CFO Strategies for Reducing Process Friction: Streamlining Financial Operations

Megan - 00:50 Today, my guest is Nikhil Patel. Nikhil has extensive experience working with senior business executives and government leaders to solve problems, engineer solutions, make investment decisions, and lead cross-functional teams in dynamic environments. His business experience entails leading teams as project leader at the Boston Consulting Group with a focus on M&A strategy, corporate finance, growth strategy, operations, and private equity diligence for industrial goods, chemicals, and pharmaceutical companies, helping build and launch Gamut.com, an industrial supply ecommerce startup, and catalyzing business development at SparkCognition, an AI computer software startup. In government, Nikhil currently serves as Deputy CFO and Treasurer at the City of Detroit, where he leads a 70-person team across cash and investment management, debt management and bond issuance, tax administration, accounting and compliance, customer service operations, and revenue collections functions. Previously, Nikhil served as senior advisor to Mayor Mike Duggan. In this capacity, he worked on strategic and operational initiatives across city departments, county, state, and federal government entities. Nikhil enjoys operating at the crossroads of his interests: science and engineering, capital allocation and investment, business, government, and history, and how society works today versus how it should work. Nikhil earned a bachelor's of science in chemical engineering and a master's of science in industrial and operations engineering from the University of Michigan. He also holds a master's of business administration from Harvard Business School. Nikhil, thank you so much for being my guest on today's episode of CFO Weekly.

Nikhil - 02:30 Good afternoon. Thanks for having me. I'm excited to be here.

Megan - 02:32 Today, our topic is process friction, and we'll be discussing ways that we can reduce it by optimizing and streamlining. And, Nikhil, I'm looking forward to learning from your experiences, so let's jump right in. You've worked in such a diverse range of roles from government projects to high stakes M&A and AI in the private sector. So can you walk us through your career to start, and then what drew you to this intersection or this combination of finance and strategy?

Nikhil - 02:59 So I started academically in engineering. So I went to the University of Michigan, did my bachelor's in chemical engineering, always loved math and science, and thought I wanted to build chemicals. And I also did a year at Michigan and earned a master's in industrial and operations engineering. And the program that I did at U of M was a joint program between the engineering school and the Ross School of Business, which basically fed a lot of individuals into one of the top tier management consulting firms, BCG, Bain, McKinsey. And that's the same path I picked primarily because I wanted to accelerate my learning coming out of college and then accelerate my pathway to leadership, running a business, and operating in the private sector. And as I did a lot of that work, early on in my career, I learned a lot more about how the real world works at the intersection of finance, M&A, business management, etcetera. But at the same time, I wanted to figure out how I weave in more purpose in my life. A lot of the work that I did was for Fortune 500 companies, private equity firms. And while the work is intellectually engaging, at some point, it becomes a bit of rinse and repeat. And so I wanted to say I asked myself, what else could give me more purpose? And I've always had this underlying drive to pursue public leadership at some point in my life and figured, maybe some experience in the government sector would be interesting and meaningful. And so after a few years in management consulting, I went to Harvard Business School, got my MBA there, and my intent at HBS was to test out government and finance. So I did a very short stint at a private equity firm in Detroit, and then I also did some of my summer here in the mayor's office and just really found in the mayor a leader that, quite frankly, was the best leader that I've ever worked for, great operator, and an individual who understands politics well, but also understands what matters to people and has run businesses in the past. So I wanted to learn from him. And so after business school, I spent some time back in management consulting in private equity and then split time at the mayor's office in a variety of different roles. And I ultimately got to this combination of finance and strategy and government because after spending about two and a half years as senior advisor to the mayor, I was feeling myself craving finance and investment management. And so in the current role that I have now as Deputy CFO and Treasurer, I do a little bit of all of those things that I've done in my career in the past altogether. So, that's how I found myself in the position that I'm in now.

Megan - 05:34 And I'm just curious. Does working in government, does it give you the purpose? Does it give you that aspect that you were looking for?

Nikhil - 05:40 In many ways, it does, and it also leaves me craving for more in a sense. And so I'll what I mean by that is, for example, when you're early on in management consulting, you might be spending seventy, eighty hours in the spreadsheet perfecting a PowerPoint slide that quite frankly is a machination of a bunch of partners and many of your directors trying to serve a client. Whereas here, you get to realize, hey. Like, all of that fancy material that you put in your PowerPoint doesn't matter. Put it on a black and white piece of paper, on a slide. What are the numbers? What is the tax burden going to be on human beings? How do we fund public safety initiatives? Do we have the right money or fund capacity to do that? So all of a sudden, you go from these more theoretical exercises in consulting to the brass tacks of running a city. And so the work is challenging because it matters more, and that gives you more purpose, at least I found.

Megan - 06:35 Well, your background is really amazing, so congratulations on all you've done. Thank you. And in your experience working across both government and private sectors, how do you define process friction, and what are the most common examples that you've seen that hinder operational efficiency?

Nikhil - 06:52 So we see a ton of that, of course, in government, and the way I would define conceptually process friction would be in a few different ways. One is the amount of time, the lead time it takes from beginning a task to executing a task, and then another would be, how many times that work has to be reworked to actually get to the endpoint. And then the way I would think about it conceptually is the error rate. Like, how often do we get errors of the thing that we just completed? And then, the last piece I would say is, from a productivity standpoint, how much resources what's the ratio of output that we're generating relative to the resources that we're using to do that as a measure of productivity? And I've seen you know, within my role here as Deputy CFO, really, it's I've done a lot of what I would say I'm a COO of this organization in many ways because everywhere I look, we're trying to improve the financial analysis processes, the financial transaction processes, payment processes across the board.

Megan - 08:00 You've worked in environments as diverse as city government and large corporate consulting as you mentioned. So how do you approach identifying and eliminating process friction in complex multilayered systems?

Nikhil - 08:12 I'm a big fan of Charlie Munger, and he has always said chemical engineers, and maybe because I was a chemical engineer, I gravitate towards this. It might be an apocryphal story, but the foundation of chemical engineering is basically saying there's a bunch of things that go into a black box. A reaction in a set of physical and chemical things happen within that black box, and something comes out. There's an output. And what you can control is the variables that manage that black box and what you put into the black box. And I think that mental model applies to every single facet of human life on the planet, whether it's medicine, finance, business, raising a kid well, it applies. And so in order to break down each one of those variables in the different organizations I've worked with, the key skill set, I think, consists of the following. One, entering a new organization or a new problem that already has stakeholders that are doing things. I sit down with each one and literally do a one-on-one. Tell me about your process. Tell me what specifically you do, which files do you open, which cells are you putting data in? So, like, let me understand the whole process from a current state perspective. Definitely questioning why, but with the goal of understanding what is the context that they have of what they're doing today. And then but you do that with everyone that's involved and then try to understand feedback from constituents or customers. What are the outside people who are using the output of that process saying about this? Is this really a problem? What could be improved? What matters? And you collect all of that, and then I think it allows you to develop a really strong view of what the future state should be. And then once you know what the future state should be, by that process of you talking with everyone, you've already had this mental model built in your head of what likely is the problem. Is it a people problem? Is it a process problem? Is something not automating? Is it a procurement problem, etcetera? So that's the approach of just taking a bigger problem, breaking it down into the baby pieces, and identifying why it's operating the way it is.

Megan - 10:16 So it sounds to me like a real important part of the process is for the CFO to really roll up their sleeves and understand the process. Yeah. And as the Deputy CFO for the City of Detroit, you're involved in many critical processes. So how do you manage to streamline financial and operational workflows while also navigating the unique regulatory and political challenges of government?

Nikhil - 10:41 Yeah. Absolutely. And I just want to clarify, I am a Deputy CFO. Don't want to take too much credit, but there's different tiers. And I'm Deputy CFO and Treasurer and a few others that have different roles. But to get to your question, streamlining the workflows, that is a challenge. So I'll give an example. One example that I'm working on right now is how do we improve income tax compliance? And what that specifically means is people paying individual income taxes, city income taxes, corporations paying income taxes. We want to improve compliance on that. But then there are regulatory challenges on that of how we can access data, how we can reach out to people, how we can work with the state to access that data. And if we didn't have any of those regulatory challenges, it would have taken the work that I did over the past year and a half and probably condensed it into three months. But because of the regulatory challenges, what my approach has been is basically saying, I need to remove all of the roadblocks that can hold this financial and operational process up before even starting to go down the path of improving that workflow. And, specifically, I mean, get the data sharing agreements in place. Get the buy-in from city council members beforehand and let them know why we're doing this. Prime the stakeholders before any changes to the workflow or work gets started and make them see why. And then once we have that, you realize, okay. They feel like they've had input in the process. The diligence has been done, and then the regulatory and political challenges effectively go away. Then you're just working in the background on the work, and then as long as you make sure that at a routine cadence you're providing updates on the progress, the buy-in is already there. I think that's one example. The biggest other set of challenges, though, that we face is technology and procurement. So there's a lot of things that I've seen in government that I often tell myself, wow. If I was in the private sector, this would've saved me six to eight months. I wouldn't need to go through all these hoops to procure something or improve this process or ask my IT team, can we use this different technology, which at the startups or corporations I worked for, it'd be a week to get access, whereas here, it's a few months. And because that's a litany of challenges. So still working through how to figure that out, and those regulatory barriers are in place for good reason, but they do present a unique challenge in government because of what government is compared to private sector.

Megan - 13:16 And when dealing with large-scale projects like the ones you led at Boston Consulting Group, how do you balance the need for thorough analysis with the imperative to really be agile when it comes to decision making?

Nikhil - 13:29 And this goes back to our conversation about getting in the weeds. I think the balance here comes from really understanding what portions of the problem matter or not and not letting perfection get in the way of incremental good improvements that will get you towards great in a way. And, you know, as you mentioned at the Boston Consulting Group, you're doing these large-scale projects. The analysis is really thorough. But if you actually look at how most business decisions are made, like, the thorough analysis actually, the last 10% that you get from the thorough analysis doesn't really change the answer. It just gets a lot of people really comfortable that you have something dense and intense that they can think that their decision is much better. But I think understanding where that line is comes from building the pattern recognition with your team and with the leaders above you of understanding what is good enough to get us to move forward, and then if things inevitably go wrong, having mitigation plans in place. If you don't have those mitigation plans in place or have identified the risks, then not doing the full thorough analysis will get in the way and actually create more friction.

Megan - 14:40 And just going back to something you said a bit ago, but I know the government has a reputation for being overly bureaucratic. So how do you work in that environment to improve processes and carve away some of those unnecessary levels of red tape?

Nikhil - 14:58 You know, I know that what you just said is obviously true. But being working in government, I think I have realized why that we've gotten to the place where we are. And I think big part of the answer is because government has been around in this country, obviously, since the beginning, but government has worked with technology that is decades old. Like, for example, six, seven years ago, the City of Detroit still used paper returns that would get sent into the office for tax filings, and we'd have team members do that. People would still bring in checks even just right before the pandemic era into the City Of Detroit property tax offices. And you'll see that's you know, people still bring checks everywhere, every municipality, every county. And the reason why I bring that up is government has legacy systems and processes because government is a legacy by its very nature. It's never been able to say, okay. Let's start from absolute scratch. And if we did, of course, the systems and processes would be less bureaucratic because technology, software technology, would allow us to reduce a lot of that bureaucracy. The example I'll give you is the City of Detroit now works on Oracle's ERP system. Well, there's lots of rules in the ordinances that we have, written ordinances that we have, and our processes that we have from the past when we didn't have Oracle meant to ensure that people that there are financial controls, that there's ways to check people who might be doing something that's fraudulent. Well, now you have Oracle. There are software ways to do that. There's people who are approved to sign off on things and limitations on that. So I think a big part of the bureaucracy in government is dealing with ensuring that the tax dollars are spent well and without fraud. And so moving forward, how you address the bureaucracy is try to understand where you can apply technology. And by technology, I truly mean software, nothing more fancy than that, just like good old software that can be a new process. And then in that transition period, it's important to do the training with the users to say, okay. We've done this work this way for decades. Here's how we're going to do it differently. And once you have that, a lot of the constraints of the bureaucracy aren't even needed because the system will correct itself.

Megan - 17:18 How do you see more advanced tools like automation and AI playing a role in reducing process friction, especially in the government?

Nikhil - 17:27 So a lot of this you know, obviously, there's a lot of interest in AI right now. The automation that I think that will be incredibly important is things like journal entry, checking, or making in the journal entries based on a certain pattern. So for example, we get revenue in from a variety of different streams. Our team has to get the wire that comes in, record it, make a journal entry of it, upload documentation to it. This is all in Oracle. Right? There's human beings doing this. And then someone downloads an Excel sheet to reconcile the different accounts. Everything that I just mentioned there, a computer should be able to help process, and then you definitely need a human still to check it. But it's those kind of places where it's the repetitive tasks that a computer should be able to pick up the patterns of saying if it comes from this bank account and it's put in this account string in Oracle, then, you know, this is the general pattern of what you have to do. I think that's at least on the financial operation side of government and automation, that's where it would be incredibly important. The other piece is around fraud. We, obviously, we have lots of chargebacks, insufficient fund issues, people with credit cards that have issues. And if our systems could pick that up sooner, that would reduce a lot of downstream work. And so I think it's in the more routine tasks that automation and AI to some extent can play a role in identifying or improving that process friction.

Megan - 18:58 And can you share an example of a particularly difficult instance where process friction impeded progress, and how were you able to work through that?

Nikhil - 19:07 So we are currently at the City of Detroit where my treasury team and I were building out a new payment platform. And I'll give you the specific example. So the City of Detroit uses a software called BS&A. It's our assessing and property tax management software. It is a software that was built in the nineties, and at least for Detroit and many other places, it's still an on-premise server software. It looks like you're operating in a 1999 kind of software. There's no APIs for it. Every time we have to run a report, it quite literally takes hours. I have team members who go home, let their computer run to download reports that we are legally required to submit. They crash and fail, etcetera. And so what we've done with the help of phenomenal team members is we've figured out a way where we can extract information from those databases, put it in a SQL database, but then go even a step further by replicating certain databases. And once we replicate them and have a live connection, we run an API directly. I'm oversimplifying, but, basically, it's an automated process that functions like an API that directly links to our enterprise data warehouse. And so the way, for example, PayPal has an API to any app that you might have on your phone, we've effectively mimicked by reconstructing or reengineering our process to do that without an API. And that's cut down on our team's time from hours a week to minutes. And in some cases, we took a process that quite literally took weeks to seconds because the system can run it immediately versus a human trying to do it in Excel. So that's the biggest place that we've seen it, and it brought up the payment platform because as a part of that payment platform work stream, we needed to do this in order to make the payment platform work. That's an example of this payment platform as the 21st century technology, trying to talk to the 20th century technology, and we couldn't make them talk to each other without this bridge innovation. And so the beauty is because of that bridge innovation, we've realized, oh, we can do this for other things that we do within treasury in our financial office. So that's been a key unlock for us.

Megan - 21:23 Looking back on your experience in M&A strategy, how does process friction impact the success or failure of deals, and what steps can CFOs take to mitigate these risks during integrations?

Nikhil - 21:35 Process friction is the largest. In M&A, and I'm sure a lot of audience will know this, the revenue synergies, I would be very suspect of any revenue synergies playing out the way that the investment banks or the private equity firms and consulting firms actually project. However, on the operational improvement synergies, AKA cost reductions or cost rationalizations and improvements, those are real because they're true hard numbers that you can track. And the way the largest driver of the friction in that implementation phase comes from teaming and people. You have one entity buying another. Now they're trying to combine forces. You're rationalizing back office processes. And I think it really is important to have someone who can be an extremely good operator and do what I talked about in the beginning of our discussion, which is go talk to both sides and understand why they're doing what they're doing and put more invest more time upfront before quickly making the changes. And then, it's important to have a sense of if you bring in a new system or if you're making this process change, do you have the right people in the right seats to deploy that new process change? And, you know, it happens in M&A as well. People who may be at the target company or maybe part of the company that are acquiring are set in their ways of how they do the work and why they do it. And so it really comes down to changing those individuals in different roles or guiding the team, holding their hand a little bit, and trying to show them why you're making the changes. I think too often change is made and it's disruptive, and then no one actually knows what their role effectively is, and that leads to more friction.

Megan - 23:25 Yeah. Great answer. Thank you. Last question. But looking ahead, how do you envision the role of the CFO evolving in the next, let's say, three to five years?

Nikhil - 23:34 Yeah. I think the CFO role will become more and more strategic strategy drivers of organizations. And I say that because as we mentioned about automation and AI, the annual audits, the accounting, monthly accounting, etcetera, all of those things can be automated or simplified. AI might be able to help create insights that are faster. But then the key is going to be, how do you actually interpret all of that data and that insight into determining what you do for the next quarter and the next five years? Understanding the what I you know, one of the partners that I love working with at BCG, he said something that always stuck in my mind that good business leaders and investors really understand the physics of a business. And I think that's what the CFO role will be, understanding the physics of your organization, how the mechanics work. If you move one thing here, how does it impact downstream? And then knowing that, helping inform the CEO and other leaders what the strategy should be. Because, of course, at the end of the day, not saying anything novel, but at the end of the day, if the money's not there to execute on the strategy, it becomes an issue, but it's sort of a reinforcing circle. Strategic roles for CFOs is, I think, where this evolves into over time.

Megan - 24:53 Nikhil, thank you so much for being my guest today.

Nikhil - 24:55 Thank you very much, Megan. This was fun.

Megan - 24:57 Yeah. I really enjoyed speaking with you, and thanks for finding the time to be here with us today to share your experience and knowledge, and I wish you all the best.

Nikhil - 25:04 Thank you.