Creating A Value-Adding Finance Function

As the demand on CFOs to provide real-time analytical insights, support senior management decision-making and become valuable strategic business partners continue to increase, a strategic transformation of the finance function is necessary.

Depending on whom you converse with, some finance professionals prefer to use the term finance transformation whereas others do not. It’s not the term you use that matters most but rather creating a more effective finance function that delivers sustainable value. It is about creating a finance vision that is aligned with the business and supports the organization’s strategic direction.

A number of challenges are confronting CFOs and keeping them awake at night. Challenges such as; market fluctuations, increased innovation and disruption, new technologies radically changing business operating models, increased shareholder scrutiny and public demands for transparency, complex regulatory operating environment, increased risk landscape etc.

In the wake of these challenges, the finance function has to evolve from being a transaction processing function to a value-adding function. There is need for finance to have improved ability to respond to opportunities and risks as a result of better financial insight and forecasting.

At the same time, finance must be able to implement new improved processes that enhance value and leverage new technologies and business models capable of delivering more efficient and effective services.

Although the doctrine of finance transformation started years ago, the light at the end of the tunnel is still a distance away. Quite a number of organizations have started the journey of reinventing their finance functions and are failing to reap the benefits of their efforts.

Some of the common reasons why many finance transformations fail include:

Focusing too much on finance costs as a percentage of revenue. In many organizations, there is this widespread tendency of viewing the finance function more of a cost centre and less of a profit. Instead, finance should view itself less a cost centre and more of a profit centre because of the reports and expert advice the function provides. Playing a strategic role requires finance professionals to look beyond costs and focus more on providing analytical insights that drive strategic decision making. Gone are the days where finance professionals were expected to spend their entire day in their cubicles glued to their computer screens. Today’s partnering role demands finance to go out there, build solid relationships with business unit leaders and help them advance their business plans and goals by providing them the data and analysis needed to execute their individual responsibilities in achieving corporate strategy.
Viewing finance transformation as a once-off activity. Reinventing the finance function is not a once-off initiative with a stop date. This is a journey and a way of doing finance which must be ingrained in the organization’s culture. As mentioned earlier on, a number of factors and challenges are disrupting the business today and with disruption comes opportunity and risk, both inside and outside the organization. It is therefore critical that CFOs are adaptive to this disruption. They should be able to determine what the potential disruption and risk to the organization and to the finance function is should things do not go as planned. Does your organization’s finance function have the ability to detect changes in the business direction and help bring the organization’s vision into reality?
Lack of collaboration between the organization’s different functions. Collaboration is critical if finance is to keep up with the changing needs and strategies of the business, instigate change and create sustainable value. The challenge is on CFOs to initiate cross-functional dialogue, lead cross-functional teams and build consensus throughout the organization. The CFO should be able to communicate to the business unit leaders the cause-and-effect of their actions on each business units’ strategy as well as the overall corporate strategy.
Lack of C-suite buy-in and support. Creating a cost-efficient and more effective finance function should fit into the company’s larger strategy. The CFO should be able to translate the finance vision to other members of the C-suite and explain how finance can help boost growth and increase shareholder value. This necessary to secure C-suite buy-in and support which is critical for driving the transformation initiative throughout the organization. Senior management buy-in is also critical for reducing change resistance at the middle and lower level ranks.
Creation of shadow costs. In order to become cost-efficient and effective, the finance organization has to deliver new processes, improve old ones and standardize disparate finance practices. This has led to some organizations adopting Shared Service Centre (SSC) business operating model and centralizing certain processes with the idea of reducing waste, eliminate duplication and ultimately reduce costs. For example, in these organizations, there is a centralized procurement centre for all global business units. The challenge arises when certain business unit leaders still want to own their procurement processes and do not want to transition to the centralized unit. There is always this fear that the centralized procurement centre will compromise existing long-term supplier relationships. If anything goes wrong in the early days, there is a tendency by business unit leaders to appoint someone to focus on procurement at a local level. Instead of reducing procurement costs, more costs are being added which in turn is counterproductive to the centralized procurement objectives.

In the past, most finance transformation processes have focused more on delivering efficient services (reduce costs, automate processes and remove non-core functions) as opposed to becoming more effective (delivering more insightful analytics, providing better business intelligence and enhancing financial flexibility).

However, if the finance function is to properly transform, both efficiency and effectiveness objectives must be balanced. Finance professionals must be able to define the objectives of their transformation efforts to include both value creation and efficiency outcomes. Start by asking the following questions:

What opportunities are there for us to reinvest savings from efficiency initiatives and create an effective finance function?
How can we shift the mindset of our people and enable them to spend more time on analytics and value creation vs. transaction processing and data gathering?
Do we have the right resources and the right operating model for effective service delivery and processing?
Is there any duplicated work within our global finance function and if there is how best can we address this?
What are the expectations of our internal clients from the finance functions?

Successfully answering these questions will help you come up with objectives and targets based on what value the finance function can provide throughout the organization as opposed to having narrowly defined objectives and targets based on unit costs as a percentage of revenue.

It is therefore critical for finance professionals to increase their business acumen in order to transition from being scorekeepers to valuable business partners who are not reactive but rather providers of forward-looking and insightful analysis that assists the organization in planning, strategy and decision-making. It is also important that finance provides one version of the truth when it gives its detailed analysis and reports.

Although the finance function has to transition to a strategic business partner, this does not necessarily mean that the function abandons its stewardship role. Having the ability to create and enforce the rules and controls of the organization is still an important role for the CFO.

In order to successfully balance their stewardship and strategic partnership roles, CFOs must be able to measure and evaluate the efforts spent on controls, performance management and operations.Transformation of the finance function involves risks. It is therefore important to balance the long-term benefits of the transformation initiative against the short-term risks inherent in the change process. Thus, proper controls must be put in place to mitigate risks.

Finance transformations must be business-led and not technology-led. Remember the finance vision must be aligned with the overall strategic direction of the organization.

Many organizations make the mistake of driving their change initiatives from a technology point of view. Although technology is a key enabler of transformation, it is not a panacea. Before buying and implementing any software, CFOs must first build a business case for their initiatives and then look for the most suitable technology that supports and helps deliver the business outcomes.

Looking at the end-to-end process vs. immediate compatibility of the technology will better serve the organization in the long-term.

It is also important to note that people play an important role in transformation initiatives. Technology can only be as good as people who operate it and interpret the outputs.

CFOs will therefore need to conduct a detailed analysis and evaluation of their current resources and capabilities and realign these to deliver the services and competencies that are required as a resulting of the transformation.

In today’s VUCA world, finance transformation is critical if finance is to keep up with the changing needs of the business and play that critical business partnering role.

It is time that finance professionals move outside their comfort zones, get their hands dirty together with operations and become the expert advisors to senior management. They must start implementing structural changes that both reduce overall complexity and provide greater flexibility, insight and value throughout the organization.

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The Art of Risk Management

This is the title of the article by BCG published a few years ago. The article discusses the principles that should govern the approach to risk management by companies of all shapes and sizes.

The authors make several points with which I agree. Here are some excerpts:

Risk management is essential in today’s volatile economy. In a continuously changing economic environment, companies cannot assume a stable risk landscape.
Stop thinking of risk management as primarily a regulatory issue. Embed risk management in the mindset of the broader organization.
Risk management is a value-creating activity that is an essential part of the strategic conversation inside the company. The goal of that discussion should not be to eliminate or minimize risk but to use it to create a competitive advantage.
Risk management starts at the top. The organization needs to demonstrate that it has made risk management a high priority and an integral part of the decision-making process by appointing a dedicated risk leader who reports back frequently to the CEO and the board to discuss the latest trends and any changes in the company’s risk scenarios.
Risk cannot be managed from an ivory tower. Risk Management should not exist in isolation from the rest of the organization, with an insufficiently granular understanding of the actual business-specific risks the company faces. To avoid this outcome, integrate risk management into the company’s entire routine management processes, including planning, capital allocation, controlling, and reporting.
- Understand the scope of the risks the company faces.
- Plan for how the company will manage those risks.
- Act to mitigate the risks or take advantage of strategic opportunities.
Avoid relying on black boxes. Although sometimes appropriate, over-reliance on complex metrics or models can muddy the risk management process, turning it from a transparent management activity into a frustrating black box. The appropriate level of complexity is company-specific and depends on the industry, business model, availability of data, level of experience, and mandatory legal requirements.
Align risk management with a company’s overall business strategy. Companies need to identify all relevant risks – not just those that can be easily quantified. Some of the relevant risks for a company may be those that are qualitative and especially difficult to quantify.
Risk management is more than a policy; it is a culture. The objective of a company’s risk-management system should be not only to enforce new policies but also to create a risk-aware culture that addresses risks proactively, not reactively, and manages them to create new sources of competitive advantage.
Effective risk management depends on the free flow of information throughout the organization. Unless employees at all levels of the organization are actively involved in the risk management process, it will be difficult to maintain the unrestricted flow of information. This can result in the most important data getting buried in one part of the organization unavailable to other parts of the business.
Risk management deals with uncertain futures. As a result, the goal should not be to develop precise metrics or future outcomes but to strive for a general understanding of the probabilities and potential impact of various trends or scenarios on business performance and enable decision-makers to confront the uncertain nature of risk and act accordingly.
Risk management is never about finding “the answer.” Rather, it is about continually refining the organization’s assumptions about the future and its understanding of the implications of those assumptions for the company’s business. Assumptions about risk often change quickly, so the relevant parameters, probabilities, impacts, and correlations should be revisited frequently.
It is possible to prepare for unknown risks by building an organization that so excels at crisis management that it is resilient even in situations in which it is blindsided by unprecedented challenges. For example, through developing the ability to detect, capture, and exploit information patterns as well as to think outside existing frameworks and risk landscapes.
Avoid the downside, but don’t forget the upside. Companies should use risk management also to identify new opportunities and to exploit them systematically. For example, scenario planning should be used to define not only worst-case scenarios but also best-case scenarios. Think in advance about how a company can make the best use of the latest market developments and trends and ultimately make the right decisions.

I enjoyed reading the article and highly recommend it.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
- Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
- Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
- Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
- Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
- Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
- Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Creating A Value-Adding Finance Function

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