Why today's top companies are finance-driven.
As soon as Microsoft Corp. finalized its new long-term strategy 18 months ago, all eyes in the conference room turned to John Connors. The company's senior vice president, finance and administration, and CFO would play a pivotal role in supporting the strategic shift. Connors made big changes within the finance function to closely align his team with four of the new strategy's core objectives: to better clarify Microsoft's future direction for shareholders, to improve the speed and quality of decision-making by dividing the company into seven business segments, to sharpen the allocation of resources, and to drive growth in several markets.
"One of the first decisions we made was to increase the number of senior-level finance people in those businesses," reports Connors. He appointed a divisional CFO to each of the seven new business units. "We've always had a very strong corporate finance function and strong field finance because those groups had P&Ls," he says, but the customer-facing portions of the business needed more high-level financial expertise. They received it.
The appointment of divisional CFOs has "allowed us to execute on multiple fronts very, very quickly in a way that would have been difficult to do in the past," says Connors. In addition, he says, the finance restructuring has brought deeper financial insight into the business groups and introduced more senior-level finance talent into the company. It has also led to an aggressive schedule for Sarbanes-Oxley compliance and to broad-based efficiency initiatives, which include a reported $1 billion in cost cuts companywide to be conducted over the next 11 months.
Microsoft is not alone. The split strategy of focusing shared-services "transaction factories" on becoming as efficient as possible while simultaneously honing analytics, forecasting and planning capabilities to improve decision-making in operations is becoming increasingly popular in corporate finance, according to Accenture global managing partner Michael Sutcliff, who's based in Atlanta.
Those who advise the world's top companies on the best ways to improve the performance of the finance function insist that a Microsoft-style transformation is much more than a matter of centralization vs. decentralization. "The bigger question is: How does finance add the most value in your organization?" explains Richard T. Roth, chief research officer for Atlanta-based best-practice research organization The Hackett Group.
For some companies, getting the most out of finance may require centralization, standardization and automation -- traditional methods of wringing cost from the function. For others, finance may add more value if the company invests in better forecasting, analysis and planning capabilities. Still other businesses need to beef up the finance function's ability to manage financial, operational, customer and reputational risk in an integrated fashion. Leading organizations usually seem to opt for a combination of all three objectives when restructuring their finance team.
Most companies have greatly lowered the cost of finance over the past dozen years. For the median company in The Hackett Group's benchmarking database, the function's cost as a percentage of corporate revenue decreased by 44 percent between 1992 and 2004. Median companies now spend 1.08 percent of their revenue on finance, according to Hackett. Yet the average company has seen little, if any, net cost reduction in the past two years. For many businesses, transforming finance via efficiency measures appears to have reached a point of diminishing returns, where the gains from additional changes may be too small to be worthwhile.
"I think the way finance adds value has fundamentally changed in the last 10 years," Roth says. "A lot of companies have taken out the low-hanging fruit, either through centralization or automation. I think finance executives need to step back a bit and reassess each of the different ways that they can add value."
When they do, they're likely to see that the best path to becoming a true business partner cuts through the terrain of decision support, analysis, planning and performance management. Finance must offer its insights at crucial points in the organization in a way that helps bolster the current and future value of the business. To boost current value, the function must comply with regulatory reporting requirements, identify and avoid economic shocks that could knock the company off its moorings, and process transactions as accurately and efficiently as possible. To improve an organization's future value, Sutcliff says, the finance function must excel at the intangibles: budgeting and forecasting, scenario planning, and analyzing the organization's capital structure to identify return on investments.
Sutcliff notes that shareholders are sending a clear message to finance executives: " 'Tell me you have a good process to make investment decisions and a better process to manage the investments so that you're getting the returns you expected. Convince me that you're doing that in a manner that fairly balances the impact between the income statement and the balance sheet over time so that you create the most economic value with the least risk possible for me as an investor. Show me that you can help the management team in the business unit, which is working with customers and growing geographies, to make better financial decisions about the future growth of the business.' "
Leading companies are shuffling finance responsibilities in different ways to add value in different organizational areas. Some CFOs refer to the drivers of these moves as "burning platforms." The burning platform that drove Microsoft to add divisional CFOs was growth. The company diversified rapidly between 1998 -- when it was, essentially, a desktop-operating-system company with some server offerings -- and 2002, by which time it was also a major player in the business applications, business services, gaming and Internet access markets. Boosting financial management and analysis capabilities where growth was occurring helped the company manage the changes in its various lines of business.
Boston-based Keane Inc. experienced a similar growth curve in the 1990s, surging from a $50 million consulting firm in the early part of the decade to a nearly $1 billion business and IT outsourcer with operations in North America, Europe and Asia. But it chose an alternative approach to reorganizing finance.
In 1999, in the midst of this dramatic transformation, Keane hired John Leahy as its senior vice president and CFO. Leahy, who had held international CFO posts with PepsiCo, was greeted with a straightforward mandate: Bring to Keane's finance function a level of sophistication comparable to that of the nation's top businesses. Leahy accomplished this mission not by repositioning finance executives internally, but by making major changes to finance processes and by injecting corporate planning with high-level financial expertise.
When Leahy arrived, Keane required about two weeks to close its books each month. Since 2002, the monthly close has shrunk to less than five days. Leahy and his finance team also installed an integrated planning process that incorporates strategic planning, annual planning, periodic forecasting and performance management. Two years ago, the process, which mirrors those at several Fortune 50 companies, was recognized by Gartner Inc. as an example of operational excellence.
In other recent initiatives, Keane's finance team has instituted a form of the Economic Value Added (EVA) methodology, with the goal of improving capital usage; dramatically reduced days sales outstanding; and documented and standardized the methodology the company uses to guide acquisitions and post-merger integration. "We want to be more than the people who close the books and do the reporting," Leahy notes. "We want to provide value by being creative in how we look at the business, address challenges, evaluate new client opportunities and analyze new M&A opportunities."
At Carlson Companies, the burning platform for change within finance was a fiery volley of post-September 11 events that exerted tremendous pressure on corporate profit margins. Executives at the Minnetonka, Minn.-based organization -- which owns the T.G.I. Friday's chain, half of Carlson Wagonlit Travel and more than 800 hotels -- looked at its five-year growth prospects in late 2002 and decided to launch a transformation effort to greatly improve efficiency and effectiveness across all of its horizontal business groups: finance, HR, IT and procurement. Executive vice president and CFO Martyn Redgrave established a plan for achieving world-class efficiency while boosting his function's support of the business units through stronger planning and performance management capabilities.
To realize the gains he envisioned, Redgrave centralized Carlson's controllership function. He reports that in only seven months the change has resulted in a 10 percent reduction in the total cost of ownership of finance; the three-year goal is a 25 percent reduction. It "was enabled by something we did five years ago," he says. "We established a very strong role for operating-group and divisional CFOs in our organizations. We installed them and then grew the talent of a 'new age' CFO in each of our groups. That allowed me to have confidence that we had the right partners in place to work with the operating group CEO, COO, and heads of HR and marketing."
Despite their different approaches to restructuring finance, leading companies' CFOs and their top advisers share plenty of similar ideas. The terms "business partner," "hybrid model" and "divisional CFO" frequently crop up when they begin to discuss the finance function's transformation. The names GE and PepsiCo are also commonly heard. Both Redgrave and Leahy honed their skills at PepsiCo, and Leahy recently returned to his old stomping grounds to hire two executives. Redgrave cites GE's corporate finance structure as a model for the changes he is helping bring about at Carlson.
General Electric appears to be a wise choice for a role model, given its emphasis on expanding corporate finance expertise and talent through a leadership development program. "GE is constantly changing its mix, and much of how it does so depends on the talent of the finance executive team," Sutcliff notes.
Other companies looking to improve finance should follow GE's lead and pay close attention to their talent pool. Sutcliff explains, "So you might say, 'I'd like a model that has more business acumen in the customer-facing portion of the business focused on the business-unit growth, but when I look at how I developed my finance organization over the past, I have a bunch of really good controllers. And actually, the really good controllers aren't the skill set I need to be facing up to the business in the business units.' "
More and more companies are coming to this conclusion, which is why the divisional CFO position is becoming increasingly common. Even midsize companies are adding high-level financial acumen to their business groups. Business-unit CFOs are pivotal in bringing about the low-cost/high-value transformation that corporate CFOs are striving for. But Tatum Partners CFO David Horn, in Atlanta, calls the divisional CFO spot the toughest job in corporate America.
"It's a very difficult position," says Horn, who served as both a corporate and divisional CFO before joining Tatum, "and Sarbanes-Oxley has cranked that difficulty up another notch." Business-unit finance executives must support their division's general managers but retain their functional relationship with the corporate CFO. Divisional CFOs within Microsoft, Carlson and GE maintain dual-reporting relationships with their local president and their corporate CFO.
"You have to bond emotionally and work smoothly with the general manager," Horn explains. "At the same time, if the GM is doing anything that's over the line, you're the hall monitor for the corporate CFO, to whom you have a huge ethical and functional responsibility."
Microsoft's Connors echoes this point. "On the one hand, you have the business pressure within the group and all of the things you have to do for the group," he points out. "You also have the challenge of executing on corporate mandates and corporate initiatives. Striking the right balance requires a good general manager."
When Connors recruited Microsoft's seven business-group CFOs, he sought "very good businesspeople who happen to be financially oriented." He also looked for individuals who were capable of taking on increasing levels of responsibility as a CFO and as a business-development executive.
Similarly, Redgrave values "true finance generalists" who have accumulated experience in planning, control, specialist finance functions and the business units. Several of Carlson's divisional CFOs have served the company in general management roles, he reports.
Divisional CFOs sometimes grumble -- fairly enough -- that moving their business-unit finance employees into corporate shared-services functions strips them of reserve troops who can serve as their backups when unexpected problems arise. This issue, combined with the intense pressures of the job, can make for long working days and short tenures. That's why Horn believes that establishing role clarity for divisional CFOs is vital to the success of the position.
Connors agrees. When Microsoft created the business-unit CFO position, he says, "we wanted to make it very, very clear that this was a sea change both in terms of the levels we were going to place into those finance functions and in terms of the psychology of how people would view it. It was the first time we had CFOs [in those positions], and we were trying to make a strong statement."
Connors spent a great deal of time defining the responsibilities of Microsoft's divisional CFOs, detailing their obligations both to the business group and, more broadly, to the overall organization. "That definition requires continuous evangelization, because in many cases you have business leaders who have never run an entire company, so they don't really understand the scope of the responsibility that the [business-unit] CFO actually has," Connors explains.
For finance executives who survive the intense pressure of divisional posts, the rewards can be great. Within the past 18 months, two of Carlson's divisional CFOs have left the position to become operating-unit presidents. "We see a lot more CFOs becoming CEOs," Hackett's Roth says. In fact, he adds, finance executives should understand that they may be able to add more value to the organization by leaving the function for high-level operating roles. "I think we're going to see more and more of that."
Sutcliff expects to see the widespread transformation of finance continue. "As soon as you get to where you thought you needed to be, the businesses continue to mature, the environment has changed, the level of sophistication of a specific capability has moved on -- and you've got to continue developing and move with it," he says. In other words, the transformational road goes on forever, and the finance function's development never ends.
The Human Side of TransformationThe objective of the finance transformation at Minnetonka, Minn.-based travel and leisure services business Carlson Companies was to achieve and maintain best-in-class benchmarks in efficiency and effectiveness. "We radically changed our traditional controllership and transaction-processing capabilities," says Martyn Redgrave, executive vice president and CFO. "And we're strengthening the entire planning, performance reporting, decision support and analytical capabilities of the organization." Redgrave and his colleagues are taking dramatic steps to effect the change. The centralization of the controllership function impacted 500 employees. "Given the scope of our efficiency-related transformation, we felt that employee engagement and leadership engagement were central to our success," he says. A formal change-management framework, anchored by a "cascading communications" strategy through which each employee learns about changes in one-on-one discussions with his or her direct manager, began on day one of the shift. The company's top 160 finance employees meet regularly to evaluate progress and to identify potential improvements to the system. The company also created an employee-communication council, which meets every two weeks to review transformation-related communications before they are distributed throughout the management structure. The council consists of one or two midlevel employees from each business unit; they were nominated by their peers based on their reputation as trusted water-cooler sages. "They tell it like it is," says Redgrave, who is thrilled to have a finger on the pulse of his organization's midlevel. "The employee-engagement process is more comprehensive than anything I've been a part of in the past 20 years." That includes his time at PepsiCo, where Redgrave directed major reengineering efforts. To better manage its transformation, Carlson's corporate finance office is tracking efficiency measures, total cost of ownership for the finance function, internal-customer satisfaction and employee satisfaction. "The benefit of doing so is that we hope employees will embrace and understand the need for change and then drive us to implement the changes that need to be made," Redgrave notes. "So far, our measures tell us we're doing just that." |