From Data to Decisions: How Raef Lawson is Redefining Profitability for CFOs

What’s the secret to profitability? In this episode, Dr. Raef Lawson, Executive Director of the Profitability Analytics Center of Excellence (PACE), reveals how CFOs can use analytics to drive impactful decisions. As he says: "Profitability isn’t just a number—it’s a mindset".

Discover how CFOs can leverage AI-driven insights to navigate uncertainty and shape the future of finance. Tune in for a conversation that will change the way you think about numbers.

Takeaways

• Profitability analytics is essential for modern businesses.
• Accountants must improve communication with other departments.
• Revenue management and cost management are interconnected.
• Technology can help level the playing field for companies.
• AI has the potential to uncover valuable insights from data.
• Future accountants need to focus on soft skills and analytics.
• Understanding customer profitability is crucial for success.
• The accounting profession must adapt to changing business needs.
• Education in accounting should include more practical applications.
• Collaboration between finance and operations is key to profitability.

Sound Bites
"It's all about profitability analytics."
"Profitability is a holistic approach."
"Technology is a leveler for companies."

Chapters
00:00 Introduction to Profitability Analytics
03:18 Raef Lawson's Journey in Accounting
06:09 The Evolution of Accounting and Profitability
09:32 Challenges in Accounting Education
12:25 The Role of Technology in Profitability
15:18 Recent Initiatives at PACE
18:11 The Future of Profitability Analytics
21:31 Advice for Future Finance Professionals

This episode of Asking Good Questions is brought to you by Caprus.Ai.

Check how we empower the office of the CFO to harness the transformative potential of artificial intelligence (AI) and revolutionize their operations.

Transcript

Edward: 0:00

Hello and welcome to asking good questions. The podcast where we explore the intricacies of the business world by well, it's in the name asking good questions. I'm your host, Edward Roski. And today we're joined by someone who has dedicated his career to deciphering the mysteries of. Profitability. Dr. Rafe Lawson is executive director of PACE, the Profitability Analytics Center of Excellence, which I will definitely heretofore call PACE because that's a lot of syllables if I don't. With over 15 years at the Institute of Management Accountants and a tenure as chair of the Department of Accounting and Law at the University of Albany, he is a leading voice in management and accounting, and I like to call him the prophet, although I might be the only one. Rafe, it is great to have you on the show.

Raef: 0:46

Well, thank you, Edward. It's certainly a pleasure to be here.

Edward: 0:49

Thank you for taking time. Uh, did you want to start out with your favorite accounting joke? Our listeners know there are only, like, two, so it's fine if you can't think of one.

Raef: 0:57

Uh, yeah, I don't know those two, so I think we better move on.

Edward: 1:02

So, Rafe, we've known each other for years. But I've never actually had the chance to ask you about your journey, like what led you to become an authority on profitability. So I want to start back in the early days of your academic career. What sparked your interest in management accounting? What got you interested in profitability analytics?

Raef: 1:25

Well, it's certainly been quite a, quite a journey. You know, as my life has progressed, it's not always been clear. Which direction to go in but looking back it all does makes a lot of sense even as an undergrad was an accounting major, you know, back then it was accounting was the language of business and I was interested in business and profitability. So got my bachelor's in accounting and master's in finance, uh, and a PhD actually in quantitative analysis and statistics. So it was probably an unusual progression, but it really prepared me for a future involved in analytics and finance. You know, I've worked in corporate accounting, public accounting, uh, didn't find that very satisfying, uh, and then moved on to academia and then, uh, retired from that. Uh, well, not retired, but moved on to the Nonprofit Association, IMA, where I led the research, uh, efforts there, global research efforts. And we really refocused, uh, the research that we did, uh, to not only look at, look at costing issues, which many accounts perhaps, uh, think is their primary remit, but it also started looking at more profitability. And we spun off our efforts, uh, from IMA, we formed a separate group, the PACES, or Property Analytics Center of Excellence, as you mentioned, and there, you know, it's really been, it's really been a journey, a conceptual journey, uh, an evolution of our thinking, where what we do is so much We're Related to the accounting profession as a whole, where we need to go, because, you know, when you talk to most accounts, where are they most, you know, what's their biggest concern? And, you know, you think about cost control, you think about budgeting, you know, it's all revolving around costs. And, you know, I like to say when, when an accountant talks to someone at operations or marketing or some other, uh, uh, some other function, you know, Migo sets in, my eyes glaze over. And why? Because, you know, you know, as accountants, we typically speak in terms of dollars or yens or euros or whatever. And, and operational folks speak in terms of, No operational quantities. And so a concern, an issue that cows in the past especially have had is that we've How does failure to adequately communicate, uh, to others within the organization and to be, to be viewed and therefore as part of the, uh, senior leadership team where we can add value. And so, but when we stopped talking about just cost, but about profitability, that's when everyone's eyes light up. That's something that we can all understand. It's something we all get behind. So, you know, at a pace, so are we've, we've evolved over, probably we've been together for five plus years. And, you know, maybe up to five years before that as an IMA committee, where we've really advanced our thinking or the, the, the work that we do to now holistically look at all the aspects that affect an organization's profitability. You know, including not only managerial costing, but also revenue management and investment management. So we now look at, you know, we do webinars, for example, on revenue management, and, you know, I think a lot of accounts are saying, what the heck are those folks up to? But it really, you know, revenue management and managerial costing are two sides of the same coin. You know, every revenue, uh, driver. is also a cost driver, so you can't really talk about one of those without the other. And, you know, this is probably outside the remit of your question, scope of your question, but where can accounts really add value? And it's, you know, in this day and age where customers, the customer is king, right? And, you know, we, the internet has You know, flatten the earth, you know, custom, we need to really understand our customer, what they need and how to market to them and how to, how to understand what customers are profit profitable. So, so many companies do a absolutely horrendous job of measuring customer profitability. You know, you look at how they, how they, uh, reward their, their sales. Is it based on sales? Some, yes. Is it, well, let's be a little more, you know, advanced in this. Is it based on gross profitability of those sales? You know, sales minus cost of sales, and yes, for many of those is that. But that really just ignores so many of the costs below the gross profit line. And so, there's, you know, so many, so many, customers vary so. tremendously in the cost to serve. We really need to consider those. So, you know, it's not just looking at the revenues, but it's looking at the cost to serve and, and the investments we make to service our customers. So anyway, all of these really go into looking at the fighting customer profitability. It goes into showing the finding where management accounts can add value. It goes really into the roots rates, the whole future. I think. Of the accounting profession with so much of what we've done in the past, we'll probably get into this is just be automated. And if we don't really look at profitability holistically, look at where we can add value within organizations, we'll be as dead as dinosaurs in no time at all.

Edward: 7:30

I definitely want to come back to why some companies are. Setting the path in terms of figuring out profitability. Other ones just seem to have no idea where the path even is, uh, to understanding profitability. But before we get there, what would you say your through line is? I mean, all the way from, you know, NYU Stern up to Pace. Is it analytics? Is it a love of numbers? Is it profit in all of its aspects like you just talked about?

Raef: 7:59

Well, it's, it's interesting because I've been involved in, in business actually as well. I've, I've had two jobs most of my life actually. I've been involved in running companies, uh, as well. So it really gives me a deeper understanding of, of, of how to run an organization, of profitability. Then. Many academics who've only been in academia may possess, so it really made me interested in not only financial reporting and understanding what the financial standards require, but really, that is reporting geared towards. External financial statement users. And so much as I've come to learn of of of what we report for external users is really dysfunctional for internal decision making. And that, you know, that's a epiphany that we've We've come across and so it's, it's, you know, you, you, you talking to operational folks over the years and just from my own, my own personal, you know, experience, so there has to be a better way. And then, of course, I've always had this. This, uh, love of numbers. I started out as a math major and decided, you know, to transition into business. So it's, and of course my PhD is in quantitative analysis. So again, this, I had, it was interviewed by some AICPA, uh, journalists a few months ago and, and they said, you know, why, Why are you, you know, a lot of accounts are, are, are adverse perhaps to technology and, and I said, I've always been, had a love for technology and I remember one of my first jobs out of, out of my master's was with General Foods. And I was a senior financial analyst, uh, looking, analyzing inventory. And in, in, in, uh, this little room, they had a, a microcomputer. It was Altair 880. It was, we had, what is it? The, uh, I think it was the 8 inch or 11, 8 inch diskettes. I don't, I'm dating myself. And I programmed my job basically in Fortran, and I eliminated half of my job, you know, at least the number crunching back then. And I think that was, that was, uh, the, the start of a love for technology and seeing the power of, of what embracing technology could do. And so, you know, just set a pattern for my. My future career, even my PhD, I, I did analyze various statistical techniques and, and, and a little technologically, uh, sophisticated, but again, it involved a tremendous amount of programming. So I guess technology and, you know, and analytics has been a common thread throughout my career.

Edward: 11:04

Excellent. Well, if it makes you feel better about Fortran, I was watching TV earlier today and an IBM Watson ad came on talking about how Watson can help program. And I happen to notice I'm being completely serious about this. What was scrolling by on the screens that these young people were programming was COBOL. So apparently what is old is new again, or IBM just couldn't, uh, apparently get any better idea to show on a computer screen than flashing cobalt by. So you have an interesting background going from, uh, you've been on the business side and helping improve companies. You've been on the academic side, you know, department chair of the Department of Accounting and Law, University of Albany, now trying to change the broader world. So as a, as a former department chair, what would you say is harder? Getting professors to agree on curriculum changes or getting executives to agree on cost allocation methods?

Raef: 12:01

Oh boy. It's that's a tough question, so it's very situational specific in both cases, and it's there's so much to impact in that question, and there's one of the big challenges we face at pace is getting. As one of my colleagues would say, companies out of the 1960s when it cost comes to costing methodologies, there's, you know, there's methodologies that were, you know, devised in the fifties, perhaps sixties, that 90% of companies use today, even though you know half, even though it's. 70s, 80s, much better costing methodologies were, were, were, were developed. And, and, you know, and why, why is that? Because the accounting profession is so oriented towards external financial reporting. And so then why, you know, I'm attacking that. Why is that? And because so many of the companies, they, big companies at least hire their CFOs from their accounting firms. Why? Because they know accounting and these CFOs, where do they come from? A traditional accounting background. They come from perhaps a traditional accounting school and the big schools, the good schools. What are they, where, what is their orientation? It's to financial accounting. Why is that? Numerous reasons. One is because the big accounting firms, public accounting firms, have the money to support these accounting programs. And why do they invest in these accounting programs? Because they'll hire 10 or 20 students from a program. And so they want to invest in those programs and make sure they're good quality. Whereas the average private company would only hire maybe one or two can't invest in a specific accounting program. But even more so on top of that, the, the accounting programs, among other things, need to make sure that their curriculum conforms to NASBA, National Association of State Boards of Accountancy. Requirements so their students can pass the CPA exam. You know, it's very rare that a program, an academic program, isn't concerned about whether it adequately prepares. their students to take the CPA exam. Uh, you know, if they, if they didn't do that, then, you know, a lot of people, well, what kind of program is that? So it's, it's some schools perhaps have, uh, have dual tracks, one oriented to public accounting, one towards. Controllership and management, management accounting, but in the last 10 years or so, a lot of schools have been under financial. A lot of programs have been under financial duress. They can't afford more than one track. And of course, that's going to be the CPA track. So they're not. They're even cutting management accounting courses. So it's, you know, it's a very sad state of affairs. So again, we have accounting students not being adequately prepared to enter, really enter the management accounting profession. We have CFOs that didn't have this background coming in for public accounting. And then it's, it's. And then, you know, it's, it's also because accounting functions as well, you know, so the last 10, 20, maybe even 30 years, they are being forced to do more with less. So the, the remit of the accounting function, you know, it used to be maybe, you know, compile this data and prepare the financial reports. But now You know, that's not sufficient. You know, now there's this call for sustainability reporting, among other things, which is great. But that's another demand on what the accounting function needs to do. And of course, there's, you know, it's not just, you know, handwritten ledgers and reports, but there's now this need to Invest in technology. Now, where's that money coming from? So then, then the counts are being charged with becoming business partners. It's no longer, no longer acceptable just to prepare reports, but what it interprets information. How do we make better business decisions? So it's, it's very, it's very challenging for the, uh, for, uh, CFOs and their teams to invest in technology. In better costing technology going back to, but that's, that's, so there are brave CFOs forward looking CFOs that say, Oh, there is a better way said they do adopt better costing technology as there are some progressive schools that say, Oh, there, there are better curriculum, better ways to adopt a more holistic, well rounded curriculum. When I was at IMA, I found that it was more, not the top tier schools, which again, are trying themselves on their CPA pass rate and their links with the big, big four accounting firms. But some of the mid tier term, uh, tier schools have very good, uh, programs oriented towards management accounting. So, there's glimmers of hope. Both in academia and practice, but but to back to your question, the pace of change is glacial in both both areas.

Edward: 17:59

Yeah, one of these days I I want to to see in my lifetime that business schools. teach profitability differently. And to your point that they don't teach business and technology is that they're two totally discreet concepts that they are two intertwined and everything we're doing nowadays. But yes, things things move slowly, but they do trend tend towards the positive. So over time we will get there. Um, at pace right now is executive director. You are, you're at the forefront of profitability. You're the one pushing that wall fighting the good fight. What are the most pressing issues companies are facing today when it comes to understanding profitability, but more importantly, when they want to improve it when they want to improve profitability?

Raef: 18:47

It, it, it, again, it, it, I guess this could be my mantra for this, uh, interview. It's, it's situation dependent. So it, it depends on the, on the, on the situation that company faces. You know, most companies will, it depends where in the business cycle we are. So, you know, many companies will want to control costs and, you know, as you know, Perhaps, you know, having been through this, perhaps we're, uh, anticipating a recession that, that the one that never came, but you know, the old saying is you can't cut your, your, your cost, cut your way to success. I think that companies need to focus more on. On the revenue side as well, generating revenues, but the biggest challenge, I think, and going back to my earlier comment is generating profitable revenues, and it's still today, as traditionally has existed, various functions work in silos, and so really developing a culture Where finance can work as a partner with operations and with marketing and other areas is really critical. Previously, in my previous life at IMA, you know, we did research reports on how to be a business partner. And, you know, that that takes time to gain acceptance because, you know, accounts have not a stellar reputation for for working with others. And then, you know, it's again, it's perhaps there's been a lack of. Uh, motivation to do it, but even those accounts that do want to do it, there's, you know, there's a, you know, look at what are you doing here? So we really have to, uh, show our proof points. We need to start small and say, this is look, this is how we can help you, you know, start with a pilot project, uh, example, for example, and really, I think companies that want to succeed in, The more competitive business environment, and especially, I'm sure we'll get to this, where technology is giving organizations the tools to do that, you know, if they, if they don't, if they don't start adopting better tools, uh, they will be left behind. So that's a lot of impact there as well, but it's really getting up with it, staying with the times. It's really understanding what they need to do to remain competitive. But in the changing business environment,

Edward: 21:29

one of the things I like about you, Ray, if you have lots of layers, you can always unpack things and go down to 10 levels deep and we are about to pivot over to the technology side. But 1st, let's pause for a moment for a word from today's sponsors. Welcome back. I'm here with Dr. Rafe Lawson, Executive Director of Pace. We are turning to the future, and Pace is at the forefront of helping change the world in the realm of profitability and in its understanding of revenue, its understanding of costs, really just trying to drive change out there. Rafe, what, what is some recent project or recent initiative that Pace is doing that you're particularly proud of, that you think it's going to be really impactful?

Raef: 22:12

Sure. Well, thanks for asking that. You know, at Pace, we have developed what we call our Profitability Analytics Framework. It's a strategic management framework that holistically encompasses all of the levers of profitability management, including revenue management, managerial costing, and investment management, uh, in the whole strategic, planning and management process. So what we're trying to do is really disseminate that framework. And so we have developed, we have developed a case study that looks at how that's been holistically, uh, applied and we'll be disseminating that in various ways shortly. We have We're writing a book that should be, uh, published actually in the next month or two, next two months that will help break down the framework. Uh, we're developing also implementation guidance because it's, again, it's, it's a very many layers conceptually. It's, the framework is not overly complex, but you can, you can dig down into the complexity of an input. Wait as you implement the model and the level of sophistication to issue, uh, apply. It can vary depending on your needs And then we also have numerous webinars that we're offering on different aspects of profitability analytics. We have one coming up in a week or so on financial plan analysis at ESG. So there's really this whole idea of profitability analytics encompasses not more than just profitability, but really holistic. Everything in an organization needs to succeed. So we have lots of exciting projects that we're undertaking and we're rolling out. The very near future.

Edward: 24:01

Awesome. We'll make sure we put a link down in the show notes so people can stay aware of everything that pace is doing and follow along because I've, I've spoken at some of those webinars before. I've, I've read some of the case studies and, and the articles that you books and everything. And it, it really is life changing if people would get on board. Um, and that's what we need is more people understand what we're doing. A lot of it is about process change. But as you just talked about, technology is a huge part of this, whether we're using technology to automate various specific tasks, or it's just getting so complicated that we can't really even understand it without technology. One of things I do like is that technology doesn't have any more biases than humans do. If we take the human biases and we stick them into the computer, it will be equally biased. But as a general rule, it doesn't particularly care if you know, this gets better. This gets worth. It's actually looking at it from a pure, uh, extrapolated logical standpoint. It's the equivalent of, I guess, Mr Spock. I was about to say Dr Spock, but he was the baby guy. It's Mr Spock coming in and saying, well, the answer is perfectly logical. You should be doing this. So how do you How do you envision the future of profitability analytics in this age of A. I. In this age of advanced data analytics? We're not since we're not having to do it by hand anymore. What do you see this new world we're going into looking like?

Raef: 25:29

That's Another great question. Asking good questions, as always, Edward. Thanks, sir. Good plug for the show

Edward: 25:38

title.

Raef: 25:39

There we go. My pleasure. Again, the answer is nuanced. You know, it depends on the company and the industry and so on. I mean, you know, we can talk about great things, and I think it really depends on company size, for example. You know, a lot of Sometimes we generalize, we always think of what these big companies can do. And, you know, all the research studies I've done that looked at the impact of company size, you know, the small companies were more agile, perhaps they're smaller. Conveyed within them better the bigger company big companies have more money to spend on Technology and it's the middle market that's always struggling because they have they have the more more management concerns But not the money to address them. So, you know when it comes to technology, I the great thing about technology is is that in many cases, it's a leveler, right? So every company can deploy ChatGPT in some aspect, right? The extent to which it applies that tool can vary. You know, the bigger companies can devise code and insert it into their various applications that'll probably make it much more efficient. But again, even the smaller companies can deploy that. To some extent, and you know, it's all of these services are being developed that smaller companies can can can take advantage of, but going back to your question, it's technology is going to have a tremendous impact impact. I think. On, on, on profitability and profitability analytics, it's, it's going to, you know, it's like, as I mentioned before, it's, it's a whole new world of, of understanding where you should be doing business with and with whom you should be doing it with. I mean, it's, it's, uh, technology, you know, the, these analytical tools can help pinpoint, you know, we talk about applying technology. In just crunching data, uh, in terms of communicating data and, and, and so on, looking up data. But that's really a very elementary application of, of some of these tools. I mean, they can, uh, uh, aid in decision making. So, as you said, they, they can make, they can make decisions or, or at least recommendations without the biases. of, of, of humans, but they can also be used for strategic analysis, right? So, you know, what, what, what, what, uh, market should we be in? You know, what, what, what, they can be used for a scenario plane and develop, uh, prescriptive analysis, not only predictive, but prescriptive analyses of what should we, should we be. Should we be doing? And then, you know, again, again, in this age of the, uh, consumers king, you know, we can have micro, micro marketing, right? Micro marketing to our customers. We no longer have to. paint our customers with a broad brush and say, Oh, this, these are the whatever, Gen Xs and Gen Ys and market them separately. It's Gen Xs that live in rural areas that drive up porrish or whatever, that like to drink Coke or something, you know, really focus. On our micro segments of our, of our customers and, you know, look at the revenues they generate, look at their, the costs involved in, in, in meeting their, their, their needs and servicing those customers. So it's, it's, it's, uh, it's a whole. Whole new world. And you know, so many companies, bigger companies really are, are, are really trying to identify their customers on a very detailed level, looking at the profitability they generate. And, and, uh, the tools are now out there to, to, uh, to advance that. And, uh, again, if companies. Don't don't employ these tools that sooner or later the competitors will, and it'll be tough for them to succeed.

Edward: 30:08

Now, what I like about that is it's not just talking about the current generation, which is really, how can I use AI to maybe be a co intelligence, but really to reduce costs? You know, can I replace task X that costs Y with task Z that costs 10 percent of Y? What I like about what you're talking about is it can actually start to. Use a I to uncover insights. It can. It can delve more into those large amounts of data that we previously overlooked. I mean, data doubling every two years. There's just no way humans can keep up with it. But one of the things that I've learned from pace is there's a lot of attention paid to costs. But you said it earlier costs. They can only be reduced to zero. Revenue can increase infinitely, theoretically. So why, when we're looking for profitability, are we focusing so much on what costs we can cut, and not what can we sell that's more profitable than something else? And it's when AI, it's going to find things like that. It can just dive into that data and get us all those great answers back. You have been educating the next generation for a couple of generations. Now, uh, you and I, uh, we both have a lot more gray than we when we started with. Uh, if you could give some advice to those future accountants, those future finance professionals, because the world's evolving. Like what it. What skills what advice would you give them? What would you say is essential if they actually want to succeed in this new AI driven world?

Raef: 31:36

That's another good question. So, you know, I think, well, I know that in the past. Uh, there's been quite an emphasis on hard skills, right? So, you know, especially in accounting curriculum, there's a focus on accounting standards and, and, and, you know, knowing what the FASB requires or, or IFRS standards or so and so. But what I'd like to say is accounting standards are the most perceivable. And what we need to do provide our students with knowledge that will last them a lifetime. And so we need to focus on more, not that that's not important, but we need to focus on soft skills as well. We need to focus on analytics, how to, how to analyze data. We need to focus on communication skills, right? Uh, written and oral. We need to focus on teamwork skills. You know, we need to even include or focus on understanding of operations because it's that operational understanding that'll help us better understand the numbers that managers need to make profitable decisions. So there's a whole, there needs to be a reorientation. And to some extent, it's ongoing. And some schools are more enlightened than others and some companies as well. But it's, it's a, it's a change that really is, needs to take place in the profession, uh, sooner than later.

Edward: 33:26

Excellent advice. Maybe that's also the next generation of AI as we'll start teaching it soft skills. How can it better communicate? We'll start seeing spreadsheets with opinions. Uh, hopefully they'll still follow IFRS and GAP and not go, well, you know how I think we should calculate revenue.

Raef: 33:42

Well, you know, to that point, though, I mean, you can use AI, generative AI. Chat GPT, for example, to make your communication better, you can say, Hey, this is my report, uh, chat GPT. Now rewrite it. So it's more user friendly. So it's clearer. So we can use these tools to help. Uh, develop that kind of competency as well.

Edward: 34:07

I, I think we have a lot more we could unpack, and we have far greater other questions we could ask in the future, but we're approaching the end of our time. Rafe, my friend, it has been enlightening, and it is always fun to explore the world of profitability with you. Any, any final things you want to say to let people know how to keep understanding what Pace is doing and how the world of profitability is advancing?

Raef: 34:31

Sure. Uh, again, I just want to mention that Pace, the Property Analytics Center of Excellence, uh, is a nonprofit association with free membership. Uh, you can find out more about us on our website profitability analytics. org. We probably have the most extensive, uh, library of resources regarding profitability. Uh, around, uh, and it's all, all of our resources are free. We have ebooks, we have webinars, we have podcasts with so many other resources. We have forums that you can join to ask questions, share ideas. Uh, and then we have a LinkedIn page as well that, that where we promote our various webinars, provide information about our upcoming events. So both of these are great resources and I'd encourage folks to check them out.

Edward: 35:19

Awesome. Thank you. I hope everyone has enjoyed this. Thank you again, Rafe, for sharing your insights with us. Thanks to our sponsor, Capris AI, for supporting this episode. And to our listeners, we always appreciate you tuning in. Until next time, keep asking those good questions.