Patrick Pichette and Art of Corporate Finance in IT Industry
I was reading through Patrick Pichette's interview with Mckinsey Quarterly last week, and it was perhaps one of the few interview reports that made me sit back, read, read, and read through again. Its quite an old interview, but worth looking given its relevance in today's fast changing IT landscape. The report certainly made me to think about many aspects of corporate finance and strategy. Patrick's ideas are certainly commendable and thought provoking - From managing Short Term metrics to Start-Up culture. Here are some excerpts and my thoughts...
'Managing Short Term/Tactical metrics'
Managing short term metrics is part of corporate life once an organization goes public. There is a general expectation from investing community to meet/beat analyst estimates and that puts a lot of pressure on C-Level executives. Nevertheless, it is required of C-Level executives to meet short-term goals as well as long-term vision.
In the report, Patrick suggests that short term/tactical metrics at Google is managed through a review of: Quarterly Metrics, Business Trajectory, and Strategic Positioning. If I understand the context right, a mere number game will not help in managing the short term metrics Year-On-Year. A number game may help for one, two, or three years, but will eventually crack when numbers are not aligned with business strategy. (This probably explains a high level of CEO attrition at 3-5 years!!!).
Google's way of managing Short Term metrics calls for a special attention as there is a general opinion that short-term views are impediments to business longevity. Yes, its true that short-term views are impediments to business longevity, but only if it is 'solely' based on accounting numbers. However, if accounting numbers are aligned with a 2-3 year business trajectory, there should not be much impediment to business longevity. It will in fact reinforce discipline in reaching long term goals and vision. In my opinion, Short-Term view is good, provided - It is alignment with business trajectory and strategic positioning.
'Business Units, Ownership, and Start-Up Culture'
Most organizations, if not all, have the concept of business units. These business units(or line of business) is head by a senior management leader, who has absolute control over the headcount and compensation budget. This type of business unit setup is absolutely fine and helps C-Level executives to manage the organization quite easily. However, there is a pitfall in this type of setup - the start-up culture.
A start-up culture is one there is an efficient allocation of resources. When there is a new project requiring additional workforce, the resources are allocated quite easily. However, in a business-unit context, the unit leaders take ownership positions and generally prefer resources in excess than required. This leads to inefficient allocation of resources, costly restructuring exercise etc.
In a fast changing IT environment (we are in Cloud-era!!!), we do not have much space for taking ownership positions and fighting for resources. The organization should be nimble to capitalize on opportunities and that implies efficient allocation of resources and a start-up culture. One way to tackle this problem in big organizations is to have a resource allocation team.
'Financial Flexibility'
Financial flexibility refers to ability of the organization to flex its muscles given a positive investment opportunity. The opportunity could be in the form of new project, innovation, a merger etc. However the key to financial flexibility is prudent management of investments and cautious management of expenses. To be prudent and cautious, one needs to understand the organization culture and its core strength - Does the strength lie in organic or inorganic growth? Does the investment meet my capital structure? Will this investment be in alignment with strategy?
Patrick's report suggests that financial flexibility is as much important as a firm's strategy. Can we disagree with his thought on that? In my opinion, he has hit the bull's eye - a company cannot exploit opportunities without financial flexibility.
'Fact-Based Analyses'
As organizations grow bigger and bigger, there is very little space to make intuition based decisions. One of the reasons is that not everyone has the same level of intuition or experience. Furthermore, intuition based decisions have room for error. A fact-based structured analyses provides for common ground and leads to sound decision making. Patrick emphasizes this argument in the interview and calls for deeply fact based analysis. It provides for some solid ground to make compelling proposals and solutions. Would suggest reading Ethan Raisel's Mckinsey Mind or McKinsey Way for more information on fact-based analysis.
Today's IT environment has plethora of options to make fact based analysis quite easy. Business Intelligence tools and powerful processors have only helped organizations make quick and real-time decisions. Using exploratory analytic measures and analyzing them in tandem with economic/financial variables, one can confidently forecast/predict the impact of investments. Suggested reading (Booz Strategy on Business Intelligence)
'Managing Short Term/Tactical metrics'
Managing short term metrics is part of corporate life once an organization goes public. There is a general expectation from investing community to meet/beat analyst estimates and that puts a lot of pressure on C-Level executives. Nevertheless, it is required of C-Level executives to meet short-term goals as well as long-term vision.
In the report, Patrick suggests that short term/tactical metrics at Google is managed through a review of: Quarterly Metrics, Business Trajectory, and Strategic Positioning. If I understand the context right, a mere number game will not help in managing the short term metrics Year-On-Year. A number game may help for one, two, or three years, but will eventually crack when numbers are not aligned with business strategy. (This probably explains a high level of CEO attrition at 3-5 years!!!).
Google's way of managing Short Term metrics calls for a special attention as there is a general opinion that short-term views are impediments to business longevity. Yes, its true that short-term views are impediments to business longevity, but only if it is 'solely' based on accounting numbers. However, if accounting numbers are aligned with a 2-3 year business trajectory, there should not be much impediment to business longevity. It will in fact reinforce discipline in reaching long term goals and vision. In my opinion, Short-Term view is good, provided - It is alignment with business trajectory and strategic positioning.
'Business Units, Ownership, and Start-Up Culture'
Most organizations, if not all, have the concept of business units. These business units(or line of business) is head by a senior management leader, who has absolute control over the headcount and compensation budget. This type of business unit setup is absolutely fine and helps C-Level executives to manage the organization quite easily. However, there is a pitfall in this type of setup - the start-up culture.
A start-up culture is one there is an efficient allocation of resources. When there is a new project requiring additional workforce, the resources are allocated quite easily. However, in a business-unit context, the unit leaders take ownership positions and generally prefer resources in excess than required. This leads to inefficient allocation of resources, costly restructuring exercise etc.
In a fast changing IT environment (we are in Cloud-era!!!), we do not have much space for taking ownership positions and fighting for resources. The organization should be nimble to capitalize on opportunities and that implies efficient allocation of resources and a start-up culture. One way to tackle this problem in big organizations is to have a resource allocation team.
'Financial Flexibility'
Financial flexibility refers to ability of the organization to flex its muscles given a positive investment opportunity. The opportunity could be in the form of new project, innovation, a merger etc. However the key to financial flexibility is prudent management of investments and cautious management of expenses. To be prudent and cautious, one needs to understand the organization culture and its core strength - Does the strength lie in organic or inorganic growth? Does the investment meet my capital structure? Will this investment be in alignment with strategy?
Patrick's report suggests that financial flexibility is as much important as a firm's strategy. Can we disagree with his thought on that? In my opinion, he has hit the bull's eye - a company cannot exploit opportunities without financial flexibility.
'Fact-Based Analyses'
As organizations grow bigger and bigger, there is very little space to make intuition based decisions. One of the reasons is that not everyone has the same level of intuition or experience. Furthermore, intuition based decisions have room for error. A fact-based structured analyses provides for common ground and leads to sound decision making. Patrick emphasizes this argument in the interview and calls for deeply fact based analysis. It provides for some solid ground to make compelling proposals and solutions. Would suggest reading Ethan Raisel's Mckinsey Mind or McKinsey Way for more information on fact-based analysis.
Today's IT environment has plethora of options to make fact based analysis quite easy. Business Intelligence tools and powerful processors have only helped organizations make quick and real-time decisions. Using exploratory analytic measures and analyzing them in tandem with economic/financial variables, one can confidently forecast/predict the impact of investments. Suggested reading (Booz Strategy on Business Intelligence)
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