CFOs need to be honest with their people. Unless they can find tangible ways to add value to the business, they will only be looked at as a cost center, and as such, constantly pressured to reduce their costs.
To make the transition to being viewed as a value adding business partner, finance organizations must first get their own house in order by managing costs in a good way over time. Traditionally, there are two methods for dealing with this pressure, a consistent approach for improving performance (continuous improvement) or a semi-regular upheaval where all aspects of finance are examined and open to change (finance transformation). Some organizations try to stay ahead of the pressure through continuous improvement (CI) programs that mandate improvements in key metrics over time. However, these organizations make two mistakes:
- They do not measure the portfolio effect of their efforts over time but only on an annual basis.
- They focus on current period cost metrics only vs.
By not measuring the portfolio effect over time, the incremental returns may seem to be insignificant and
can make it harder to maintain CI momentum.
Solely focusing on cost metrics is a self-perpetuating process where the finance organization will be viewed as a cost center versus a business partner.
As mentioned in Part 1, finance organizations that undergo FT efforts often settle into current ways and methods and their performance stagnates, what we have called the plateau effect. Then every five to seven years they take on a new major transformational effort to try to close the performance gap. This transformation timeline tends to result from a combination of three factors: leadership horizon, a rip and replace systems approach, and an idea that organizations cannot consistently digest the CI approach.
Leadership Horizon - CFO tenure has been hovering around the five year mark for quite some time so this cyclical approach is not surprising. The typical cycle as a new CFO arrives is they will settle in for a year or so and then takes on the mission of transforming the finance team, often through a new system deployment.
Rip and Replace Systems Approach - Many finance organizations associate finance transformation, or finance excellence, with the latest system development. While traditional ERP lifespans had previously been approaching a decade, the benefits offered by cloud based solutions have recently starting to pull forward the decision to swap out core accounting systems. Also, large system driven transformations have been shown to have a low probability of success and often have a negative ROI for 5+ years. As many FT efforts are system driven, the 5 year window can be viewed as the lower bound for how often a company with traditional on-premise solutions will holistically revisit the performance of their finance organization.
Sustainability of Continuous Improvement - The last element that forces a cyclical approach
to transformation is the idea that your organization cannot digest the change required for ongoing improvements. While we would agree no organization would want to annually inflict the personnel toll that major systems deployments bring about, there are usually ways to more fully leverage the existing technology stack, streamline processes, or both.
Unfortunately, most organizations are unable to slay
their Goliath, in that executing the complexity of a major
finance transformation program has a high likelihood of
not achieving the desired business objectives. According
to CFO.com, only 27% of these efforts are viewed as
successful in achieving and sustaining their business
case objectives for two years post-implementation.
Even in the unlikely event that a program is deemed
a success, typically measured in headcount reduction
and/or the launch of a new system, the organization
that has traversed the dangers of the transformation
minefield is exhausted and has little interest in finding ways
to continuously improve. The organization then settles
into their “new normal” and their performance plateaus
as the cycle starts anew, this is what we call the Plateau
Effect. Over time their “new normal” becomes “old hat”
and then BOOM!!! The gurus are back. The key thing to
understand is that most gurus are not in the business of
curing you forever, they just want to have you go through
cycles of remission. They know that once your new
normal establishes a performance gap large enough to
justify a transformation effort, they can come back and
run the process again. (For more Guru discussion see
Part 1: What is Finance Transformation)
Continuous Improvement (CI) is not a new concept but
when it relates to FT, people tend to consider them
separately. CI is really the creation of a culture that
fosters innovation and has the supporting processes to
capture and leverage that innovation. Our proposition
is different in that it combines the two frameworks and
promotes organizations to view the combination of CI and
finance transformation as “Finance R&D” and manage
it on an ongoing portfolio basis to produce the expected
ROI. As mentioned in Part 1, there are four root causes
for why organizations undertake finance transformations.
While establishing a Finance R&D mindset will not
preclude the impact of business combinations or
transformative technologies, it will make them easier for
your organization to digest. CI will eliminate or significantly
defer the need for the other types of transformation. An
important consideration is that while the R&D spend
should have a measurable ROI, it should not be lumped
together into the finance operating budget and therefor
find its way into the benchmark finance spend as a % of
revenue. It should be measured separately from operational
costs just as organizations treat any capital investment.
Finance R&D is an incremental approach with a higher
probability for success vs broad scope transformation
efforts which are riskier and much more painful for your
team. Also, by developing a Finance R&D culture your
need to make major systems changes become elongated
as you maximize the ROI of your current platform and
the decision to deploy major changes becomes easier
because you have more data to support the benefits
relating to why the organization needs to undertake the
Unfortunately, no approach would completely remove the
need to undertake system driven transformation efforts
driven by innovative technologies but they will be more
likely to succeed, produce a higher ROI and lower the toll
on your personnel.
If you are tired of being stuck on the transformation
merry-go-round the following approach is for you. No
approach works for everyone, but there are proven
methodologies that can be leveraged in new ways
to help change the way your organization deals with
Sustainable Way Forward
Finance organizations need to understand their mission
within their firms. Some finance organizations are
looked to for decision support, advanced analytics, M&A
strategy, and other high value services. For a variety
of reasons, often mainly cultural, in other organizations
the finance organization is not viewed as a strategic
enabler. The first step for the CFO is to determine what
your organization expects, or in some situations will
“tolerate” out of the finance function. Many people try to
over-complicate this analysis by creating multiple types of
deployment models or “faces of finance”. While creating
a number of categories can make for a good debate,
there are essentially two deployment models for a finance
organization: value creator or cost center. In both cases,
the fiduciary responsibility of the CFO will require that
cost optimization to be a key focus. If your organization
would like to be viewed as value creator however, you
may need to develop an organizational structure and/
or employ more of or a different type of resource than
you might as strictly a cost center. Cost optimization is a
pre-requisite for organizations that want to make this jump
and graduate to value creation. If the finance organization
can demonstrate the ability to spend money wisely over
time then often the organization will let finance invest in
“value creating” personnel and tools. This can result in
a Strategic/Skillset driven Transformation but the leap
will be easier for your organization to make if you have
adopted the Finance R&D culture, as you will be better
funded and your organization will have proven ability to
By driving the Finance R&D mindset,
Finance organizations become scalable,
efficient and fast.
The CFO must determine how to align Finance capabilities
with the business. This should not be viewed as a oncesize-
fits-all approach. Different parts of your organization
may demand vastly different levels of support from the
finance function. Some consulting firms have started to
take the approach that finance organizations focus less
on customer satisfaction by suggesting that the finance
organization say no to some of the demands from their
constituents. This approach is short sighted and driven
from the focus on annual cost related benchmarks. The
1% of revenue benchmark for finance costs has become
the standard rallying cry for consultants when trying to
spur their clients into undertaking finance transformation.
The issue with finance ceasing to provide services demanded
by their constituents is that if they are not provided the
business will find another way to source those services,
often at a higher cost to the organization. This creates a
cost for “shadow finance” that is typically not measured.
Many are blindly looking to lower finance spend percentage
without understanding the payback or potential knock-on
impacts. Beware of the hidden cost of cost reduction.
A high performing finance organization provides the
services at the most efficient cost but also charges their
constituents for all non-standard services. That way
their constituents understand the related cost for their
requests. If the finance organization sets the expectations
of the organization around what services will be provided,
additional services that are requested can be provided
but at an agreed upon cost for the service provided.
This pay for service concept is difficult for some finance
organizations to grasp if they are too intensely focused
on customer satisfaction.
APQC benchmark data quoted in CFO.com suggests
that 62% of finance spend is related to people costs.
While many organizations still struggle with these people
costs being spent on process work that could and
should be automated, there is no evidence that says
less than 62% of spend should be spent on people costs.
The question really lies in whether or not those people
costs are being spent against the appropriate tasks.
To build a sustainable high performing finance function you must choose intelligent benchmarks that align to
the expectations your organization has of the finance
Manage costs, demonstrate capabilities and the business
will seek the involvement of finance. Being invited to the
party is always a better approach than forcing your way
in. Per a survey of 1,900 CFO’s by IBM2, few Finance
organizations have been able to make this graduation
from the focus on cost optimization to value creation.
The report goes on to show from 2003 to 2010 the mix
of time spent between transactional activities and areas
involving analysis and decision support have remained
fairly flat. This is due to the following:
This is due to the following:
- FT efforts are not addressing the organization design
issues discussed above.
- While process automation has demonstrated capability,
it is human nature to find ways to interject a human
factor into processes that do not require it. In our
estimation, greater than 50 percent of transactional
processes can be automated but currently fewer than
20 percent currently are. This is not due to a lack of
desire to automate processes but it is due to a natural
tendency for humans to revert things as they know it
and all finance organizations are used to having people
involved as approvers, reviewers, etc.
- A heightened control/regulatory environment has diverted
gains that could have gone to decision support to
- The data environments faced by most CFOs are
cumbersome and hard to manage due to the fact that
systems estate is not integrated and usually not built
to capture the key metrics required for a successful
A R&D approach works far better when trying to automate
a large number of processes because it provides focus
on a management set of processes versus a big bang
approach and it allows for lessons learned to be applied
to later process sets. The R&D approach also places a
focus on ongoing skill development so your organization
can stay current. Monitoring business performance,
providing inputs to corporate strategy, driving enterprise
cost reduction programs, supporting and managing
risk, product portfolio analysis, driving data integration
and governance across the organization, and predictive
modelling are some of the areas that Finance organizations
need to develop capabilities in in order to become a
trusted business partner/value creator with the business.
More than 45 percent of CFOs indicate that their Finance organizations are not effective in the areas of strategy,
information integration, and risk and opportunity management1. While the survey results are not pretty, we might
suggest that the number is higher than 45 percent as it is often human nature to grade ourselves on qualitative matters
easier than reality would suggest. These results are not surprising as not many finance organizations have not tackled
the basic blocking and tackling that would be required for them to really move ahead with the capabilities required to be
value creators. These efforts not only involve automating transaction processing but it strongly relies upon a shift in
the type of resources that are required to be successful. Technical accounting skills continue to be important but in
today’s world analyzing large volumes of data to find clues to help the business achieve competitive advantage or
more effectively manage risk are skills that traditional finance organizations did not have. These skills are a mix of
data management and quantitative analytics personnel. It is no longer satisfactory to have a group of CPAs who are
proficient at Excel and can help the business put together their annual budgets.
R&D Model for Finance Operations
Run the Finance function with a certain level of spend
focused on ongoing improvement, Finance R&D. This
spend can be focused in a number of areas, but if a finance
organization is not spending some amount related to
Finance R&D every year that is an immediate red flag.
The finance organization that is not
continuously focused on improvement
is just a FT program in the waiting.
This continuous improvement approach is the only way to
avoid or at least dramatically delay the cycle of FT. Why
should you care?
- Properly executed FT is typically quite expensive.
- FT efforts are very hard to pull off successfully.
- A heightened control/regulatory environment has diverted
gains that could have gone to decision support to
- Due to their scale FT programs are draining and they
will drive your good people away if you do them over
and over again.
To achieve the efficiency required to reach the level of
insight, CFO’s must help their organizations overcome a
number of common challenges, including but not limited to
behavioral changes, poorly integrated systems environment,
and a lack of a common data framework. TThese issues
can be addressed by employing the Finance R&D approach
which has a higher probability of success and will result
in greater precision and speed for your company overall
and your finance organization. In order to achieve peak
performance, employees need to know what is expected of
them and managers must have timely access to information
to help them make better decisions. If you build these
scorecards appropriately you can create quicker feedback
loops and also automated monitoring capabilities that will
enable the organization to optimize performance in a
more real time fashion. By driving a higher level of finance
efficiency it should feed more into the funding for R&D and
the process will become self-sustaining and also motivating
for the people involved. Organizing “investment committees”
in the finance organization would be a welcome change of
focus for your finance staff.
While it is not practical to expect your organization to never
have to undertake a complex and risky transformative
journey, you can structure your finance organization in a
way that makes it feel less like you are constantly having
to transform your operations. Our approach begins with
the identification of the strategic fit for finance within
your organization. Our approach will further change the
focus from regular major upheavals to one that focuses
on regular adjustments to optimize results. To do this you
need to develop the Finance R&D mindset and measure
and report results over a period longer than one year,
and deliver consistent improvements. You will also need to
determine what level of finance R&D you need to invest in
order to deliver against the expectations of your organization
based upon the strategic alignment of finance.
Finance organizations that are successful in doing the
above will not only lengthen the time between transformative
efforts but they will have a much higher success rate
for those transformation efforts when they are required.
Once you successfully deliver your transformation
effort and establish the Finance R&D mindset you will
find that your high performing organization is better
able to keep alignment with the business and deliver
consistent results and as such it will feel like it is your
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