament, you can observe the IBM’s predictive functionality in real time:

This here is one of the most important predictive KPIs provided by Smarter Analytics – it is designed to show most important milestones one must achieve to reach one’s goals, and supposedly it is applicable to any data set.

In tennis application they call them Keys to the Match. Right there on the screen, in just two sentences IBM delivers the gist of the chart, explaining both the terminology and the methodology: “Keys to the Match system identifies key performance indicators – what players need to do to succeed in a match. Each player’s performance is measured against their keys and updated in real time.”

This one in particular was for the 2014 Championship match between our very own champion extraordinaire Serena Williams and Caroline Wozniacki. The system isolated three performance keys for Serena: 1^st serve points, medium rallies, and the returns of the opponent’s 1^st serve.

According to the system’s algorithm these parameters are the most impactful in terms of the winning statistics. The calculated "musts" are in blue and according to the statistical analysis of the historical data, Serena won 74% of sets when she won more than 61% of points on her own serve; 87% of sets when she won more than 49% of medium rallies, and 81% of sets when she won more than 38% of points returning her opponents 1^st serve.

The red sectors show where Serena was in this match. She exceeded all requirements: reaching 62% in the first parameter (very close), 54% in the second (also pretty relevant), and 68% in the third. It is no surprise that she won the Championship match, but that wild discrepancy between the prediction and the actual in the third indicator (38% vs. 68%) makes me question its relevance.

We will come back to my doubts about the validity of the entire model in a moment. Now, let’s see how we would apply the same approach to a business. Here is a chart that identifies AZ Company’s Keys to a Successful Month: what needs to be done to achieve sufficient profitability and positive cash flow.

AZ Company's Keys (640x495) These are very familiar to all business runners and highly vital parameters. Product mix is a crucial profitability factor. The same goes for the portion of the gross profit eaten up by the overhead. And, of course, the speed with which we manage to turn our inventories into receivables and receivables into cash determines whether we can generate more cash than we disburse during a particular period, in other words, produce a positive cash flow.

The green bars represent the levels of the parameters at the moment this snapshot was taken. Orange ones are the objectives that simply must be achieved, and pinks are desirable targets that supposedly guarantee a financially successful performance.

According to the model’s algorithm the share of the highly profitable product X in the
trading mix should be at least 39%, because 69% of the months when such mark
was achieved were profitable. Obviously the overhead has far more definitive impact on the bottom line – the model confirms it by calculating a higher probability of success (79%) at its relatively lower levels. There is even closer interrelationship between receivables and inventory turnovers on one side and the positive cash flow on the other – respectively 80 and 85 percent.

Many business owners and executive managers, when they see a chart like that, get very excited by the prospective of having a system that can “see the future” – they think they’ve got the ultimate solution in their hands. The widespread assumption is that Technology is smarter than a human, calculates everything faster and with higher accuracy. And this application presumably eliminates the need to process information yourself – analyze, ponder, be anxious, listen to your gut feelings, or rely on anybody’s expertise. Just follow the model’s suggestions and everything will be fine.

If you sense sarcasm between the lines it’s because I am very resentful to such a blind reverence of computing technology. And coming from me it’s a very serious statement, because I love progressive computerization. But I cannot tolerate the lack of common sense.

Look, the selected parameters themselves are great – no question about it, but do we need a fancy program to tell us that the business is going to be okay if we push sales of a high-margin product to nearly 40% of the volume and turn most of our beginning-of-the-month AR into cash? I don’t think so. The years of our own expertise will kick in and reassure us – we don’t really need the statistical confirmation of the possibly successful outcome.

But I have even more troubling concerns about this “keys to success” model. Let me show you that the examples we just reviewed are fraught with at least two serious problems.

The first one is the size of the statistical sample. In quantitative research, you need a sufficiently large sample in order to be able to pinpoint trends with an acceptable level of realism. Did you notice that Serena’s KPIs were related
to sets rather than matches? That's understandable. The Smarter Analytics uses just 8 years of grand slam performance. In the period from 2007 through 2014 Serena Williams played 157 matches in the four major tournaments of the year.

Women play “win-2-out-of -3-sets” matches. Sometimes it’s 2 sets, sometimes it’s 3, and sometimes your opponent retires before you get to finish the first set. Serena has a high percentage of straight-set wins, so we can safely estimate her average at 2.25 sets per match. This means that the predictions produced by IBM are based on a pool of
data collected over 353 sets. It’s not US census, of course, but it's an okay sample size.

Now, in business, to approximate the tennis-model’s reliability of conclusions we would need to look at least at 30 years of a company's monthly performance data. And that's a lot to hope for: 25 years ago the majority of small to mid-size companies were not even computerized and the paper journals and ledgers are either rotting in some storage unit or gone!

But the bigger problem is the quality of the historical data, its relevance to the very specific, very present moment in time. We operate in remarkably dynamic environments. Business conditions change every moment. One day everything is going great and another day everything falls apart. Labor costs grow exponentially in every corner of the world. Foreign exchange policies force one currency to soar and another currency to drop below everyone’s expectations. Cyclicality shifts all the time: what was true for February of 2005 may not be applicable at all for this month. And there are multitudes of industry-specific stressors.

For decades Kodak was competing with BASF, TDK, etc. for the worldwide market share of film distribution. Who knew that the biggest challenge would come from the photo and video equipment that didn’t need any film at all?

20 years ago American agricultural sector exported nearly 3 million tons of frozen meat and poultry to Eastern Europe. Then came 1999 and protectionist governments in the region declared US produce unsanitary. Prices tanked and multiple industries contracted.

15 years ago fashion industry had six major seasons. Today it operates in micro-cycles with styles changing every two weeks. This dramatically altered the landscape of apparel importation.

Well, business insiders live and breath this knowledge, but does the prediction model take into account all these factors? It simply cannot – any mathematical algorithm can only account for a limited number of time-proven constraints. How can we presume then that what might have been true historically will apply to our current conditions?

Even Serena’s keys to success, as far as I am concerned, are not too trustworthy, even though they are based on the game that have been played by the same rules year after year, on exactly the same courts, tended in exactly the same way. But was it the same winning Serena Williams in September 2014 as she was in 2007, when she fell away in quarterfinals? Or was she even the same in January of 2014, at Australian Open? Can you spot the difference that made a significant improvement to her swing?

Can IMB’s "social" software comprehend that? I don't think so!

There is no way I'm putting away the years of expertise and my business instincts to start relying 100% on some computerized predictions in my strategic and tactical decision-making. It may be a good contributing tool (again if you can afford it), but a computer is nothing more than a sidekick to the human brain; even if it's the IBM’s star artificial-intelligence child Watson. Hence, the appropriate name it's given. Yes, it can answer questions posed in natural language and wins Jeopardy! thanks to the 4 terabytes of information stored inside its metal guts. Yet it's not able to intuit the right response to a simple clue “This hat is elementary, my dear contestant!” My mind, on the other hand, serves up the answer instantaneously.

An expert with a common sense should be able to formulate her conclusions and make fast decisions herself, without any magical software, as long as she is steadily provided with timely and relevant information – whatever it is: business, sports, or arts. It's as I always say: give me sensible data and I will tell you what needs to be done.

The Distortion of Bill of Rights in Small Business Environment

Regardless of your position – CFO, Controller, operational staff, CSR, janitor -when you accept “employment at will” arrangement in a privately-held company, you inadvertently give up the majority of your rights granted to you by the US Constitution. Since the Bill of Rights is automatically presumed, it is not necessary to include freedom clauses into Employee Handbooks, Rules of Conduct and other such documents. Look through them again whenever you have a chance: they primarily describe what the company expects of you, not the other way around.

Closely-held companies are not democracies. They are owners’ kingdoms, absolute monarchies. And most of the time there is nothing you can do about it. Let us look at some of the Amendments.

1. Free Exercise of Beliefs. Having been always based in NYC precluded me from ever witnessing open discrimination of employees for their religious believes. At the same time on many occasions I’ve observed explicitly expressed irritation about people’s taking their PTO to celebrate religious holidays. Quite a few times I saw the candidates being rejected based on the unspoken possibility of their observance.

2. We do not have Freedom of Speech as employees. We try to keep our political, social and cultural opinions to ourselves if we know they contradict those of our bosses. Frequently we are not even given an opportunity to retort abusive, accusatory, or unfair verbiage directed at us or at our subordinates.

3. We cannot exercise Right to Assembly. I myself as a supervisor is pretty strict about people congregating for reasons not related to their jobs during work hours. At the same time I am not as obsessive about it as some business-owners who throw tantrums every time they see people talking.

4. The Protection from Unreasonable Search is violated time and again in the workplace. The business files, emails, etc. are rightfully belong to the company you work for, and if you are openly asked to follow established policies of information sharing, files locations and full disclosure, you should willingly comply. But many employers use System Administrators to secretly look through their employees’ emails, files, etc. They open doors with spare keys and look into draws containing personal affects. They use special programs to record IM communications, etc, etc.

5. Not a single right guaranteed by the Fifth Amendment (due process, double jeopardy, self-incrimination) is considered when you are judged, persecuted and punished by your boss. Fairness is laughed at in business environment. A lot of CEO’s, with whom I dealt over the years either as an employee or through business and social networking, considered my personal determination to be as fair as possible and judge people on their merits in all situations as one of my “strange” qualities.

One right we, as employees, can enjoy under “employment at will” arrangement is the very special freedom it guarantees you: just as your employer can fire you without warning, you can quit on a moment’s notice. That, of course, if you can afford to do so.

“We Are Good Bosses,” Says One Boss to Another

So, that's how these people manage to live with their own shitty selves! They walk around with a clear conscience; with no doubt in their souls about their actions. They don't think about the injustices and the insults of different caliber they spread around with every step they take. They don't even qualify them as injusticies and insults. Instead, they pat each other on the backs and tell themselves that they are good bosses! Their self-delusion probably goes even further: I am terrified to think about it, but they might have convinced themselves that they are good people. Honestly, the idea of these people going through their lives thinking that they are saints makes my skin itch on the inside.

To tell you the truth, I prefer honest assholes, like the ones whose primary traits are itemized in the list provided by the Time's article attached on the bottom of this post. They are at least somewhat conscious of their attitudes and justify their behavior with the "business necessity." You know: A man's gotta do what a man's gotta do – that sort of thing. I also think that self-aware bastards are less casual with their cruelty. Unless they are real sadists, they apply it knowingly and, therefore, sparingly.

The conversation quoted in the title is not an allegory: I actually had the misfortune of witnessing it. I had to summon all my will power not to burst out laughing at these jerks. I've had pangs of suspicion that many business owners felt good about themselves, but this was the first time one of them actually voiced such self-deception in my presence. Why was it so bitterly funny? Because, the statement was prompted by their finally adapting a pension plan they promised their employees two years ago.

These are employers who pick favorites and treat them with an obvious preference, while discriminating against others. They forget to disclose new commercial initiatives, thus forcing everyone to run against time in order to turn their ideas into business realities. They will not hesitate to make a "good-natured" joke at an employee's expense or brazenly comment on someone's deficiency. The list can go on, and on, and on, and on… What can I say? Swell guys!

But let's see. What are (in my opinion) the attributes of a really Good Boss???

1. Fairness and objectivity; no bullshit like, "I don't like that bitch's personality, so I don't care if she's going to leave, even if it'll hurt my company."

2. Dedication to a merit-based system of rewards comprised of both tangible and moral incentives.

3. Intelligence and business acumen that perpetuates the company's success and keeps employees gratified that they don't work for an incompetent idiot.

4. High performance standards applied equally to everyone – first and foremost to his/her own work.

5. Capacity to fully comprehend the abilities and values of their direct reports.

6. Sufficient organizational savvy to match subordinates' abilities with functional tasks.

7. Acceptance of personal responsibility as a job-creator and human-resources leader.

8. Strong emphasis on the development of employees' know-how and professional growth.

9. Balanced combination of delegation and efficient supervision; none of that hands-off micromanagement crap I write so much about.

10. An actual effort to understand people working for the company.

11. Sufficient tact and self-confidence (!) to prevent casual personal insults, usually resulting from deeply seated insecurity.

12. And this one is just for me: For once in my life I would like to work for someone with a good memory, because I'm fucking fed up with their forgetting time after time the stuff I say, write, and report to them.

So, my dear business owners and other chiefs, try to test your performance against the criteria above and see how you do. None of the "good bosses" I know would score enough for a "D" grade.

9 Core Beliefs of Truly Horrible Bosses

2013 Audit Season: Joke #4

I remember a few years ago, during a business lunch, somebody was recapping an episode from one of the numerous crime series all networks are running to compete against each other. My head was preoccupied with the business purpose of the meeting, nevertheless I do recall that the murder plot turned on a discovery that one of the characters, a compulsive gambler, bet his classy wife's sexual favors in poker and lost. FBI questioned if the payoff actually took place. Of course, it did: the real gamblers are "men of honor." When asked how the pimped out wife handled it, the winner said, "She was willing, but not happy." I bet this is the best line the screenwriter who churns out this pedestrian crap has ever written!

Willing, but not happy… The state of mind applicable to so many situations. This is exactly how all corporate accountants feel about financial audits, lenders' exams, investors' due diligence, etc. Commercial and fiscal needs of our employers throw us at mercy of the outsiders: we are forced to carve out time from our main responsibilities and open ourselves up to various poking, probing, and testing. Oh, we totally understand the importance and the unavoidable necessity of it. Frequently, it's our own search for new financing resources that culminates in these proceedings. Yes, we are totally willing, but we are not happy to go through with it.

I devoted two whole chapters (29 and 30) of CFO Techniques to advising readers on how to deal with auditors, keep yourself focused on the ultimate benefits for the company, and minimize the pains of distraction and intrusion. It helps to remind yourself that your company needs it more than the one that sends people to conduct the examinations.

And I have to say, most of these specialists of prodding are well aware of the invasive nature of their jobs. They understand that a financial executive abides by their standards and accommodates all their requirements, because he wants good results, and that this puts a CFO or a Controller into a subservient position. Many auditors are very apologetic for the endless interruptions, inquiries, requests, follow-ups, etc.

Of course, there are always exceptions…

For the CFO with exposure to international measurement systems from this season's joke #2, the last stage of the bank's field exam included physical inventory counts at three locations specifically selected by the bank. This is habitually done by auditors and examiners in order to (a) establish the presence of various inventories and (b) verify the accuracy of the subject's records. Obviously, nobody at the audited company has any impact on the choices of locations, timing, or people sent to perform the task. In fact, the CFO, who every year faces a financial audit and three bank exams, never knows who the hell the counters (usually junior auditors) are.

This time was bound to be different. One of the locations the bank selected was the company's storage in Savannah, GA. A day before the scheduled visit the CFO gets a phone call. An agitated young man in the receiver tells her that he is from the bank's Jacksonville office and that, according to Google Maps, the drive is 2 hours and 40 minutes each way. "And it's Friday! This is outrageous," he says.

The CFO was perplexed: anyone who had dealt with these matters even for one month would know that she had nothing to do with the rookie's plight; that, if it was up to her, she would much rather avoid the scrutiny. Considering her executive position and professional status, she could've just hung up on this wimp. But she is the one with a sense of humor, remember? So, she asked the boy, "Well, what would you like me to do? Move the inventory to Jacksonville, or cancel your visit?"

"Could you, please, cancel it?" was a hopeful answer.

The Clueless Boss of a Frustrated Downshifter

The economy and the resulting miserable state of the job market forced many financial executives to downshift, i.e. take jobs way below their levels of expertise, authority, and adequate compensation. It's been almost a year since I wrote about the heartbreaking reality of first finding such a position and then accepting it for the sake of having food on the table and keeping the roof over your family's head. Yet, the painful topic is still relevant.

But let's look a little further. We have an opportunity to examine an interesting situation brought to my attention by an actual downshifter – a former CFO of a, now defunct, $500-million-dollar firm. After a year of a futile job-hunting he accepted, at 50% of his former compensation, a Controller's position in a young and small ($30 million) company, ran by two owners – a female CEO and her partner with a COO title.

How many times did I write about accidental bosses? And here we go again: this business has started because the two partners got lucky. They were in the right place at the right time with extensive connections and sufficient funding at hand. Neither of them actually needed it to survive, but the opportunity were too exciting to pass up.

Guess what? The CEO never led a company before. She never even worked in a commercial enterprise. Her partner has an MBA from an Ivy League school, but he only worked overseas. Neither have the chops to make good executives, yet both have undeniable talents and a lot of enthusiasm. She is a sales ace and the toughest negotiator you can find. He is incredibly detailed-oriented.

Not only that they managed to get the company off the ground eight years ago, they kept it growing with minimal labor resources, including a single bookkeeper. Hiring a senior financial person was definitely not among their priorities. Until… Some people are just born lucky. An even bigger opportunity presented itself. To implement it they needed more capital. The dogged COO wore down one of the major banks into providing them with a substantial trade finance line. Among bank's mandates was hiring a proper Controller.

Enter our former CFO.

Because both execs are not very clear on the leadership functions, the division of responsibilities is blurred. The COO was in charge of the Controller's hiring. The CEO never even saw the candidate's resume or salary history. When COO decided that this is their guy, the CEO was called in for a minute to shake the future Controller's hand.

Yet, once our downshifter started working there, he realized that the woman's word was the final authority on pretty much all other issues. Now, because she lacks corporate experience, she is not capable of assessing the Controller's performance. In her mind, any other accountant would provide the same input as this guy, who managed in the first three months to correct more procedural, systematic, recording, and administrative errors than he did in 25 years before this job. Moreover, he contributes into the company's strategic decisions. All that for a price of a low-brow peripheral Controller. The CEO has no clue that what she's got was a gift; that she got very lucky again and obtained an Hermes bag for the price of a Coach.

This is a big problem. If your boss doesn't understand your value, she cannot appreciate your contribution. The fact that someone with lower qualifications and less experience would not be able to attend to the sophisticated tasks you accomplish remains unnoticed. As a result, you are helping to better the company without a chance for a fair reward.

What to do in this situation? You are not the type to brag every time you do something extraordinary. The first thought comes to mind is to re-introduce yourself. The guy who hired you didn't share your resume with his partner, so give her one together with your salary history. You can say, "I understand you've never had a chance to look at it before and I think it's not fair for either of us." I know some people will say it's tasteless, but the options here are limited.

Secondly, you must propose a proper evaluation system for all staff members. Because these people have no idea how to go about it, they will turn to you. This is your chance! Provide them with the format that allows employees to list their own accomplishments. Then, make sure that reviews are actually conducted.

Finally, if you don't get satisfactory acknowledgement anyway, start looking for another job. Maybe you will be luckier this time around. It's like I always say, employment at will works both ways: they can separate from you at any time, but so can you.

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