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David A. J. Axson.

David A. J. Axson

President The Sonax Group

There are two types of complexity forces--external, which includes, globalization, competition, regulation etc.; and internal, which includes organization structure, process capability, sourcing technology architecture, etc. Today, the issue with external complexity is not so much the growing list of outside forces but the volatility and the unpredictability of these forces. This makes it far harder for companies to sustain market leadership and profitability over the long term. Most improvement efforts over the last 15 years have focused on simplification, with the objective being costsavings. Today finance executives are increasingly focused on enabling flexibility in order to better respond to growing external volatility. It is imperative that financial executives understand not just their cost structure but also their "cost elasticity"--that is, how flexible your cost structure is to business activity changes. Can you sustain profitability during periods of revenue decline, as well as when revenues are growing? The ability to adapt rapidly to changing market conditions will be the hallmark of companies who can sustain profitability over the long term.

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Secondly, in an effort to solve internal complexity, extreme efforts have been taken to automate processes. However, for many the outcome is only one of replacing a variable cost with a stable technology-based fixed cost and not solving the problem. Increasing your organization's cost elasticity creates greater flexibility. Outsourcing offers one route to increasing cost elasticity. Not only can costs be made to vary with business activity, but you also move the burden of capital investments, technology risk and their management to the third-party partner.

A focus on cost elasticity must then be translated into the overall management processes. Embrace uncertainty and ambiguity, stop predicating your forecasts based on certainty. Look broadly at risk, as it's not just about operational execution or more traditional financial risks, such as credit or treasury risk, but increasingly embraces areas like "reputation risk." As finance executives understand that the financial results of any business event are the last step in the chain, they must aggressively seek insights upstream that provide visibility to future financial results and buy time to react and respond.

Contact: daxson@sonaxgroup.com
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Title Annotation:Manage Your assets; Sonax Group
Author:Schulman, Donniel S.
Publication:Financial Executive
Geographic Code:1USA
Date:May 1, 2005
Words:362
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