Make Your Next Transformation Last

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:
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 system enhancement.

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 transformation.

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 digest change.

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 function.

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:

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.

Resource Shift

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?

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.

Summary

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 last transformation.
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