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Former Caterpillar Group CFO on The Leadership Skills Finance Professionals Must Master to Reach the Top · The Diary of a CFO

0:00
Welcome back to the Diary of a CFO podcast. I'm
0:03
your host with Wassia Kamon. I'm a CFO with a background
0:05
in accounting and FP &A. And I started this show
0:08
to talk about what leading finance really looks
0:10
like and what it takes to become a modern CFO.
0:13
Each week, we explore how today's top finance
0:15
leaders build high performing teams, partner
0:17
with CEOs and boards, and lead through growth
0:19
and transformation without burning out in the
0:22
process. Today, I'm super delighted to have with
0:24
me, Dave DeFreitas. Dave is a retired group chief
0:27
financial officer of Caterpillar. Inc. and a
0:30
retired chief revenue officer at Tata Cognitive
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Solutions. He's a high impact leader with a unique
0:35
combination of expertise in business leadership
0:38
and financial management, directing senior business
0:40
leaders and strategizing paths forward. Fun fact,
0:44
Dave has been my mentor for now close to three
0:46
years. He was well untold into that role and
0:49
he has been a member of our personal board of
0:51
directors ever since. Super excited to have you
0:53
here. Welcome to the show, Dave. Thank you. It's
0:56
great to be here. Awesome. I just want to dive
0:59
in straight because you spent over 30 years at
1:02
Caterpillar and you ended up as group CFO. When
1:05
you look back, what are three things you will
1:08
say really made the difference for you to getting
1:11
to that level? Yeah, I would say first and foremost,
1:16
it was getting excited about what I do. When
1:21
you think about finance, you think about accounting,
1:24
some people kind of, oh, you really have got
1:28
to do that for 40 years and then retire and I'm
1:33
going to audit a company or in some cases, I'm
1:37
going to do debits and credits, but it's... Find
1:40
something to get excited about and embrace it
1:42
and go do it. And frankly, if you can't find
1:45
something to get excited about within the profession,
1:48
then quit and go find something you can get excited
1:51
about. The other thing that as I started to go
1:56
up the ladder at Caterpillar is I would tell
2:00
some of my peers, if you have people in your
2:02
group that can't get excited about your goals,
2:05
your objectives and what you're trying to accomplish,
2:07
then get them transferred. And I don't mean to
2:09
another department within your company, get them
2:11
transferred to your competition because they'll
2:13
drain the life right out of them. Nice strategy.
2:17
But that's kind of the first thing is getting
2:19
excited. The second thing is know the people
2:24
around you and become a sponge for what they're
2:29
doing as well. Understand. how your company works
2:32
and why it works the way it does. Because you
2:35
will become much more valuable when you're answering
2:38
questions and doing your work as you bring those
2:43
answers and bring that work back to others because
2:46
you'll be able to think about the bigger picture
2:49
of how it all fits in and provide more value
2:52
to the overall organization. And probably the
2:55
last thing is Don't fear the lateral move because
3:02
that is a great way that as long as you're continuing
3:06
to get new experiences, you're continuing to
3:08
get good performance reviews, it'll be the way
3:11
that you can learn about how that company works
3:14
and why it works the way it does, and that's
3:17
where you can really become more valuable. Wow.
3:19
Thank you so much for sharing. And on the last
3:21
one, when you said, don't be afraid of lateral
3:24
move, I had the lateral move too in my career,
3:26
but I'm curious to hear what are some of the
3:28
lateral moves you had at Caterpillar and how
3:31
do you think it helped you, you know, become
3:33
eventually group CFO? So that's a great question.
3:38
I had a mentor at Caterpillar that frankly, he
3:42
could have just kept everybody in their jobs,
3:45
made them functional experts at what they were
3:48
doing and could have coasted. But instead, every
3:53
six months to two years, depending on the job
3:56
and how long it took for the individual to learn
3:58
what they needed to learn, he would move everybody
4:01
so that they would get rotational experience.
4:04
And so in my first six years at Caterpillar,
4:07
I had seven different jobs before I got my first
4:09
promotion. Wow. Then after that, the next six
4:13
years, I went up 10 levels. and got to Group
4:16
CFO. And so what that did for me, I mean, they
4:20
were roles like I started in internal auditing.
4:23
Then I moved into legal entity accounting focused
4:27
on inventory management. Later I went into profit
4:32
and loss statement accounting. When we first
4:35
moved from cost centers to profit centers, I
4:38
basically coordinated the profit and loss statement
4:41
for about a $2 billion entity at that time. Then
4:45
I went into budgeting and coordinated the budget
4:48
across that entire entity. Then I moved into
4:51
cost accounting. And from those positions, I
4:55
learned so much about everything from manufacturing
4:59
to engineering to accounting to the whole operations
5:05
that later, interestingly enough, when I went
5:08
to Leicester, England and was the CFO for one
5:15
of Caterpillar's product lines, one of the guys
5:18
that I had worked with and had seen me in all
5:21
of those roles at the Aurora manufacturing facility
5:24
for Caterpillar, he was now the managing director
5:27
of all of the operations of Caterpillar UK. And
5:31
when he was looking for somebody to lead that
5:34
entire group, he said, Dave, I think I want you.
5:37
Wow. And I love to tell this story because it
5:39
was a two level promotion. And I said, OK, sure,
5:42
no problem. I'll do that. You know, what's it
5:45
involved? Oh, 650 people, three manufacturing
5:49
facilities across the United Kingdom. You're
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going to have engineering, design control, manufacturing
5:54
and marketing responsibilities, and the product's
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going to be sole sourced out of Leicester, England.
5:59
And I said, great, two level promotion, sign
6:01
me up for it. And after everybody left the room,
6:04
you know, everybody congratulated me. I closed
6:05
the door and I turned to my boss and I said,
6:08
are you nuts? What do I know about engineering
6:12
and marketing? And he said, Dave, you had the
6:15
same mentor I did. You know how to lead. You
6:19
know how to manage people. You know how to lead
6:21
people. And you don't have to be an expert in,
6:24
say, engineering. You have an engineering manager
6:27
that knows that stuff. But what they do is sometimes
6:31
they get lost. They can't see the forest for
6:33
all the trees. you have the ability because you
6:37
see, you know how the company works, you know
6:39
why it works the way it does, to step back with
6:42
them and say, let's think about this from the
6:44
bigger picture. And let's think about where we're
6:47
going. In other words, what does done look like?
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And if we have the same picture of what done
6:53
looks like, now we can start to plot the route
6:57
we're going to take to get to that destination.
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And when we start to go astray, Dave, you can
7:02
bring them back to get them back on route. And
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that really was those jobs that we talked about.
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And later on, I'll probably delve into one or
7:12
two of those jobs at the staff level that was
7:14
most important to that journey. But it gave me
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such a perspective that, yes, it really allowed
7:20
me to have success. And that was the pinnacle
7:23
job when I got three years out of accounting
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for good behavior, managing this entire pipeline,
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that ultimately gave me the potential and the
7:33
ability to become a divisional CFO and later
7:35
a group CFO. And really it put me in a position
7:39
where some of my bosses at that time really called
7:44
me the most unique CFO or divisional and then
7:48
later group CFO that there was at Caterpillar
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because of that business experience I had beyond
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just finance and accounting. That's awesome.
7:56
And I hear a lot of people now, you know, they
7:58
have like COFO title, COO and CFO, and there's
8:02
definitely value in, you know, getting that operations,
8:05
you know, background and experience. So I'm curious
8:07
as you moved from accounting outside to operations,
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what are some things that had to change maybe
8:14
in your mindset or in your habits? Well, for
8:18
starters, you know, as an accountant, it used
8:22
to be, okay, Cut cost. I mean, when I opened
8:25
my wallet, OK, there were cobwebs in there because
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it was like the dollar bills that were in there.
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They'd been in there for decades. I was not going
8:33
to pull those out and spend them on anything.
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But I got to tell you, your perspective changes
8:38
when you're sitting across from a farmer in his
8:42
farmhouse, in his conservatory in England, and
8:46
he's serving you lemonade. But while he's serving
8:48
you lemonade, he's looking at you saying, do
8:50
you realize your product? that I bought from
8:53
your company failed for me in the field and I
8:56
was not able to bring in my harvest, my bales
8:59
of hay, for example, to feed my animals in a
9:02
timely and effective manner. And he said the
9:06
failure, when he told me about it, it was actually
9:09
one of the items that we had under warranty that
9:12
we were thinking about doing a recall on and
9:14
proactively fixing as opposed to waiting until
9:17
they failed. And it caused me to think, wait
9:20
a minute. This is no longer about optimizing
9:22
the expense. It's about satisfying the customer.
9:27
No, delighting the customer to the point they
9:30
want to come back and buy from me and rebuy from
9:34
me because ultimately I'm not going to maximize
9:37
my sales, my margin, my profitability. I want
9:42
to optimize it. And when I say optimize it, that
9:45
ultimately leads to the maximum you're going
9:47
to get. You may spend some dollars. But the old
9:50
saying, you got to spend money to make money.
9:53
Well, it really is true. And that was one of
9:55
the things I had to change my perspective. It
9:57
wasn't just about the lowest cost number. It
10:00
was about, hey, what does Dunn look like? The
10:03
perfectly satisfied customer that's repeat buying
10:07
and he's out there telling all of his friends,
10:10
his neighbors, his even competitors, my goodness,
10:14
this is my secret sauce. It's this product that
10:17
I'm buying from Dave at Caterpillar. And that
10:20
spending the money in the right places to go
10:22
do that was a mindset change for me. I've got
10:26
several more, one of which is sometimes there's
10:30
just no good substitute for rolling up your sleeves
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and jumping in and being a part of the solution.
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You couldn't just come in and delegate and go,
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guys, we got a problem. You guys are the experts.
10:42
Go do it. Sometimes you can do that. but you
10:45
have to know how to lead. I learned how to lead
10:48
through situational leadership, which means sometimes
10:51
I need to get in with that group. roll up my
10:54
sleeves, brainstorm with them, and help lead
10:57
them to the solution. Again, they're the experts,
11:00
but sometimes they just need somebody to come
11:02
in and help them put the pieces together. That
11:05
was a lot different for me than it was of just
11:09
being an accountant and saying, okay, what system
11:11
am I going to use to close the books and how
11:14
can I be most efficient in that? Yeah, getting
11:17
really into, like you said, rolling your sleeves
11:20
and working with your team. Thank you for sharing
11:23
that, but there's also something, like if I remember
11:26
right, you became a divisional CFOs in your thirties
11:29
and you were leading teams of hundreds of people.
11:33
So in that process, not just going from operations,
11:36
from accounting to operations back to finance,
11:38
but going to finance at such a high level, at
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such a young age, like what did you also have
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to change to lead effectively? Well, and again,
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it comes back to that situation of leadership.
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When I first came into the divisional CFO role,
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I was 35 years old and I had six direct reports.
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Now this organization was about 150 people. And
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so I had staff level reporting to supervisors,
12:08
reporting to division managers, reporting to
12:10
then ultimately to me. And four of the six of
12:15
them were 60 years of age or older. And one of
12:19
them actually came in for our first meeting and
12:22
he had known me and I'd been with the company
12:24
then about 15 years or so. And I might have been
12:29
about, probably within 13 years. So he came into
12:33
me and he did this. He said, I can do this. Yeah,
12:39
I can make this work. I'm going to, I'm going
12:42
to do this. And then he looked up at me and I
12:45
said, Dave, his name was Dave also. I said, what
12:48
was that all about? And he said, you know, Dave,
12:51
I've worked for people younger than me. Um, you
12:55
know, I have in the past, uh, I'm going to be
12:57
working for you now. And in the future, I'll
12:59
probably work for others that are younger than
13:01
me, but I've just never worked for anybody younger
13:04
than my son. And so. Right then I knew, okay,
13:10
how am I gonna lead somebody like this who knew
13:13
me the day I walked in the door as a staff level
13:16
accountant? He's in pricing, parts pricing. He's
13:19
been doing that job for 15 years and he'd been
13:22
at Caterpillar for over 35 years. And now I've
13:25
got to lead him with an attitude like that. Well,
13:29
guess what? So situational leadership, I said,
13:32
I need to take him to zone four. And zone four
13:35
says, You know, you work with him, you don't
13:38
abandon him, you agree upon the objectives, but
13:40
ultimately you get out of his way. He knew more
13:43
about parts pricing than I ever will or ever
13:46
would for that matter back then. And so I said
13:49
to him, I said, Dave, what do you need? And he
13:51
said, I need you to stay out of my way. I know
13:53
what I'm doing. I can get the job done. I've
13:55
been doing it for years and just let me do my
13:58
job. I said, okay, great. But I'm going to meet
14:01
with you on a regular basis. We've agreed upon
14:04
the goals. And I want to make sure if there are
14:06
any obstacles or anything there that I'm helping
14:09
you remove them." And he said, that's great.
14:11
That's what I need. And he said, but you won't
14:13
do that. And the reason you won't do that is
14:15
because you're an accountant. And I've worked
14:17
for accountants before, and they get busy with
14:20
debits and credits and closing the books. And
14:23
oh, wait, don't forget about your budgets. You
14:26
know, you got to roll those up. Oh, they're so
14:27
important. And whenever I need my boss, he's
14:31
never there. And so you won't be either. So I
14:33
remembered that. And on the rare occasion where
14:36
he needed me to be in his corner when somebody
14:39
was trying to make a decision that was not very
14:42
good and he knew it and I knew it, even if it
14:45
was up to the CEO of the company, I was there
14:48
with him to support him. And you know, five years
14:52
after he retired, he was playing in a band and
14:56
a group of people that either worked for him
14:59
or worked with him. about 20, 25 of us came out
15:02
to listen to him play. And at a break, he came
15:05
over, big smile on his face, and he put his arm
15:07
around me in front of everybody else. You did
15:10
this with nobody else. He just walked over to
15:11
me and he goes, I just wanted to let you know,
15:13
in all my years at Caterpillar, you're the best
15:16
boss I ever had. Now, the reason I tell that
15:19
story is not because I was a good leader, but
15:22
because when you embrace a concept called situational
15:26
leadership, it really works. It makes a difference.
15:30
and it's just in a very simplified, summarized
15:34
way, you have to understand where the person's
15:37
at in their journey. Don't judge others entirely
15:40
by the years and yardstick of your own experience.
15:43
If you've got a new employee, they're like a
15:46
dog with a bone. They're excited, they're enthused,
15:49
but they don't necessarily know what to do. So
15:52
you have to be more directive in your approach
15:54
and less coaching. in nature. Here's what I want
15:57
you to do. Here are the 10 steps. Once you get
16:00
that done, come back and see me. When you get
16:02
to zone two, you've got somebody that maybe has
16:04
been on the job six, nine months, and they're
16:06
starting to go, is this it? Is this all I'm going
16:11
to be doing for the next 40 years? By the way,
16:14
I don't know if I'm job failing or not. I don't
16:18
think I'm learning anything. That's where you
16:20
can, you still have to be fairly directive, but
16:22
you have to step back and do more coaching and
16:25
say, no, no, you know, you're doing fine. You
16:27
really are. Think about pause for a moment and
16:30
think about where you were six to nine months
16:32
ago. You didn't even know where the bathrooms
16:34
were. You know how this works. You know how that
16:37
works. You understand the 10 steps you're supposed
16:40
to be working on. So it's more a combination,
16:42
but when they get to zone three, it's one where
16:46
You get a new project, and you bring in the employee,
16:49
and they say, great, boss, what do you want me
16:51
to do? And that's where you go, no, I want you
16:54
to tell me what you think we should do. Well,
16:56
boss, I don't know how to do that. I can't do
16:59
that. Sure you can. You've done six other projects
17:02
in the last two years that are very similar to
17:04
this. So go out, think about those projects,
17:08
how they relate to this one, come back to me
17:09
with a plan, and we'll talk about it together,
17:11
and we'll agree upon it. Now, it would have been
17:14
easy for me in that situation to do the plan
17:17
and tell them exactly what to do. It took more
17:19
time this way, but it built confidence in that
17:22
employee the next time knew exactly what to do.
17:26
And it builds them into then zone four, which
17:29
is they know as much or more about it than I
17:31
do. And I can just let them get out of the way
17:33
and go do it. That situational leadership. And
17:36
if you build like that, then you get the best
17:40
staff possible. Wow. Thank you so much for this
17:43
great breakdown of what situational leadership
17:46
is. So you talked about zone one, they're brand
17:48
new and that's when you need to be more directive.
17:50
And then as you move to zone two and three, you
17:53
get more into the coaching and less directive.
17:57
But what about zone four? I think that's where
17:58
your former employees was in. So with zone four,
18:02
that's heavily in delegation. And so there it's...
18:07
If you have a project or if there are even just
18:10
common processes you agree upon, what are the
18:13
objectives? Again, let's get a clear picture
18:16
together, the same picture in our mind of what
18:19
done looks like. And I'll give you an example.
18:22
A lot of companies talk about finance transformation.
18:25
I hate finance transformation and here's why.
18:28
Because what's it mean? It means if there are
18:30
100 people in an audience, there are 100 different
18:33
pictures in their minds of what transformation
18:36
means. It's okay to say transformation, but you
18:40
have to follow it with transformation at our
18:43
company means moving from this XYZ system to
18:45
this new ABC system, and it also means taking
18:48
a process that used to take two days and applying
18:51
artificial intelligence to get it down to two
18:53
minutes or whatever. But everybody then has the
18:57
same picture in their mind. It's like if I said
19:00
to you, hey, we're going to go watch a football
19:03
game, and we're going to do it in September.
19:06
And that's all I tell you. What are the odds
19:08
we're going to end up at Soldier Field watching
19:11
the Chicago Bears play their home opener at 12
19:14
noon getting a hot dog and a beer? It won't happen.
19:18
But if I say... Hey, we're gonna go see a football
19:22
game. It's gonna be the Bears. It's gonna be
19:23
on September 12th. It's gonna be at 12 noon.
19:26
And we're gonna get a hot dog and a beer together
19:28
and just have a great afternoon. The odds are
19:30
pretty good that you and I have the exact same
19:32
picture in our mind of what done looks like.
19:35
And you may take a train, I may take a plane,
19:38
whatever, may take a car. We may take different
19:40
routes, but at least we have the same endpoint
19:44
in mind. So with that zone four, you get everybody
19:47
on the same wavelength. And then you say, hey,
19:50
you don't even have to necessarily go over the
19:53
plan with them of how they're going to do it.
19:55
They've driven that route to that destination
19:58
so many times. You just say, now that we know
20:01
we're going to Chicago, hey, Joe, Bob, whoever,
20:05
go get us there. And if you have a problem along
20:09
the way, or you have a breakdown, you got a flat
20:11
tire, call me. I'll be glad to roll up my sleeves
20:13
and help you fix the flat tire and help you get
20:15
there. I'll remove any obstacle you got. I'm
20:18
just going to let you drive the car. Wow. This
20:21
is, this is so impactful. Thank you so much for
20:24
sharing. I'm curious to hear, like, how did you
20:27
first learn about situational leadership? Is
20:29
it something that you learned the hard way? Was
20:32
it a training? Because I'm always curious because
20:35
I realize now that, you know, as a CFO, as any
20:39
financier, once you pass manager, you're dealing
20:41
more with people than with numbers. Like 99 %
20:45
of what you do is leadership and leading people.
20:48
So I'm always, I really like this kind of frameworks
20:52
that can help. So curious to hear how the concept
20:55
probably evolved for you. Well, early on, at
21:01
Caterpillar when this is way back in the late
21:03
80s and early 90s. When they identified people
21:07
as potential leaders of other people, they had
21:11
a series of training courses. And you started
21:13
with something called social styles, where you
21:16
really went in and you learned to assess other
21:20
people. And for example, I am an amiable driver.
21:24
Driver is my core or foundational strength or
21:28
social style, if you will. The amiable part of
21:31
it is kind of a subset. That basically means
21:34
that I'm very task oriented and I am, if you
21:37
got a list of things to do, I love to check off
21:39
the boxes, get them done and move on. The amiable
21:43
is, but I tend to have the ability to also work
21:49
with people along the way. There are multiple
21:52
other styles. Some people are very into what
21:54
they call woo. Or in other words, they're very
21:58
good with other people. It's all about how they
22:00
feel and how the other people feel. And they're
22:03
not very task -orient. So they're not all about
22:06
getting the task done as fast and efficiently
22:08
as possible. So those two social styles, just
22:10
as an example, clash. Because I'm over there
22:13
constantly going, come on, let's go, let's get
22:14
it done, let's go. And for you, if you were more
22:19
of a woo type... person, you might be, yeah,
22:22
we'll get there, okay? But really, but how you
22:24
feeling? You know what, and let's talk a little
22:27
bit about the situation. How did you feel when
22:29
this project came out with this answer and this
22:32
analysis? Who cares? Let's move on. When you
22:36
do that, that's step one. Step two was another
22:39
training program, and it was called Situational
22:41
Leadership. And it was external training packages
22:43
that Caterpillar purchased at the time and took
22:46
us through. But it really did allow you to learn
22:49
the difference between being a manager and being
22:52
a leader. So many people think they are leaders,
22:56
but in reality, managers maintain the status
22:58
quo. Leaders set bold but achievable goals. They
23:02
innovate. Okay. Managers use their titles and
23:06
position authority. Leaders leverage their reputation
23:10
and people want to follow them because they're
23:13
inspired by that leader to want to do the thing
23:16
that has to get done as much or more than the
23:18
leader does. So it takes on a life of its own
23:21
and people just go to the end destination. Managers
23:25
do things right, leaders do the right thing.
23:29
Managers also share minimal information where
23:32
leaders share absolutely as much as they can.
23:36
And managers coach the team as it exists. And
23:41
this actually came from the head coach of Bradley
23:44
University and their men's basketball team. But
23:47
he says, look, I don't coach the players that
23:50
I have. And I don't coach the team that I have.
23:52
I coach, I assess their potential, and then I
23:55
coach the players. for the players that they
23:58
can be at the peak of their potential. And I
24:01
coach the team at that same way. So I push them
24:05
to accomplish and achieve more than they even
24:08
thought they could possibly do. And my last one
24:11
is managers manage change, change management.
24:16
I hate it. Okay. Leaders lead improvements. Okay.
24:20
So you can do change leadership or you can do
24:23
change management and think about this. What
24:26
do people do when you talk about change? They
24:29
go, change? You want me to change? Well, no,
24:32
no, no, no. See, what I'm doing is fine. I like
24:35
what I'm doing. I understand it. Now, Wasee over
24:38
here, she's got some problems. Maybe you should
24:41
go work on her stuff because she probably needs
24:43
to change. Just leave me alone and I'm doing
24:45
good. But if I were to come forward and say,
24:49
if there were a way that you could improve the
24:51
way you do your work, you probably want to know
24:54
about it, wouldn't you? Now, all of a sudden,
24:56
the body language is, well, wait a minute. You
24:58
mean you can help me? free up some of my time
25:02
from the mundane things that I don't like to
25:05
do that don't add much value and give me more
25:07
time to do the things I do like to do where I
25:09
can add more value. Well, tell me more. What
25:11
do I need to do? That's change leadership and
25:13
it's just one of the six ingredient recipe I've
25:16
got on leading change or sorry leading improvements
25:20
as opposed to managing a change. But the first
25:22
step is really getting in and talking about leading
25:26
and improvement with the employees. Wow. And
25:29
so for you, when you think about the difference
25:31
between a manager and the leader, love that definition.
25:36
And then you go to the next step and think about
25:38
how do you manage change versus leading the change,
25:43
leading the improvement? What would you say are
25:45
some of the steps? Because right now, the big
25:47
change in many organizations is bringing AI,
25:50
right? What do you think is happening? Like if
25:54
people are just seeing AI as managing a change
25:58
versus leading improvements. So the short answer
26:03
to that as you lead an improvement, take AI.
26:08
Um, so I, and, and I can even use an example.
26:11
I at one point in time had accounts payable in
26:14
my organization and I had a group of employees
26:17
that all of them at the staff level that were
26:20
running the process of accounts payable were
26:23
in their late 50s early 60s and they were happy
26:26
with what they were doing and multiple leaders
26:28
before me had tried to get them to change their
26:32
processes put in new technologies and things
26:35
of that sort and they just wouldn't do it I mean
26:38
they fought it and the whole what not me I mean
26:41
you know go talk with Mary she's got a problem
26:43
but me I'm fine so I came in a little differently
26:46
because with change leadership I said, OK, talk
26:50
to me about your process. So we did value stream
26:52
mapping. And with each step in the process, not
26:55
only did we cost it using activity -based costing
26:58
applied to the office processes, but we then
27:01
said, what's the value of each step? And by putting
27:03
a value on it, all of a sudden, their pain came
27:06
out. They talked about, look, we actually have
27:09
to take an invoice. from a supplier and manually
27:12
type it into one system. And because the one
27:14
system won't talk to the other system, we have
27:16
to manually type it in. We hate doing that. It's
27:19
all of our time. And we make mistakes because
27:22
we're daydreaming about other time out. So now
27:25
if I'm going to put in AI or some kind of a change
27:29
to their process, while I'm under the hood fixing
27:32
the engine, I'm going to make sure I address
27:35
that. Nice. So now all of a sudden these employees
27:38
hear, wait a minute. You mean you're going to
27:40
take away me having to enter the same invoice
27:44
in two systems? And I said, yes. But I'm going
27:48
to go one step farther. And we actually did this
27:50
at the time with robotic process automation and
27:55
with bots. And we said, not only am I going to
27:58
make it so you don't have to enter it in two
27:59
different systems manually, but I'm going to
28:01
make it so you don't even have to enter it in
28:03
the first system. We're going to let the bot
28:05
read the invoice and put it in the system for
28:08
you. So all you have to do is go in and check
28:10
it and then help process it from that point forward
28:13
within our value stream mapping processing that
28:17
we did. And all of a sudden, they were on board.
28:20
They were ready to go because they hated doing
28:22
certain things. And I said, yeah, I'm going to
28:24
change your entire process. But when I do, I'm
28:26
going to fix that problem. Now I got it. Because
28:29
now they want to do that improvement as much
28:34
or more than I did. So that's a key part of getting
28:37
this thing done within any kind of improvement
28:42
that you want to make. Yeah, value stream processing.
28:46
I know you explained that to me when the bus
28:49
at a conference. So why don't you give our listeners
28:53
like a 101 of what it really is and what is the
28:57
value of value. Yeah, so some people would say,
29:02
look, aren't you just talking about process mapping?
29:05
Well, not exactly. I mean, it starts with a process
29:08
map. It says, okay, to do this office process,
29:13
here's step one, step two, step three, step four,
29:15
step five, however many steps there are, break
29:17
them down into what are the manageable chunks.
29:20
Think of it like an assembly line and think about
29:23
it this way. If you have 10 people in your group,
29:26
if you've got two people that are doing step
29:30
one, four people that are doing step two, one
29:33
person that's doing step three, et cetera, then
29:36
how long does it take for those two people to
29:40
do step number one? How long does it take for
29:42
them to do step number two? What is the wage
29:45
and benefit rate? So you cost it out, and then
29:48
next to it, you come along, and if there is a
29:51
step that's actually generating a revenue that
29:53
you're billing a customer, there's your revenue.
29:55
Are you getting more in revenue than the cost
29:58
to do that step? Yes or no? That's the first
30:01
question. If you can't put a dollar amount on
30:05
the revenue you're bringing in, then use a Six
30:07
Sigma style approach of maybe $139 to actually
30:11
say, look, step number one is hugely valuable
30:14
because it feeds six other groups the information
30:17
they need or whatever. Okay, that's going to
30:20
get a nine. And you go through, and once you're
30:22
done with that, you take it and you evaluate
30:25
each step in the process. And you say, step number
30:28
one is something that is of high value and low
30:31
cost. All right? You know what? Not only is it
30:34
good that we're doing that, but we gotta see
30:36
if we can do more of it. Because I'm getting
30:39
a favorable margin out of it. Step number two,
30:43
or another step in the process, is high value.
30:46
We're really good at it. It's a core competency.
30:49
But you know what? It's high cost. It's costing
30:51
us so much to do it that it's equal to or maybe
30:55
more cost than the value. So what can we do within
30:59
that process? Apply technology, whatever it may
31:01
be to reduce the cost because you want to keep
31:04
it. The next one is it is low value, but it's
31:10
low cost. And in that case, you know, it's probably
31:13
a distraction for your organization. outsource
31:17
it. There's somebody out there who probably does
31:19
it better. I'll give you an example. Caterpillar
31:22
years ago, they used to hire people that actually
31:25
did the janitorial services and it was noise
31:27
because if The toilets weren't clean one day
31:30
and all of a sudden half of the manufacturing
31:33
facility where I was working got all in a lather
31:36
about we gotta go talk to the leaders and department
31:39
heads and figure out how to get more toilet paper
31:41
in the bathrooms. They said this is distracting
31:43
us from designing, manufacturing, and marketing
31:46
the best products in the world. Have another
31:48
service like a service master or whoever come
31:51
in and do that for us. If there's a problem,
31:53
we call them up and go fix it. So it's no longer
31:56
a distraction. And the last type is it's low
31:59
value and it's high cost. Try to find a way to
32:02
just stop doing that. Do we even need to do that
32:05
step anymore? If you absolutely have to do it,
32:10
then find some way to significantly streamline
32:13
it or do it as little or as few a times as possible.
32:16
And those are the four main quadrants. And once
32:19
you break it down, now you can attack each You
32:22
can find out which step is the critical process,
32:26
critical step within your process, and then tackle
32:29
it. And once you get done, now you can rebalance
32:32
your assembly line, because what you don't want
32:34
to do is have step one take two hours to do.
32:39
The person or people in step two, maybe it only
32:42
takes 10 minutes. So when they get done with
32:44
theirs, they go, I got an hour and 50 minutes
32:47
to wait for the group in step one to get me what
32:50
I need to do step two. then take some of the
32:53
things that the people in step one are doing
32:56
and shift it and have the people in step two
32:58
do it. So now each step is balanced at about
33:01
30 minutes a piece. So when the people in step
33:04
two are just finishing things up, the people
33:06
in step one are just getting done and feeding
33:08
them their output, which becomes step two's input.
33:12
Now you've got a fully streamlined process and
33:16
you've got the line rebalanced. That's when you
33:18
should also step back and say, hey, Why am I
33:22
doing what I'm doing where I'm doing it today?
33:26
So now you can think about world sourcing and
33:29
I give you an example a caterpillar They would
33:32
have owners manuals, you know parts books things
33:35
of that sort in okay. They're virtual now They're
33:38
up in in the cloud. But the point is you start
33:41
in English because that's You know, Caterpillar
33:44
was an American company. Over time, they started
33:47
to sell into other countries and they needed
33:49
to translate into French, German, Spanish, whatever.
33:53
So they would hire people where their world headquarters
33:57
was at that time in Peoria, Illinois to do the
33:59
translations. Wake up one day and now they're
34:02
a global company and you're like, why do we translate
34:06
all of the literature that we have in Peoria,
34:09
Illinois? There are a billion people in China.
34:13
There are probably more people in China that
34:16
speak Mandarin that also speak English than there
34:18
are in Peoria, Illinois. So maybe we should do
34:21
the main parts book in English in Peoria and
34:25
we have a group of people in China, in France,
34:28
in Germany, etc. that do the translations into
34:30
the local languages. It seems to be more cost
34:34
-effective and more efficient. You streamline
34:37
the process, you rebalance the line, then you
34:40
look at why are we doing what we're doing it
34:42
today? The reason Caterpillar was is they were
34:44
a U .S. company that added France. And then a
34:47
few years later, added Germany. And so all of
34:50
a sudden, it made sense at the time to just add
34:53
one or two people for a new country. But you
34:56
would have never organized that way initially
34:58
if you said, bang, go from just a U .S. company
35:02
to global company overnight. Wow. Thank you so
35:06
much for sharing these great frameworks. And
35:08
I think they're so relevant to what we seeing
35:11
now with AI. Um, if people were using your process,
35:14
right? Whether it's value stream processing or,
35:17
and trying to understand where to go next, it
35:20
would be great. But now what we seeing is we
35:23
just want AI. The push is for AI, whatever AI
35:26
like is like ketchup on the side. So what would
35:29
you say are some of the things that you know,
35:32
CFO and finance leaders needs to be aware of,
35:35
you know, whether it's mistakes to avoid or how
35:37
can they prepare their team to implement AI the
35:40
right way? So, you know, AI is a part of an overall
35:47
solution. It's, you know, I used to have a friend
35:51
who actually started in accounting and later
35:53
branched off into IT at Caterpillar and became
35:56
a CIO for one of the divisions. And when we started
35:59
talking about AI and we started talking about
36:02
robotic process automation because it's just
36:05
the next stage in the evolution of technology
36:09
and automation. Think about the spreadsheet.
36:12
The spreadsheet finally replaced what my dad
36:16
had when he was in accounting at Caterpillar,
36:18
a 22 -column manual. They used to take his pen
36:21
and fill it in with numbers and use the old crank
36:24
adding machine. So this is just the next stage.
36:27
It's not the solution. What I would say is, first
36:32
of all, find places where AI can augment the
36:37
human. And what I mean by that is, by itself,
36:41
if the human doesn't know the right questions
36:43
to ask, if they don't know how the business works,
36:46
why it works the way it does, AI is going to
36:48
come back with wrong answers. So, and everybody
36:50
knows you can't just apply it across the board.
36:53
It's... it'll make mistakes. But if you apply
36:57
it in the right spot and in your correct processes,
37:00
it will make the human more efficient. And I'll
37:03
give you an example of a way to do that in a
37:05
moment. It was done by a group of college students
37:08
and saved a company hundreds of thousands of
37:12
dollars a year. But first and foremost, as you're
37:16
talking about applying it, think about this as
37:19
well. A beach, what is it? you got a bunch of
37:22
sand and individually each grain of sand doesn't
37:26
mean much. But when you put all the grains of
37:28
sand together they become a beautiful beach.
37:31
Well that's no different than AI or applying
37:34
technology. Once you apply it you're going to
37:37
have to think about how do I link it together
37:39
so it makes the entire process more efficient.
37:42
So that I can either do more with the same amount
37:45
of people or do the same amount with a less amount
37:47
of people. Because if If all I do is do a bunch
37:50
of AI, but I'm still employing the exact same
37:52
amount of people and doing the exact same amount
37:54
of work, then I haven't cut any cost. I haven't
37:57
improved any profit. So you either have to pay
38:00
people less or less people, or else you got to
38:03
get more work, more business as you apply this
38:07
stuff. And that's what finding a way to connect
38:09
those things together. And I give you an example.
38:12
So I was working and mentoring a group at Bradley
38:16
University, a group of students, and their convergence
38:19
project, their senior capstone project, was to
38:22
work with a company that was an insurance company.
38:26
And their actuarial process was extremely expensive.
38:29
And they said, help us. So this is a group of
38:33
students where they got an accountant, they got
38:34
a marketing person, they've got somebody in data
38:37
and analytics technology, they've got people
38:40
that are more on the general management side
38:42
that helps with like HR, marketing, they're all
38:45
together. And so there are 10 steps in this actuarial
38:49
process. Step three was one where because it
38:53
was such a unique focus for this company, their
38:56
actuarial science employees would have to go
39:00
out and do sometimes 100 or more hours of research
39:04
in multiple different sources just to come back
39:08
and actually write the policy. So what this group
39:11
did is they went in and understood all of that
39:14
and using ChatGPT, they actually wrote something
39:18
that would go do the research into the databases
39:21
for the actuarial scientists. Now, when they
39:24
did it, all they did is they went in and they
39:27
said, hey, source number one, has no relevance
39:31
to the policy that you're trying to write. So
39:34
put it aside. And if there were 100 sources,
39:37
it would go through in what used to take about
39:40
100 hours for the human in about three hours.
39:43
And it would boil it down to here are the three
39:46
or the five, whatever, sources of information
39:50
that are most relevant to this policy. So now
39:53
the human. didn't have to do all the research
39:55
to go, number one, don't need that. Number six,
39:58
don't need that. Number 10, don't need that.
40:00
I need number two, 47, and 62 are the three bits
40:05
of data and information that I need to deep dive
40:07
on. The humans still did the deep dive, but all
40:10
that work to rule out or to get through the noise
40:14
and focus on what's important was done by the
40:17
technology. And it literally saved them hundreds
40:19
of thousands of dollars a year. because of the
40:23
way it was applied. They didn't apply it across
40:25
the entire 10 steps. They took one and simply
40:27
improved it. That's amazing. Thank you for sharing.
40:31
And also you are a university professor now.
40:33
So I'm curious to understand how you think the
40:37
curriculum needs to change, you know, in light
40:40
of AI and really what the modern finance organization
40:44
needs. Yeah. So I think There's a couple things.
40:49
I think the curriculum needs to become more experiential
40:53
in learning, and I know that's the big buzzword.
40:56
Some universities do it better than others, okay?
40:59
But when I'm talking about experiential learning,
41:01
in the classroom, these students need to understand
41:05
how to apply all of the concepts they've learned
41:08
over four or five years. And I even had a student
41:12
say to me not too long ago, I learned each individual
41:15
topic. over my first four years, but it wasn't
41:20
until your class when you started to say, hey,
41:23
for example, financial statement ratios and evaluating
41:27
the financial statements of a company, we actually
41:30
went in and did it. We took a 10K, we applied
41:32
the ratios, did the calculations, then we said,
41:35
what do they mean? So you have an inventory turns
41:37
of 2 .41. Is it good or bad? And we really got
41:41
into how you apply it, how you compare it to
41:44
competitors. And then are they really competitors?
41:47
Because one company maybe is more vertically
41:49
integrated than another one. So that has an impact.
41:52
So it really came down to it taught them how
41:54
to think. And so now they understood when they
41:58
went out in the working world, not just how to
42:01
do the math and do the staff level. pull the
42:04
invoices in an audit and tick and tie. Instead,
42:07
they understood the questions to ask. So now,
42:10
if AI was gonna do that work, they could ask
42:12
the right questions of AI to know that they were
42:16
getting a good answer back. So that's step one.
42:19
Understand how to ask the right questions and
42:23
get some training because of experiential learning.
42:25
The second one, and is probably as or more important,
42:29
is to learn how to triangulate. Meaning, when
42:31
you get an answer back from AI, You know, one
42:35
of my mentors used to say, Freitas, I don't care
42:37
what the spreadsheet says, I know you got all
42:39
the formulas right, but is it the right answer?
42:42
And how do you know it is? Well, if you're good
42:45
enough to know there are six other metrics that
42:49
are out there, and we know when they're aligned
42:52
like this, it means that inventory turns, in
42:55
my example, should be between two and three.
42:58
So if something comes back with AI and it tells
43:01
me nine, I know it's wrong. Yes. Maybe I didn't
43:04
ask the right question, but I have to deep dive
43:06
because it cannot be right. If it comes in between
43:09
two and three, I can probably move on. AI helped
43:12
me. It's close enough. And by the way, some people
43:14
will go, well, Dave, what if you're wrong? What
43:16
if it was 2 .2 and the answer came back 2 .2
43:20
and it's really 2 .4? Would it have changed what
43:23
you were going to do? Would it have changed your
43:26
decision? If not, just move forward. It doesn't
43:29
matter. You don't have to do anymore. It doesn't
43:31
matter whether it was 2 .2 or 2 .4. The point
43:34
is you were still going to do the project. Now,
43:36
if it really was nothing, you may not do the
43:39
project, it would change your decision. So it's
43:42
understanding the ability to triangulate. But
43:45
on the other side of it, I would say universities
43:48
need to sit down with partner companies, companies
43:54
that they partner with, whether it be on advisory
43:56
councils or things of that sort, and say, How
43:58
are your job descriptions for entry -level positions
44:02
going to change? What are the duties going to
44:04
be like when AI is fully deployed and technology
44:08
is fully deployed? And listen to what they're
44:10
saying as to, well, when we bring somebody in,
44:12
they're not going to do this, this, or this anymore.
44:14
Here's a job description. Here it is right here.
44:16
I'm going to send it to you. These are going
44:18
away. Here are the new things they're going to
44:20
do. Once they understand that, now universities
44:23
can... tailor their curriculum around meeting
44:27
those new job descriptions. And the reason I
44:30
say that's important is because I don't think
44:32
a lot of employers know exactly how quickly that
44:36
it's going to move those entry level positions
44:38
and exactly what they'll look like. but they
44:40
can start to get an idea. And if the universities
44:44
stay close to their partner companies, they'll
44:46
be able to see that migration and make the adjustments
44:49
over the course of time. Wow. Thank you so much
44:52
for sharing. That is so insightful because I
44:54
remember coming out of college, however many
44:57
years ago, because I'm 39, 99, right. And I didn't
45:01
feel prepared even though I graduated summa cum
45:04
laude and I went into the workforce. I was like.
45:07
Okay, I'm not sure I know how to apply. So I
45:10
think with AI, like you said, we need to be more
45:13
experiential, like we need to be more practical
45:15
in the curriculum to better prepare people. But
45:18
I'm also curious about people already in the
45:21
workforce, and AI is here. It's changing our
45:25
job descriptions as we are in those jobs. How
45:29
do you think we need to evolve the way we think?
45:32
Because you mentioned for students, I'm teaching
45:36
them how to better think so they can ask better
45:39
questions. For someone that started their accounting
45:41
career 15 years ago and still have a good 20,
45:45
30 years in the profession, what do you think
45:48
are some of the things they can do to adapt and
45:52
evolve with AI? Well, I think they have to Again,
45:59
it comes down to understanding how a company
46:02
works and why the way it does. I know I've beat
46:04
that to death, but I mean, I'll give you an example.
46:06
When I first started working with data scientists
46:09
and I had some work for them and I thought I
46:14
was asking the right question. I said, look,
46:15
I need you to go in and take the last 10 years.
46:18
And whenever this situation applied, I need to
46:20
know what the variable margin was. And they said,
46:23
OK, great. And we got into it. We talked about
46:26
a bunch of different things. He was all excited.
46:27
And he goes, I just got one question for you.
46:29
What's variable margin? And how do you calculate
46:32
it? OK. This was not an accountant. They were
46:36
a data scientist. So I realized right there,
46:39
okay, I have to come back and take a little different
46:41
approach because I have a non accountant who
46:44
I can't take for granted. They understand what
46:46
variable margin is. And if he hadn't asked that
46:48
question, what I would have gotten back, I would
46:50
have wasted a few days and he would come back
46:53
with something. I've been going, this is not
46:54
verbal margin. I can't use it. And so, um, making
46:58
sure you understand either who you're working
47:00
with or if it's truly artificial intelligence
47:03
and you're asking Claude or whatever questions,
47:07
don't assume that they know what variable margin
47:09
is, for example, or make sure you're asking your
47:12
question in a way that will get you the right
47:15
answer. I'll give you another short example.
47:20
When I was a part of a team with an engineer,
47:23
manufacturing specialist, a purchasing specialist,
47:27
marketing and me as the accountant designing
47:30
a new line of wheel loader lift arms. I had the
47:34
engineer tell me, so what's going to cost less?
47:37
Should I do this with a casting or fabrication?
47:40
If I'd had AI today, I would say, what's the
47:43
cost per pound of a fabrication or a cost per
47:48
pound of a casting? Wrong question because it
47:50
would have come back and given me a generic answer.
47:53
Problem is with fabrication, what I found out
47:56
was there is a material spec called 1E577 and
48:00
it is a lot stronger than the 1E170. The 1E170
48:03
is a lot lower in cost per pound. So today I
48:08
would have said look I know this thing based
48:10
on what the engineer told me has to be built
48:12
with 1E577. So what is the cost? of material
48:17
at the 1E577 spec on a cost per pound basis.
48:22
And if I've got, you know, one ton of material
48:25
that I need or whatever versus in a casting.
48:29
Oh, by the way, casting is going to have to infuse
48:31
a certain type of material into the dye to avoid
48:36
hot tears. So now that I know that material,
48:38
I can be more specific in what I ask for. But
48:41
if I didn't know that, then I would have asked
48:43
a higher level question and I would have run
48:45
with the answer and been wrong. So it's that
48:50
kind of thing where the... accountants of the
48:55
world, employees of the world have to get beyond
48:58
the, I'm gonna come into work, I'm gonna plug
49:00
some numbers into spreadsheet, I'm gonna do,
49:02
they really have to understand far beyond their
49:05
functional discipline as to what are we in business
49:08
to do and why, and how does this thing work,
49:10
because I gotta know what question to ask AI.
49:13
If I do, I'm gonna be really efficient, the company's
49:16
gonna be efficient. If I don't know how to ask
49:18
the right question, we're either gonna be bankrupt,
49:20
because we're gonna make the wrong decisions,
49:22
or it's going to cause me to have to rework it
49:25
and I'm going to be at a competitive disadvantage
49:27
because it takes me way too long to get things
49:29
done. Wow. Thank you so much, Dave. I know we
49:33
we're coming at the end here. This is so good.
49:35
Like you gave like five masterclass in one episode.
49:38
So you I hope you're coming back. And so my last
49:42
question will be wanting to know what is your
49:45
favorite thing to do outside of work? So first
49:49
and foremost, it's spend time with with family.
49:52
But if I set that aside, because it's a lot of
49:56
fun with a wife of 37 years, a son and a daughter
50:01
who are both in their 30s, very successful as
50:04
well, and now three grandsons. But you set that
50:07
aside for a minute. Yeah, I like to play golf
50:11
and like to travel. The golf game, it's... It
50:16
varies in my ability to play it well, but I like
50:21
to get out and enjoy it. And I do about 2 ,500
50:24
miles of walking or jogging, running, that type
50:27
of thing each year. And so that all goes together
50:31
with the golf and you can kind of enjoy it. And
50:33
then traveling, we've been getting into riverboat
50:37
cruises and ocean liner cruises. And so that's
50:41
a lot of fun. And it's definitely... you know,
50:44
uh, don't, uh, nobody's got a contract to be
50:48
here tomorrow, so it's okay to plan for the future,
50:50
but just don't forget to live for today. Make
50:53
a difference each and every day. Take a step
50:56
towards your personal and professional goals
50:58
each and every day. Wow. Thank you so much, Dave,
51:01
for being on the show. I definitely wonder when
51:03
I grew up to be like you in so many ways. Thank
51:07
you so much. Thank you. And that's it for today's
51:11
episode of the Diary of a CFO Podcast. I hope
51:14
you enjoyed it as much as I did. If so, don't
51:17
forget to leave a review and subscribe. Dave
51:19
is such a great mentor. He has helped me so much
51:22
to have him on my personal board of directors,
51:25
actually one of seven people I have on my personal
51:27
board of directors. And if you're new to the
51:29
whole concept of having a personal board of directors,
51:31
I strongly encourage you to look into it. I actually
51:34
wrote a guide about how you can get started and
51:37
I will leave the link in the description. helped
51:39
me in many ways. I can't even begin to, uh, to
51:43
explain. So definitely check it out. As always,
51:45
if you have any questions, just email me at ask
51:48
at the diary of a CFO .com and for deeper dive,
51:51
you can always visit our website, the diary of
51:54
a CFO .com with insightful, insightful articles.
51:58
I just wrote one about the first 90 days as a
52:01
CFO, as well as other good gems. So head out
52:04
there and I'll see you next time.