Optimising financial processes

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“Received Wisdom” and the Art of Pareto

In the era of ever-increasing need for business transformation at speed it is remarkable how often strategic projects and technology are embraced based on “received wisdom”.

How often do we genuinely assess for potentially better, quicker and more effective options.

After all, what is the essence of innovation? Where does “received wisdom” come from?

The broad set of options might include some more tactical ones that may serve as a stepping-stone towards the strategic outcome while producing significant business value at a fraction of the costs and the time involved.

Business is getting ever more complex, in expectations, consumer demands, process, technology, organization, governance and more. This makes it difficult to have clear oversight on what is actually needed, enhances the fear of ”missing the boat” of what your peers and competitors are investing in and exacerbates the confusion of technology vendors and consulting firms parading “the next BIG thing”.

If you don’t think upfront about alternatives to received wisdom, you risk becoming a victim of the Dunning-Kruger effect.

The Pareto Principle is certainly not new but has proven to be helpful in business, and is part of the foundation of Six Sigma, for example. Applying the Pareto principle can serve as a sanity check for senior executives and also for the troubled CIO or business leader who is challenged to resource all strategic initiatives AND delivering business value at pace.

Pareto in a nutshell: The route to 10x increase in Return on Investment

Pareto Analysis, a.k.a. 80/20 thinking, is deceptive.

At its most basic, the ability to deliver business value at 1/5 of the effort and cost immediately has impact and resonance. But it is bigger than that. The time saved also has a monetary value, a significant one. The 80% part of the equation is an assessment of an overall benefits number that is bigger than is typically ever actually delivered. On these factors alone, it is quite reasonable that a Pareto initiative can deliver up to 10X returns compared with its more time, effort and cash consuming cousins.

Pareto is a straightforward decision-making technique for assessing and ranking problems and measuring the impact of resolving them. The aim is to focus on solutions that will provide the most benefit in the smallest effort, time and money envelope. Pareto thinking recognizes that poor governance can result in heavy future “technical debt”, a burden sometimes referred to as the “Frankenstack”, a clunky amalgamation resulting from an initial ‘quick win’ extended over time using disparate technologies and platforms. I am sure you have seen examples such as this in your travels!

Governance and risk management still matter in Pareto, maybe more than ever, and “Frankenstack” issues are proactively avoided.

The 80/20 ratio in this respect is not set in stone and should be seen as a relative and not an absolute measure.

A Pareto Analysis follows these steps:

  1. Identify and List Problems: List of all of the problems needed to be resolved. Brainstorm, gather factual feedback and perceptions/opinions.
  2. Identify or Create a hypothesis of the Root Cause per Problem; Define to the root cause of each problem, often it is enough to apply the “5 Whys” (have you ever tried asking “why” 5 times in search of the root cause of an issue), if needed augmented with techniques like Cause and Effect Analysis.
  3. Score Problem: Give each problem an importance score. Depending on the topic you are addressing, the scoring will be based upon on the most relevant measure(s) like value, costs, time, cash impact, risk, customer satisfaction etc.
  4. Grouping Problems: Using the analysis from steps 2 and 3 group problems together by common cause.
  5. Total Scores for Each Group: The group with the top score should logically be your highest priority, the group with the lowest score your lowest priority.
  6. Define Options: Define any alternatives to resolve the group with the top score. All alternatives should be marked with the elements costs, time to value and risk (and be honest!).
  7. Get stakeholder agreement to the selected Pareto option. For best results, ensure that you have already developed a sustaining stakeholder engagement process, and this is not a “one off”. 
  8. Take Action: Execute!

A few considerations:

  • As a rule of thumb there are always at least three alternatives:
    • doing nothing (accept the consequences),
    • the perfect solution (the ideal, long-term),
    • the pragmatic solution (an 80/20 solution within the top scoring group).
  • Don’t over-analyze the scores with complex calculations. Do not go deeper than necessary for informed decision making.
  • Vested interest driven arguments are a given: expect comments like: “over time we expect . . . ”, “we have invested in this already”, “everybody does it”, “but it only delivers . . . . ” and the classic “it’s not our strategy” (by definition any new innovation is not current strategy!). Make sure the not-invented-here arguments are put in perspective of the overall business value.
  • Every organization has its own “immune system”. The white blood cells of the organization will swarm around new, unproven ideas. Don’t assume every new entrant is a disease!

In summary, a Pareto Analysis enables organizations to quickly identify areas of business where addressing challenges will return the most value. Pareto creates awareness of the various solution options and their impact as the basis for informed decision, and enables a balance of tactical and strategic solutions. Pareto should enable you to “look before you leap” and also validate current strategic initiatives that don’t (yet) deliver the desired business value.

As you work through this, remember that we never made step change improvements by just following received wisdom. To keep doing the same thing and expect different results? Well, we all know where that leads . . . .

Let me know your thoughts.

Thanks for reading . . . .