Building World-Class Finance and Performance Management Capabilities
Finance executives play several important roles in creating shareholder value and building competitive advantage. First, they must operate efficient financial organizations capable of processing transactions, maintaining controls, and reporting results at world-class levels of operating costs. Second, they must create analytic capabilities to help employees across the company understand the key drivers and results of corporate performance in time to modify strategies and influence events. Finally, finance executives must concisely articulate a clear understanding of the company's economics in context of the industry, changing macroeconomic environment, and strategic goals for investors and other interested stakeholders.
Trends Impacting Finance Organizations
After investing to increase productivity through the '90s, finance organizations sailed into the new century, breezing through Y2K issues, and feeling well positioned for the future. Basic process reengineering had been successful, investments in new ERP systems promised tremendous payback, and the first generations of shared services delivered substantial cost reduction. Further, business leaders wanted CFOs to put processes and metrics in place to ensure that employees companywide could measure and report results in time to make decisions and take actions aligned with corporate strategies. Heady growth over the last few years created an environment of increased focus on capturing new markets, expanding shares in existing markets, and implementing new business models. Operational cost leadership moved down the list of priorities as companies took interest in growth opportunities.
The dot-com crash and ensuing economic malaise changed CFO priorities. With weakness in the global economy, attention has once again turned to managing costs across the company. Finance organizations are far from immune to the belt- tightening. CFOs who failed to fully explore ERP, shared services, and reengineering opportunities are now feeling intense pressure to do so. CFOs already on the forefront of these practices are again exploring cost reduction initiatives.
Finance organizations must support the corporate growth agenda. The trend to implement global or regional operating models as opposed to country- based operating models continues to accelerate. Furthermore, intensified industry consolidation and acquisitions aggravate ongoing efforts to build appropriate financial operations and required performance reporting capabilities.
Geographic expansion continues to impact the finance agenda. Even relatively small companies are pursuing strategies to exploit new markets, such as those in Asia-Pacific, which offer access to economies with superior growth prospects. Additionally, companies are taking advantage of labor arbitrage opportunities in low cost Eastern European and Asia-Pacific countries as shared service models are implemented on a global scale.
At the same time finance organizations are getting squeezed on costs, internal customers are demanding more value. This decade-old trend has business leaders renewing their demands with increased urgency. The pace of business is accelerating and finance processes must adapt to keep pace. Stakeholders are interested in transaction reporting – from the moment a business event occurs until it is reported in consolidated financial statements. Finance organizations are expected to have common financial languages capable of speedily reporting across geographies, languages, and currencies.
Business leaders expect the finance organization to function as a source of impartial financial and management information to provide analytical insight and understanding of industry and company value chains. To succeed, the organization must recognize customer, product, and channel profitability.
Corporate and financial risk management are top priorities as companies face mounting pressure to understand and manage enterprise risk. In several industries, such as energy and utilities, companies are now required to operate effective trading organizations in addition to managing physical supply chains. Trade credit, long managed with little attention, is now a multi-trillion dollar issue in need of more sophisticated solutions.
Successful transaction processing and performance reporting is not enough. CFOs must also communicate with the analyst community, ensuring their company's full potential is reflected in the market. Unfortunately, communicating with the street is increasingly difficult. In the past two years, numerous corporate governance failures created an environment where investors are flush with skepticism. As once strong companies struggle, or even flounder under new economic rules, investors learned that many employed aggressive and sometimes questionable accounting strategies that complicated or potentially misrepresented results. According to The Wall Street Journal, accounting restatements soared in recent years from about 50 to more than 150 in 2001. CFOs are now at the forefront restoring the investor trust critical to company valuations and efficient operation of capital markets.
Finance organizations confront more choices in specific business capabilities sourcing and delivery options. Service providers offer many comprehensive and sophisticated outsourcing options and technology solutions for finance organizations. Industry participants are partnering to create private exchanges capable of originating, processing, and settling transactions independently from internal business processes and systems. Enhancements from ERP vendors are leveraging new technologies to facilitate information exchange between business parties involved in a transaction using common business language and processing rules. These trends place pressure on finance organizations and offer a variety of options for improved capabilities in the future.
CFO Strategies
Finance organizations – never idle in the face of adversity – continue to try to lower costs and raise service levels.
CFOs are looking once again to technology; utilizing Web-enablement to connect more directly with vendors, customers, and employees. Many are turning to outsourcing as a strategy to achieve increased efficiencies and control over back-office costs. ERP, shared services, and outsourcing are cornerstone options for extending finance capabilities to support business growth.
CFOs are connecting forward-looking planning activities with day-to-day performance measurement. Connecting planning to performance measurement helps align execution with business direction. Taken together, CFOs are constructing important capabilities for restoring the fragile confidence of today's investor.
To deliver superior business performance, CFOs are reasserting their role as owners of management information and performance management processes. Concepts such as the "virtual close" and "straight through processing" are catching on as companies optimize delivering critical information to the right people in a timeframe that allows room for responsive action. The finance organization, because of its traditional informational ownership, is frequently considered the primary source of reliable company data. Finance leaders are using this position of credibility as a foundation for building richer sources for management information and as a launching point for introducing new performance measures. Finance organizations are bringing together customer, channel, competitor, product, and financial data into a comprehensive management information framework. This inclusive framework enables a more robust understanding of available business options across the enterprise. Finance organizations help drive value agendas across the business by explaining value concepts and consistently delivering analysis of fact-based financial information oriented towards shareholder value creation opportunities. The focus on value targeting and fact-based analysis allows the finance organization to apply its unique competencies in identifying and discussing value-creation opportunities.
The consequence of heightened attention to shareholder value is a trend toward using value-based measures, such as EVA®, ROI, and economic profit. Finance organizations are leading value-based measure efforts not only for business decision-making, but also for underpinning approaches to executive compensation, strategic planning, forecasting, budgeting, and measuring on-going performance.
CFOs are connecting forward-looking planning activities with day-to-day performance measurement to increase alignment between corporate strategies and daily execution of the business. They are implementing rapid planning processes with frequent update capabilities that provide more timely and accurate forecasts of future business potential. Taken together, CFOs are building important capabilities for restoring the fragile confidence of today's investor.
The Starting Point: Operational Excellence
Faced with such an array of challenges and potential solutions many CFOs ask where to start. Of course, there is no one right answer to this question. Many CFOs begin by getting their own house in order and then focus on championing value creation across the company. They start by taking a hard look at finance operations to understand if they are serving customers with the optimal mix of services at the lowest possible costs. Typically, in answering these questions it is discovered that the services most valued (e.g., business analytics, performance information, and strategic insight) are in need of improvement and the services least valued (e.g., back-office transaction processing) cost too much.
These two discoveries are deeply intertwined for at least three reasons. First, many of the investments in systems and capabilities streamlining back-office processes are also important cornerstones for improving information access and deploying business analysis toolsets. Second, bringing finance operations up to world-class standards earns respect, repositioning finance operations from an accounting transaction processor to a trusted business advisor. Third, the cost savings from efficiency improvements make funding investments for value-adding skills and capabilities more palatable.
The cost savings are often substantial. A 30 to 50 percent reduction in cost is possible for companies moving from decentralized transaction processing operations to shared services. Additional savings can be achieved if outsourcing is considered. However, such savings are not the only benefit. Companies embarking on programs to transform accounting transaction processing have also reported increased integration of acquisitions, increased uptake of new finance technologies, faster access to information, and improved service overall.
For these reasons many finance organizations choose to focus on operational excellence as a first step towards reinvention. But which strategies work best to achieve this goal? The answer to this question has evolved dramatically over the past 15 years. In the late '80s, a company's average finance cost as a percentage of revenues benchmarked at over 2 percent. Measurable progress was made through process reengineering, TQM, ABM, and other improvement methodologies. In the early '90s, finance costs benchmarked at over 1.5 percent of revenues. SAP, PeopleSoft, Oracle, and others entered the market with client/server ERP systems as strategies for finally achieving an integrated technology environment and standardized best practice processes.
The advent of ERP systems unlocked new organizational models. Shared services entered the lexicon as a way to describe a range of organizational solutions that retain consistently responsive customer service without requiring physical proximity to the customer. The shared services model allowed organizations to rethink how and where work was accomplished when balancing cost and service requirements across business lines and geographies.
By the late '90s, benchmarks indicated that the average finance organization operated at just over 1 percent of revenues. Pushing through the 1 percent barrier has proven difficult but compa-nies are finding a combination of solutions to achieve that goal. They are also seeking the next big idea.
Companies with finance operating costs below 1 percent of revenues are no longer investing with cost reduction as the primary goal. Instead, they invest to create competitive financial operations that allow the rapid generation and communication of information required to effectively manage working capital, react within the year to reduce effective tax rates, and provide profitability and performance management information in time to make a difference.
Some companies have turned to Web-enablement to connect electronically with vendors, customers, employees, and managers. "Virtualization" is the ultimate objective, an operating model where many finance processes, like requisition-to-payment and order-to-cash receipt, proceed without intervention from finance personnel and Web-based tools provide all the necessary electronic linkages. The role of the accountant shifts toward managing the process to ensure control rather than keypunching transactions. Other companies turn to outsourcing as a leapfrog strategy to rapidly achieve world-class service levels at lower operating costs or rapidly implement new finance capabilities.
Shared services entered the lexicon as a way to describe a range of organizational solutions that retain consistently responsive customer service without requiring physical proximity to the customer.
Conclusion
As new strategies for achieving operational excellence evolve, the old ones are not discarded. In this first volume of Accenture's CFO Project: Competitive Financial Operations, we will explore the wide-ranging approaches companies are exploiting to achieve operational excellence. The solutions stretch from new angles on proven strategies to the latest big ideas. Subsequent volumes will build on these themes to further explore how CFOs are addressing the other challenges they face in bringing more value to their companies. We hope you find the articles in this volume worthwhile reading, and that you look forward to future volumes as we continue to share leading points of view on finance and performance management issues.
