Design Thinking in Finance: A study on Innovative Financial Leadership

Introduction

Innovation and Design Thinking are always associated with organisations outside India. The reasons for this are worth researching but it is more important to discover that Design Thinking has always been in India, albeit in less sensational terms. Design thinking means solving problems in a creative and innovative way, using a human-centred approach. It is an iterative process where the decision-maker looks at problems from users’ perspective and redefines them to get alternative solutions. Therefore, strategies, not initially apparent are discovered and the focus shifts to a solution-based approach.

For this very reason, Design Thinking is referred to as “Out-of-the-box Thinking”. Design Thinking dates back to the 1960’s though its revival in the corporate arena began in India few years back.

While Design Thinking has widely been associated with product or process design using technology, its application in Finance is extensive. A financial analyst once remarked that the most innovative job is that of the Chief Financial Officer. In finance, Design Thinking is more challenging as the function has both internal and external customers.

Get quality help now
Prof. Finch
Verified writer

Proficient in: Equity

4.7 (346)

“ This writer never make an mistake for me always deliver long before due date. Am telling you man this writer is absolutely the best. ”

+84 relevant experts are online
Hire writer

Objectives

This research paper focuses on Design Thinking in Innovative Financial Leadership in India Inc. The main objectives of this paper are:

  1. To lay down the areas in Finance where Design Thinking can be applied
  2. To bring out the innovative strategies adopted by few Indian CFOs.
  3. To identify the obstacles Indian CFOs face in completely adopting Design Thinking.

Scope and Need

Finance is a people business. Wealth creation, cash flow management and capital expenditure are all based on people involved in the financial cycle of any business.

Get to Know The Price Estimate For Your Paper
Topic
Number of pages
Email Invalid email

By clicking “Check Writers’ Offers”, you agree to our terms of service and privacy policy. We’ll occasionally send you promo and account related email

"You must agree to out terms of services and privacy policy"
Write my paper

You won’t be charged yet!

Behind all the number-crunching and analysis is the fact that people can often make or mar any financial institution or market. Thus Design Thinking, with its human-centered approach, should find many areas of application here.

IBM, in its research has found that Design Thinking has the ability to increase business efficiencies by 75% and Return on Investment by up-to 300%.

However, there is less awareness of the applications of Design Thinking in Finance. Finance has two major objectives – to take care of the regulatory demands of all stakeholders and to provide relevant information to the top management for decision making. Thus the processes must cater to both internal and external customers. It is therefore important to interact with them to solve problems. For instance, the reports that management needs, to make relevant decisions must be decided upon not by the Finance department alone but in liaison with the top managers. As simple as it sounds, it usually doesn’t happen that way. Design Thinking can be applied to understand the key indicators and generate only the relevant reports for every stakeholder. This is just the tip of the iceberg. Many of our very own CFOs have applied user-centric and innovative strategies to solving problems. But still some mental blocks that deter the use of Design Thinking, exist.

Research Methodology

This is a descriptive research paper based on secondary research of articles, papers and reports on Design Thinking as well as on national leadership awards for innovative strategies adopted by Indian CFOs. The objectives of this research paper did not warrant any primary data collection and analysis. Qualitative analysis has been to undertaken to accomplish the purpose of the study.

Analysis and Findings

While traditional problem solving has Problem acknowledgement, Problem Definition, Solution Proposal, Implementation and Monitoring as its major steps, Design Thinking has a totally different approach as illustrated here.

A CFO has many goals to achieve and in each of his goal, Design Thinking can be adopted. A pictorial representation of the applications is shown here.

Innovative Financial Leadership in India

The role of a Chief Financial Officer has evolved over the years. He is not just a key managerial person but a major strategiser as well. He should not only be able to communicate the good financial position to the Board but also prepare them for adverse situations. He must have the vision and creativity to put across solutions to face challenges. He must ensure that agile processes and systems are formed for cost and risk management as well as to drive growth. Technology is nowadays a part of the CFO’s armory. In such a scenario, it is important for the CFO to be extremely innovative in his strategies with a people-oriented approach. He must drive effective IT investments, use technology to improve productivity and embrace innovation to have a competitive advantage in today’s global market. This is where Design Thinking comes to the fore.

Among the various areas of Finance, where Design Thinking can be applied successfully, this research paper looks at four important ones:

  • a. Asset-Liability Matching
  • b. Liquidity Management
  • c. Sustained Wealth Creation
  • d. Transformation

In each of the above, one Indian CFO of a reputed organization has been selected and his innovative and successful strategies, discussed.

Asset Liability Matching

In March 2014, Mr. Sanjay Jain took over as the Chief Financial Officer of the Future group, the Indian conglomerate with presence in the retail and fashion sectors. The biggest challenge he faced was that the market capitalization of the group companies were low then. E-tailing was catching up fast. While Flipkart was valued at Rs. 70,000 crores in the year 2014-15, the consolidated value of the Future Group was only about Rs. 8,000 crores. Sanjay Jain set himself a target – to increase the market capitalization of the group to Rs. 65,000 crores by 2021. However, his vision and creative acumen helped the group reach about Rs. 60,000 crores in early 2019 itself.

A “Creation and Control” policy was adopted by the group and Sanjay Jain took over the “Control” part. He focused on conserving capital employed to maximize Return on Capital Employed (RoCE), facilitated monetization of non-core assets, worked on capitalization of Balance Sheet, while ensuring a high degree of corporate governance. Sanjay Jain refinanced the entire Liabilities side of the Balance Sheet. The group was going on an expansion spree but faced the typical industry challenge of limited capital avenues. Without going for large borrowings, Sanjay Jain opted to correct the asset-liability mismatch and worked on the right debt-equity mix.

On the equity front, Sanjay Jain initiated a major rights issue, an IPO and multiple rounds of private equity. Debt was raised through domestic and international bonds. In 2019, he opted to raise Non-Convertible Debentures worth Rs. 900 crores through private placement to convert some high cost near term debts to low cost ones. He chose low cost Working Capital loans and Commercial Papers. This resulted in tax advantages and a significant reduction in the interest outgo. The acquisitions were majorly funded by equity and were creatively structured to ensure tax savings.

Liquidity Management

Liquidity is the lifeline of any business! Shankar Raman, CFO of L&T, India’s largest Engineering and Construction Company, won several awards for his creative strategies on liquidity management and value creation for shareholders. A 5-year strategic plan was framed in 2016 to expand margins by 100-120 basis points, to 11.2%, improve return on equity by 6% to 18%, and decrease working capital by 6% to 18% by 2021. L&T grew at an average rate of 2.5% in the previous years and yet Shankar Raman had set these targets that required a big leap of almost 15% growth rate. Though bulk orders helped the company grow, the CFO’s plan and approach were major contributors.

The order flows from the domestic market had started dwindling and Shankar Raman decided to fix a revenue ratio of 70:30 from domestic and international markets. The company focused on infrastructure projects in Middle East and Africa to improve fund flow and thereby liquidity. From less than one-tenth share, L&T got a contribution of almost one-third in both orders and revenues in a couple of years. In the June quarter of 2016, though the domestic order inflow declined by 9.7%, the international market order flow grew by 14%.

Another key challenge that Shankar Raman encountered was that L&T had a complex structure of about 82 business units, due to which the Return on Equity to shareholders had halved between 2008 and 2015. The main reason was inappropriate allocation of capital in a number of low-return businesses. Hence reducing the working capital was another major objective. This was achieved by effective receivables management. Shankar Raman also evolved an innovative risk management framework for L&T. In his own words, his contribution was to ensure consistent availability of liquidity at optimum costs to enable the company to take business risks. He also improved investor relation processes of the company – a fine example of the application of Design Thinking. He achieved cost management, cash flow control as well as generation of well-analysed financial reports for better decision making.

Sustained Wealth Creation

Lalit Malik, the CFO of Eicher Motors, displayed innovative thinking for sustained wealth creation by focusing on strong cash flows, negative working capital and maximisation of operating leverage. He faced dual challenges of strengthening financial processes and enhancing control, by implementing digital technologies that generate insightful information on the product and consumer. Malik’s razor-sharp focus always lay on maximizing operating leverage, an indicator of operational excellence.

Eicher Motors had a sales volume of 52,000 units in 2010, revenues of around Rs. 450 crores and Net Profit of Rs. 75 crores. In 2016-17, these numbers became 6,66,000 units, Rs. 7,033 crores and Rs. 1,665 crores. In 2018-19, the sales were Rs. 9,794 crores and Net Profit Rs. 2,054 crores. The cash balance grew to a whopping Rs. 690 crores in 2018-19 from Rs. 89 crores in 2017-18. Thus Lalit Malik, with his innovative three-pronged focus improved his company’s financials considerably. He won many accolades including the Best CFO Award for Sustained Wealth Creation in 2018 from Businessworld.

Transformation through Merger and Acquisition

Design Thinking in finance probably works at its effective best in the wake of a transformational acquisition by a large sized company. Hindustan Unilever, in December 2018, announced that it would acquire GSK Consumer Healthcare Ltd. It was one of the most expensive, all-equity deal in the Indian consumer goods segment at Rs. 31,700 crores. The share-swap ratio was 4.39:1. The entire acquisition was handled by Srinivas Phatak, the CFO of the HUL Group with able support from his team. The biggest strategic success of Phatak was in arriving at the all-equity arrangement because GSK had been insisting on a cash transaction. The next challenge was to go through the integration process of the complicated deal. The merged entity was estimated to result in an accretion of Earnings per Share (EPS) by about 9% and share prices by about 3%. Phatak believed that there was a synergy benefit of 800-1000 basis points in growth.

The following were the estimates of analysts and was most probably the calculations of Srinivas Phatak as well.

Srinivas Phatak won the ‘CFO of the Year Award’ at the Financial Express CFO Awards for 2019 for successfully strategizing this immensely large deal.

Obstacles to Adoption

Though some Indian CFOs have been innovatively making decisions, certain behavioural aspects of Indian managers still serve as roadblocks to completely embracing Design Thinking. These are discussed in this section.

Experts have identified important tenets of Design Thinking as:

  • Customer-centred approach
  • Quick Iteration
  • Visualisation
  • Tact
  • Collaboration

An Innovation evangelist and TedX speaker, Dr. Pavan Soni, identified the psychological blocks that Indian managers at various levels have, in applying Design Thinking. Many other analysts and practitioners of Design Thinking have also discovered several obstacles. It has been almost unanimously suggested that more than anything else, the human psychological challenges are prominent in preventing innovation.

Empathy

The first step in Design Thinking is to empathise with the users. However, India being traditionally a land of scarcity, has inadvertently made most of Indians reluctant to understand others’ difficulties and focus only on trying to get what they want. Since there has always been competition in achieving their goals, the concept of sharing or empathizing does not come naturally, goes the observation. There has always been a ‘me-first’ attitude.

Being right the first time

Research has also found that to achieve objectives, people want to get it right in the first attempt itself. In Design Thinking, the most important principle is to come out with many solutions repeatedly and not stop with the first approach that comes to mind. The pressure of failure is also a contributor to this cause. Innovation is perfected by mistakes and failures.

Information Asymmetry

Indians have grown up learning to be secretive, right from classrooms to the boardrooms. The result, according to analysts, is that Indian managers find it difficult to collaborate completely with their team and share all information about any situation. Indians are found to be very good at taking and giving orders as well as executing a well-defined job. But collaboration to ideate uncertain solutions seems to be a difficulty.

Skills vs Knowlege

Another research finding in the context is that Indians compartmentalize knowledge and skills. The managers seem to excel in the knowledge part and expect someone else to use their skills to build models and collect information. But in Design Thinking, prototyping is an important process and managers must get their hands dirty to build models. As a result, visualization, another major tenet, does not happen. The ability to write down ideas or draw models is disappearing.

Other barriers

Apart from the above, bureaucracy, “This will not work” attitude, over-valued hierarchy and ego are also among the list of barriers to adopting ‘Out-of-the-box Thinking’ in Indian corporates.

Conclusion

The research undertaken has thrown light on various aspects. The major finding is that there is no dearth of areas in Finance, where Design Thinking can be successfully applied. It has also been found that Indian CFOs have been successful in adopting innovative strategies in their businesses and improved RoE, RoI, EPS, RoCE etc. – the pillars of value creation to investors. Major roadblocks to adopting Design Thinking have also been quoted. The good news is that these are being identified and gradually removed. Hence Design Thinking may soon make deeper inroads into the Indian corporate financial arena.

References:

  1.  https://www.interaction-design.org/literature/article/what-is-design-thinking-and-why-is-it-so-popular
  2. https://www.exlservice.com/resources/assets/library/documents/Design%20Thinking.pdf
  3. https://cio.economictimes.indiatimes.com/news/strategy-and-management/design-thinking-can-boost-efficiencies-by-75-roi-by-300/70789776
  4. https://www.linkedin.com/pulse/how-design-thinking-helped-me-change-my-perception-role-hodgson
  5. https://www.interaction-design.org/literature/article/what-is-design-thinking-and-why-is-it-so-popular
  6. https://www.businesstoday.in/magazine/cover-story/kishore-biyani-strategy-turnaround-future-group-bharti-retail/story/219409.html
  7. https://www.businesstoday.in/magazine/cover-story/kishore-biyani-strategy-turnaround-future-group-bharti-retail/story/219409.html
  8. https://economictimes.indiatimes.com/markets/stocks/news/future-enterprises-plans-to-raise-up-to-rs-900-crore-via-ncds/articleshow/69925603.cms?from=mdr
  9. https://www.livemint.com/Companies/fE12vu5QajU1qaA1Ftbj9O/LT-aims-to-double-revenues-by-2021.html
  10. http://www.businessworld.in/article/Investing-In-People-Processes/17-05-2018-149455/
  11. http://www.businessworld.in/article/The-Enabler-Of-Sustainable-Growth/17-05-2018-149450/
  12. https://economictimes.indiatimes.com/eicher-motors-ltd/profitandlose/companyid-13787.cms
  13. http://www.forbesindia.com/blog/technology/3-key-strategies-to-become-a-cfo-who-drives-innovation/
  14. https://www.hul.co.in/Images/merger-of-hul-and-gsk-ch-india—hul-presentation_tcm1255-530029_1_en.pdf
  15. https://www.financialexpress.com/industry/fe-cfo-awards-srinivas-phatak-pulling-the-right-lever/1525275/
  16. https://www.indiainfoline.com/article/general-editors-choice/hul-%E2%80%93-gsk-consumer-deal-what-is-there-for-the-shareholders-118120300182_1.html
  17. https://medium.com/@pavansoni/why-design-thinking-eludes-indians-4ad2fbed40b
  18. https://www.thnk.org/blog/the-human-challenges-of-design-thinking/

Cite this page

Design Thinking in Finance: A study on Innovative Financial Leadership. (2022, Jun 06). Retrieved from https://studymoose.com/design-thinking-in-finance-a-study-on-innovative-financial-leadership-essay

👋 Hi! I’m your smart assistant Amy!

Don’t know where to start? Type your requirements and I’ll connect you to an academic expert within 3 minutes.

get help with your assignment