In today’s complex business environment, there is tremendous pressure for business functions and units to perform their core duties and deliver to the expectations of internal and external customers alike. Finance and accounting functions have not been spared by these growing and increasing expectations of them, by the internal stakeholders and external partners. Under these circumstances, the finance department is expected to remain an enabler to the business, so that the business can grow and be competitive. In addition, even as they deliver critical information, various filings and reports, Finance and Accounting leaders must adhere to stringent accounting rules and maintain controls and compliance. And as expectations continue to rise, resources, on the other hand, are becoming ever more scarce. In all this, the finance function must meet business demands for faster turnaround and lower costs.
There is a lot of debate going on concerning what the Finance function must do in order to become an enabler to the business and remain relevant in today’s increasingly complex business environment. Ultimately, all the suggested initiatives fall into one of these categories: People, technology or systems and processes. All three are essential for the successful transformation of the Finance function into a value-add business partner.
According to Irene Liu, a consulting partner at PwC, “Finance functions that successfully transform themselves on the back of lean spend 20 percent more time on insights and less on data gathering.” And she adds, “They are able to pay staff 25 percent more and still run with 36 percent lower costs than their peers. Moreover, an unsurprising consequence of the improvements is that staff motivation improves and turnover reduced.” Adopting lean finance practices can help an organization do more with less through efficiency in reporting and other repeatable processes, and through waste reduction in data and communication flows. Internal stakeholders are not the only ones who can benefit from adopting lean finance principles, but external partners, such as investors, venture capital groups, and mentors also stand to benefit from the added transparency and improved efficiency. And by creating workflows that remove non-value added steps, it becomes easier to provide the information outside advisors need to help your organization be more profitable and reduce burn rate.
What is Lean Finance?
“Lean” can refer to a wide range of ideas, from working with a small staff to “doing more with less.” The essence of lean is value and efficiency. In the context of lean finance, it refers to a set of tools and working habits to improve efficiency within the team.
Lean finance involves simplifying, streamlining, and harmonizing essential finance processes to create a leaner, more efficient finance operation.
Reduced operational cost is only one goal of lean finance. It can also dramatically boost speed, flexibility, and quality across the finance function and enable finance teams to deliver services of greater range and value. This is illustrated in Figure 1. Below:
Figure 1: Lean Finance Transformation (https://assets.kpmg)
It must be pointed out from the outset that: “Lean does not change core accounting and finance services but it does simplify the processes for executing these functions, and makes it much easier to spot defects, redundancies, and wasteful steps.”
What are the Origins and Principles of Lean Finance?
The idea of ‘lean’ was born when Kiichiro Toyoda, Taiichi Ohno, and others at Toyota revisited Ford’s original thinking and invented the Toyota Production System (TPS) after World War II (late 1940s).
Lean Management (or simply ‘Lean’) is a disciplined approach to management of processes which seeks to continuously improve processes by minimizing waste and improving efficiency with the view to improve quality and minimize costs. The improvements achieved are small and incremental and happen over the long-term. Incidentally, one area of business in which the application of lean techniques can be particularly beneficial is the finance function.
Although different manufacturing systems invented by Henry Ford and Kiichiro Toyoda utilized aspects of lean management, the term "lean" was originally coined to describe Toyota's business during the late 1980s by a research team lead by Jim Womack, Ph.D., at MIT's International Motor Vehicle Program. It was popularized by the publication, in 1990, of the book “The Machine That Changed the World”, by James P. Womack, Daniel T. Jones, and Daniel Roos. The authors broke down lean management into five concepts:
Identify Value
Value Stream Mapping
Create Continuous Workflow
Create a Pull System
Continuous Improvement
Figure 2: The 5 Principles of Lean (Kanbanize 2021)
The Lean principles are explained below:
1. Identify Value
Identify value from the standpoint of the end customer. The product must be the part of the solution that the customer will readily pay for. This means that the value you want to deliver to the customer must first be identified.
2. Value Stream Mapping
This step refers to the process of mapping out the company's workflow, including all actions and people who contribute to the process of creating and delivering the end product to the consumer. The value stream mapping will show you where value is added and in what proportion different parts of the process do or do not produce value. Steps that do not create value are eliminated whenever possible.
3. Create Continuous Workflow
There is need to ensure that value-creating steps occur in tight sequence, so that the product will flow smoothly toward the customer. This prevents any interruptions or bottlenecks that may occur in a cross-functional teamwork scenario. Work is broken up into smaller batches, so that visualizing the workflow and detecting and removing process roadblocks becomes easy.
4. Create a Pull System
In order to establish a stable workflow, ensure to create a pull system. The pull system lets customers (downstream stations) pull value from the next upstream activity - the work is pulled only if there is a demand for it.
Having a stable workflow guarantees that your teams can deliver work tasks much faster with less effort. This also allows you to optimize resources’ capacity and deliver products/services only if there is actual demand for them.
5. Continuous Improvement
Once you go through all previous steps, you have established your Lean Management system. However, there is need to begin the process again and continue it until a state of perfection is reached, in which perfect value is created with no waste. A variety of techniques are used to identify what an organization has done, what it needs to do, any possible obstacles that may arise and how all members of the organization can make their work processes better.
Nowadays, lean is quite widespread and applied to nearly every workflow imaginable. Among accounting teams, lean finance can be utilized to improve reporting, reduce the time needed to generate information, and ultimately create increased value for all stakeholders through nimbler processes and effective communications.
What are the Benefits of Lean Finance?
The Lean approach is a continuous process improvement technique not solely focused on implementing once-off improvement initiatives and tools. Rather, it is more about driving sustainable results by building capabilities and an effective continuous improvement culture.
A successfully implemented Lean finance project will, typically, yield the following benefits:
Lower-end transaction processing work is moved out of the finance function and concentrated within shared and/or outsourced service providers
Routine procedures are standardized and automated where possible to increase efficiency, reduce the potential for error, and improve quality
Finance function roles and responsibilities, processes, and controls are standardized and streamlined.
Data flows and underlying IT architecture are standardized and streamlined in order to automate the transfer of data inputs and better integrate systems.
Finance personnel have a better understanding of financial & operational processes
Lean embeds a culture of continuous improvement in the finance function.
CFOs are able to establish KPIs that are linked to value creation and promote a culture which holds employees accountable for continuous improvement, removing any inertia which may exist.
Table 1. below shows the results of a PricewaterhouseCoopers (PwC) client who implemented a lean finance project successfully.
Table 1: Results of a PricewaterhouseCoopers (PwC) client (pwc.com)
It’s clear that a well-executed Lean process improvement program can lead to significant savings in both time and effort expended, allowing your finance function to refocus attention on higher-value business issues.
Beyond merely improving workflows, Lean provides an operating methodology to sustain process excellence and continuously improve results. This changes the way finance and accounting professionals view their work and manage their activities. In doing so, Lean helps transform finance and accounting into high-performing, customer-focused organizations.
How can one Implement Lean Finance?
When a decision has been made to implement lean finance in an organization’s finance function or, indeed, any other area, there are a number of steps to be followed and considerations to be made during implementation of the project.
The following are the key steps and considerations:
A key requirement in establishing lean within a company’s finance function, or in any other area for that matter, is top management support. The tone from the top should be positive and encouraging. The level of top management support will make or break the project, since in any case, management directs and allocates resources for the project.
The second step is to identify stakeholders affected by the project. Although your results, generally, are not made public, it’s in the interest of internal partners to receive the information you provide. Think of your output through the lens of the five lean finance principles
The third step is to pinpoint where and how the finance function adds value. This requires reviewing all functional areas of the accounting/finance department, including transactional processing, budgeting, financial reporting, and control and decision support activities. In essence, Value Stream Analysis should be performed for all the processes within the scope of the lean finance project.
While the preferred method for documenting processes is direct observation, some back-office processes are often not executed with sufficient consistency and frequency to be readily observed. A common alternative is to capture the core elements of these processes through process mapping sessions, and then validate them when the process is eventually executed.
It should be always kept in mind that Lean focuses on eliminating waste as quickly and simply as possible. And so it is only wise for one to avoid being bogged down in analysis when improvements can be made quickly. While fully reengineering a process may take a few weeks and sometimes months, there are a number of actions that may be implemented without much effort that will significantly alleviate pain and build momentum.
What is the Future of Lean Finance?
The Bright Side
Generally speaking, many commentators foresee lean becoming a way of life for companies in the years to come. In addition to simplifying, streamlining, and harmonizing essential finance processes, lean is also expected to align the finance function with the risk function – a merger of functionalities which significantly overlap in terms of data gathering, reporting and analytics. This creation of synergies will result in breaking down barriers in traditionally separate functions and can become a model for management to rethink how departments are being segregated.
Caution
Even as the adoption of lean finance principles continues to gain popularity, it is advisable to consider some views from various experts and commentators, as presented below:
Lean should not be taken as a panacea. However, it should be regarded as an important part of the overall toolkit for process improvement, and not the only tool a company can deploy in its quest to develop a world-class finance function. Increasingly, centers of expertise for lean, global process ownership and intelligent automation are being combined to drive a multi-dimensional approach to process improvement. And more recently, some practitioners have combined Six Sigma ideas with lean resulting in a methodology called “Lean Six Sigma”. Lean Six Sigma is the integration of Lean and Six Sigma tools and techniques aimed at producing the best possible quality, cost, delivery, cycle time and other process attributes.
As industries become ever more competitive, and as change occurs at a faster pace, there is more need than ever before for companies to consider innovative ways to transform their operational performance. The key is to find the right balance between making significant changes to their business models and the oversight of their continuous improvement activities. While Lean is a natural part of this evolution, lean principles are unlikely to be sufficient for companies facing significant and rapid change within industries where speed and results matter in the short term.
For every upside, however, there is a downside. The application of lean principles should have a positive impact on quality and productivity. If lean is not implemented properly - for example without proper communications - the repercussions can be highly disruptive. As a result, staff may be demotivated, suspicious of management intentions, view the process as a mere cost cutting exercise or be unsupportive toward the entire project.
While there is, generally, consensus regarding the transformative power of lean in finance and accounting functions, skepticism surrounding what lean can accomplish cannot be ignored. Questions are raised as to whether lean is now a way of life for companies or a tool insufficient to affect significant change. To help us arrive at our own conclusion, a number of factors contributing to the success of lean implementation must be considered including: top management support, knowledge of lean, training, levels of expectations and the nature of the organization concerned. But as to whether lean finance is a panacea or passing fad or somewhere in between, is really a matter of opinion. Finding the middle ground between the two extremes is, therefore, crucial.
References
Finance Transformation. Available at: https://www.pwc.com/th/en/consulting/finance/assets/pdf/ [Accessed February 2nd 2022]
Lean Finance. Available at: https://aircfo.com/ [Accessed February 2nd 2022]
Lean Finance. Available at: https://www.kmco.com/resource-center/article/looking-forward/ [Accessed February 5th 2021]
3 Reasons Why Taking a Lean Approach Can Help Finance Drive Business Performance. Available at: https://erpminsights.com/ [Accessed February 6th 2022]
Leveraging Lean Across the Finance Function. Available at: https://www.financierworldwide.com/ [Accessed February 10th 2022]
Make The Difference with Lean Finance. Available at: https://assets.kpmg/content/dam/kpmg/pdf/2015/07/ pdf [Accessed February 10th 2022]
About the Author
Andrew Salimu is an independent Consultant who works with organizations of all kinds to help them Improve their processes, improve productivity, and to implement ISO Standards. Andrew believes Process improvement and optimization are key for any organization to grow and remain profitable and competitive in today’s global economy. Andrew has various certifications, including Project Management, ISO Management Systems, Six Sigma, Lean, Digital Marketing, Strategic Management, Kaizen and Toyota Production System. He holds a BEng degree in Mechanical Engineering from The University of Birmingham, England.
E-mail: andrewsalimu@yahoo.com
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