We've heard about the new model from every consultancy. We've read about the new paradigm in just about every finance magazine. Every finance conference or seminar harps on the same theme. This "finance of the future" vision has been shouted as far and wide as this year's election promises.
Yet the efforts of finance organizations to achieve the desired "end state" have yielded widely varying results. Why is it that only a few organizations have broken through and achieved the "best-in-class" performance levels desired? And, equally important, how can finance organizations continue to improve and sustain performance in today's complex environment? To answer these questions, it's worth first turning back a page or two, to revisit a time in the not-too-distant past.
It's no secret that ERP-led initiatives enabled many of the early transformational gains in the mid-'90s. However, many of the initial ERP programs, while "enterprise" in name, were supply chain-driven due to the huge incremental savings associated with procurement and manufacturing. In fact, many of the business cases used to support initial ERP investments were based solely on the quantitative benefits derived from the supply chain improvements, while the benefits to finance were largely qualitative.
Finance really didn't have "skin" in the game and therefore didn't stretch the possibilities of what could be done. They went along for the ride, but in many cases felt that they were losing a good deal of flexibility, especially in the area of reporting. As time has passed and finance -- as a function -- has become more comfortable with ERP functionality, many organizations have actively sought to reap the benefits enabled by ERP and have focused their collective attention on efficiency gains through various initiatives (organizational centralization, process standardization, and so forth).
To prove the worth of these initiatives, and since finance professionals are, in general, "numbers"-oriented people, benchmarking has been the standard tool for measuring success. The standard high-level benchmark most frequently cited during this time has been the "cost of finance as a percentage of revenue." Finance organizations have worked tirelessly first to identify and then to manage this percentage lower. The good news is that this cost reduction effort has been largely successful, even with a slight spike in costs over the past four years as organizations comply with Sarbanes-Oxley requirements.
The bad news is that these cost reductions have occurred sometimes at the expense of service effectiveness. Drastic cuts in personnel achieve a target level of lower cost, but taking people out of the organization without fundamentally changing the work through process improvements and/or technology enhancements usually means fewer people having to work harder. This leads to a "death spiral" for many organizations, as talented people opt to leave, resulting in even fewer (and usually less talented) people left to do the work.
These cuts often lead to unsatisfied managers who are left with less service than before. In many cases, unhappy executives sometimes respond by hiring a "marketing analyst" to perform the same activity. So instead of gaining the efficiency that comes from centralizing finance activities, the company actually has duplicate or "shadow" finance activities occurring.
The net result is that the "official" cost of finance (cost measured within the finance function) goes down, but the true cost of finance (cost of finance activities regardless of where they are performed or by whom) goes up. Further, because these activities are now performed outside of finance, inconsistencies in process execution rise and varying technologies are often adopted.
See chart How Finance Costs Have Dropped. [1]
There is increasing discussion these days regarding what transformation activities are required by finance to continually keep pace with increased expectations and demands, and what metrics are appropriate for finance to use to continually assess its overall performance. Clearly, the focus of transformation activities and the evaluation of performance have to consider more than just cost. Some companies are starting to introduce the notion of a "balanced scorecard" for finance.
Much like the enterprise balanced scorecard introduced by David Norton and Robert Kaplan in 1992, finance scorecards attempt to provide a wider, more comprehensive view of performance and typically focus on four major areas:
The reality is that many finance organizations are focused mainly on the first two areas: Cost Efficiency and Service Effectiveness. Improvements in either of these areas also tend to have a positive impact on the controls environment as Sarbanes-Oxley requirements are taken into consideration during project planning and implementation. Staff Growth and Development becomes an important enabler as organizations are restructured to support newly designed processes and systems and new roles and skills requirements are defined. But it is the constant challenge to reduce cost and at the same time improve service effectiveness that CFOs are still most concerned about.
To address this challenge, finance organizations are undertaking a series of discrete projects aimed at addressing either effectiveness or efficiency. We refer to this current scenario as the "dual path." Most finance organizations are following this dual path in some shape or form, and the overall emphasis is shifting from a purely "cost reduction" (efficiency) focus to a "value from operations" (effectiveness) focus.
One challenge facing those finance leaders who are pursuing the dual path approach is that there is no one single benchmark to help them measure performance improvement. Performance improvement can best be achieved along the path by managing effectiveness and efficiency in tandem and by measuring and balancing both internal costs and stakeholder satisfaction.
Building and maintaining performance improvement momentum along the dual path has proven to be difficult for many organizations. This is complicated by the fact that new practices, technologies, and solutions are evolving all the time. Organizations are continually challenged to keep up with the latest performance improvement possibilities. While this is happening, other organizations are striving to improve their own performance levels to gain competitive advantages. The result? The bar is continually being raised on performance standards for everyone. Therefore, an organization that solely maintains an operational status quo is actually losing ground on performance relative to any efficiency or effectiveness benchmarks. In addition, improvements put in place yesterday may no longer be delivering the benefits initially achieved - there's no such thing as "auto-pilot" when a project is complete.
See the Dual Path to Finance Performance Improvement. [2]
So how can finance improve performance going forward? Our belief that there is no single "off-the-shelf" solution or standard "glide path" that all companies must follow to guarantee success. All companies will track a path in their own unique way. How a company proceeds will be largely dependent upon where they are starting from and what the prevailing requirements are. This scenario presents CFOs with the unique challenge of having to understand and align the relationships that exist between their organizations and the multiple customers they serve.
Specifically, CFOs need to:
• Understand the potentially diverse set of expectations and needs from multiple customer/stakeholder groups.
•Translate those expectations and needs into a coordinated set of operational objectives.
• Transform the organization to achieve the optimal service delivery model.
While this is a relatively straightforward concept to understand, in practice, few organizations are addressing performance improvement in such a manner. We've seen finance organizations have the finest mission statements, passionate executive sponsorship, and strong stakeholder commitment, only to fail in project execution. We've seen companies have flawless technical project execution yet not deliver what the stakeholders are expecting. We've seen companies succeed in achieving targets, only to face the same issues just a few years later because they couldn't sustain the improvement levels. While many companies still struggle with getting this right, those that do succeed often employ a more comprehensive and cohesive approach or framework that addresses multiple challenges and drives continuous and sustainable performance improvement.
The key elements within this framework are as follows:
•Finance must define and agree with its stakeholders on what services and outputs it will deliver and at what cost. And in turn, finance professionals must understand and agree on the very same services and outputs they are expected to deliver and produce. All too often, what stakeholders want and expect is not what finance thinks that it needs to produce and deliver.
•Finance must develop a strategy, a delivery model and/or programs to deliver against agreed-upon expectations. An optimal finance organization must have the right leadership and resources in place to chart the course and aggressively manage phased programs that deliver benefits on a regular basis.
•Finance requires disciplined execution against specific projects, focused on delivering the components of an overall program that continuously builds, step by step, the vision or "end state" that was defined and agreed upon.
•Finance must adopt a disciplined management philosophy and implement governance programs not only to sustain improvements that are made, but also to use the higher performance level as the new foundation or platform for additional improvements.
Companies that adhere to a framework as outlined above are more likely to break through and achieve "best-in-class" performance levels, not just in terms of cost but also in terms of service effectiveness. These companies are able to push the boundaries of finance performance improvement because they are able to answer both the strategic and the tactical questions that define what and how they are expected to function within the enterprise.
As finance follows a "dual path" toward efficiency and effectiveness, true performance improvement needs to be measured via a more balanced (and sometimes conflicting) set of metrics that includes both internal cost-based and external service delivery-based metrics. If becoming a better business partner is what is expected, then knowing what your business partner wants and staying aligned on expectations becomes critical.
To define these more customer-focused metrics and drive the new standards for performance improvement, finance must understand and align the relationships that exist between their organization and the multiple customers they serve and stakeholders they impact. Only then will finance be able to balance and deliver process efficiency and service effectiveness in a controlled environment and become the "better business partner" they aspire to be.
See Aligning Relationships: Building Momentum Along the Path [3]
Links:
[1] http://businessfinancemag.com/files/misc_file/35.gif
[2] http://businessfinancemag.com/files/misc_file/36.gif
[3] http://businessfinancemag.com/files/misc_file/37.gif