Is Your Finance Function Ready For Change?

Last month, CFO Research in collaboration with the business process management firm WNS, released a report on the Finance Function’s Readiness for Change.

The report is worth reading and discusses how finance organizations can prepare themselves for the corporate and market demands of the future, and help their companies realize full value from data and drive business performance.

As the volumes of financial and performance data continue to increase, pressure on the finance organization to help senior managers and decision makers make sense of this data is also increasing. Instead of hiding behind the scenes, CFOs and their teams are being challenged to become strategic business partners and add value to the business.

If the finance organization is to add value, the function has to quickly adapt to the changing business landscape and become agile.

According to the Finance Function’s Readiness for Change report, in order to play a critical role in the future, the finance function has to develop and improve in four areas:

  1. Finance operating model
  2. Automation of finance processes and activities
  3. Governance, risk and control (GRC) structures and processes
  4. Adoption of sophisticated analytics and digitization

Improving the Current Finance Operating Model

Of the surveyed respondents, 60% plan to shift further towards a more centralized and standardized finance operating model. By adopting this shared services center model, finance chiefs are expecting to cut down on complexity, reduce costs of finance and improve the overall control and management of finance processes.

Other benefits indicated by the respondents as accruing from adopting an advanced and centralized finance operating model include improved working capital management, reduced risk from a more controlled and stable operating environment, improved company-wide operations, increased revenue and an overall improvement in business performance.

Shifting from a basic to an advanced operating model requires a well crafted finance strategy and execution abilities. The finance strategy must be aligned to the broader strategy of the organization, and ensure it contributes towards its achievement. You don’t want to have a finance organization that is solely focused on achieving its goals and objectives at the expense of the overall corporate strategy.

Also important to note is that cost reduction should not be the sole purpose of moving towards an efficient finance operating model. Improving finance operations is also about freeing finance from spending more time on routine, non-value adding activities to focusing more on value-add activities. Getting finance involved in the operations of the business and support effective decision-making processes.

Automating Finance Processes and Activities

As per the survey results, to be successful in the future, 57% of the surveyed finance executives agreed they will need to boost their current levels of finance process automation.

When asked to consider the potential benefits from achieving advanced automation capabilities, respondents identified two benefits as the most important:

  • Realizing efficiency gains in transactional processes such as order-to-cash, procure-to-pay, record-to-report, and cash management; and
  • Adopting digital performance management tools (e.g., dashboards and visualization; customized management cockpits for planning, budgeting, and forecasting; profitability and cost management).

Depending on the size and scale of the organization, it is worth looking at your finance processes and review the level of manual data intervention processes and activities involved.

Automating your organization’s finance processes and activities will enable you speed up transactional processes and reduce the number of costly errors arising from manual interventions.

How many times have we heard of companies that lost millions and millions of money due to spreadsheet errors?

When it comes to embracing new technologies, it is critical to understand that new technologies are an enabler for decision-making processes. Many senior executives tend to believe that implementing the latest technologies will instantly work magic for their organizations, which unfortunately, is not the case.

Just like the finance strategy above, the IT strategy must also be aligned to the broader strategy of the organization. What solutions are you seeking from the new technology or system? Are you trying to improve your budgeting and forecasting processes? Are you seeking to efficiently collect and organize data in ways that provide management with better decision-making tools? Maybe you want to develop and improve your reporting structures and ensure faster period closing?

More often, when implementing new systems, senior managers tend to go for the household names just because everyone is using the same packages. The result is that you end up embarking on costly implementation projects for a system that is standard to the industry but not specific to your organization’s needs.

It is therefore critical to first conduct a thorough cost-benefit analysis and then shop around for the right technology or system that addresses your needs at the right price.

Improving Governance, Risk and Control (GRC) Structures and Processes

The environment in which business is conducted today is very volatile, uncertain, complex and ambiguous (VUCA). As a result, companies are exposed to a wide array of risks, and if these risks are not identified, assessed, managed and monitored properly, there are far reaching consequences on the overall performance of the business.

Surprisingly, two-thirds of the survey respondents view their current GRC structures and processes either at an intermediate level (61%) or at a basic level (5%), whereby there is a huge reliance on non-standard processes and individual judgement-based metrics or mix of standardized and non-standardized processes for global or functional needs, meaning we are still a long way from reaching the ideal position.

The report also mentions that “The primary benefit from improved GRC processes, selected by 48% of respondents, is seen as ensuring compliance and avoiding personal liability”.

I have a problem with the above statement. First, the term “GRC” itself causes a lot of confusion to many people. To some, “GRC” stands for Governance, Risk Management and Compliance. To others, “GRC” stands for Governance, Risk Management and Control.

When the primary benefit of “GRC” is seen as meeting regulatory compliance, definitely there something which is very wrong. “GRC” goes beyond that.

According to OCEG, “GRC” is the integrated collection of capabilities that enable an organization to reliably achieve objectives while addressing uncertainty and acting with integrity.

This definition therefore calls for effective board operations and the alignment of strategy formulation, performance management, risk management, compliance and internal audit processes as well as the other aspects of organizational governance to ensure they are all working towards one common objective.

When “GRC” is aligned to the broader business, high-risk potential areas can easily and quickly be identified, in turn enabling the organization to be more proactive as opposed to being more reactive.

In other words, “GRC” should be seen as supporting effective decision-making processes instead of being seen as a box-ticking exercise that is conducted once or twice per year.

Finance executives have a critical role to play here and ensure that one definition of “GRC” applies through-out the organization and also that “GRC” is promoting the right behaviours and driving business performance.

Adopting Sophisticated Analytics and Digitization

New advancements in technology such as analytics, digitization, artificial intelligence and machine learning are disrupting business models and those companies that have thoroughly done their homework and tapped into these new technological developments have already started seeing and reaping the benefits.

Much has been spoken and written about finance becoming the analytics powerhouse of the organization. Unfortunately, this will not happen unless finance makes a firm a decision to change it’s identity and become the real business partner sought after by senior decision makers.

The finance organization is used to reporting on what happened in the past. However, in today’s fast-moving business environment, maintaining a competitive advantage requires the function to become forward-looking, as well as develop a real-time understanding of changing conditions and markets. This can be achieved by adopting more advanced analytics and digitization technologies and tools.

While respondents from the survey plan to implement technological capabilities for advanced data mining and predictive analytics, it important to have a clear strategy and execution plan. You first need to identify your data analytics needs and the questions that you are seeking answers for.

Yes, it is true that these new technologies have the benefits of reducing operational costs, improving operating margins, improving performance reporting and  overall decision making processes. However, the challenge with advanced analytics and digitization projects is selecting and implementing the right tool that will help you achieve all the benefits above.

It is not a matter of just choosing one technology over the other based on gut-feel. You need to conduct a cost-benefit analysis and the value add to the business of the new technologies and tools. Do you have enough resources to allocate to the project?

How familiar are you with the project? If your organization does not have experience of implementing advanced analytics, it is recommended that you start with a pilot project before going full-scale.

How easy is it to integrate the new technology with the current systems and processes?

You have to ask as many questions as you can as this will help you make the right decision.

Digitization will be a priority for finance moving forward. Thus finance executives should be prepared to make the case for how digitization can support the advanced analytics that will be necessary to drive future competitive advantage for their organizations.

This is a fine document for preparing the finance function for the future. But are finance professionals ready to adopt the changing new role and drive business performance?

I welcome your views.

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Finance Analytics: It’s Not About the Size of The Data

As the need to make impactful operational and strategic decisions in real time increases, CFOs are playing a greater role in the adoption and integration of data analytics in their organizations to support data-driven decision making.

Executives and business unit leaders are increasingly relying on insights produced by Finance to better understand enterprise performance. That is, what has happened, why it has happened, what is most likely to happen in the future, and the appropriate course of action to take.

In an era where data is proliferating in volume and variety, decision makers have realized it’s no longer enough to base key enterprise performance and risk decisions on experience and intuition alone.

Rather, this must be combined with a facts-based approach. Which means CFOs must set up modernized reporting and analytics capabilities with one of the main goals being the use of data as a tool for business decision making.

Appropriately analyzed and interpreted, data always has a story, and there’s always something to discover from it. However, many finance functions are failing to deliver value from their existing data analytics capabilities.

There is a misconception that to deliver actionable insights, the function needs more data for analysis. As a result, the supply of data keeps rising, while the ability to use it to generate informed insights lags badly.

Yet it’s not about the size of the data. It’s about translating available data and making it understandable and useful.

In other words, it’s about context and understanding that numbers alone do not tell the whole story. Finance leaders should connect the dots in ways that produce valuable insights or discoveries, and determine for example:

  • What is being measured, why, and how is it measured?
  • How extensive the exploration for such discoveries was?
  • How many additional factors were also reviewed for a correlation?

Further, to use data intelligently and influence better decision making, CFOs and their teams should recognize that most enterprise data is accumulated not to serve analytics, but as the by-product of routine tasks and activities.

Consider customer online and offline purchases data. Social media posts. Logs of customer communications for billing and other transactional purposes.

Such data is not produced for the purpose of prediction yet when analyzed, this data can reveal valuable insights that can be translated into action which delivers measurable benefits.

Often the company already has the data that it needs to answer its critical business performance questions, but little of it is being aggregated, cleaned, analyzed, and linked to decision making activities in a coherent way.

Exacerbating the issue is the mere fact that the company has a mishmash of incompatible computer systems and data formats added over the years ultimately making it difficult to perform granular analysis at a product, supplier, geographic, customer, and channel level, and many other variables.

There is nothing grand about data itself. What matters most is how you are handling the flood of data your systems are collecting daily. Yes, data can always be accumulated but as a finance leader:

  • Are you taking time to dig down into the data and observing patterns?
  • Are the observed patterns significant to altering the strategic direction of the organization?
  • Are you measuring what you really want to know, what matters for the success of the business?
  • Or you are just measuring what is easy to measure rather than what is most relevant?

CFOs do not need more data. What they need right now is the ability to aggregate, clean and analyze the existing data sitting in the company’s computer systems and understand what story it is telling them.

Before they can focus on prediction, they first need to observe what is happening and why. Bear in mind correlation does not imply causation.

Yes, you might have discovered a predictive relationship between X and Y but this does not mean one causes the other, not even indirectly.

For instance, employee training hours and sales revenue. Just because there is a high correlation between the two does not mean increase in training hours is causing a corresponding increase in sales revenue. A third variable might be driving the revenue the increase.

Jumping to conclusions too soon about causality for a correlation observed in data can lead to bad decisions and far-reaching consequences, hence finance leaders should validate whether an observed trend is real rather than misleading noise before providing any causal explanation.

Certainly, big data can be a powerful tool, but it has its limits. Not all data is created equal, or evenly valuable. There are situations where big data sets play a pivotal role, and others where small, rich data sets trump big data sets.

Before they decide to collect more data, CFOs should always remember data is comparable to an unexploited resource.

Even though data is now considered an important strategic asset for the organization, raw data is like oil that has been drilled and pulled out of the ground but not yet refined to its finer version of kerosene and gasoline.

The data oil has not yet been converted into insights that can be translated into action to cut costs, boost revenues, streamline operations, and guide the company’s strategic direction.

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Doing The Right Thing For Too Long

Markets and business models are shifting, and so should you keep up with these market changes if your business is to survive and succeed. Compared with the past, the current era of digitization represents an inflection point.

Consider individual trends such as artificial intelligence, virtual reality, Big Data, cybersecurity threats, drones, the Internet of Things, driverless cars, blockchain technologies, and more.

These new technologies have significantly changed the way we connect and interact as individuals, including how businesses deliver products and services to their customers.

Reinventing your business will determine whether you succeed or fail in the digital age. As the saying goes, disrupt or be disrupted. No company, business, or industry is safe from disruption. Today, individual businesses have the potential to compete against multinational companies and win.

These businesses are quick to anticipate market changes and flexible to get ahead of the curve. Sadly, many companies are blinded by their successes and aren’t willing to disrupt themselves. They are not experiencing their desired growth trajectory because they are stuck doing the right thing for too long.

Don’t get comfortable with the status quo and allow your business to get stuck on a strategy and mindset that no longer fit the market.

Here are a few questions to ponder, the answers to which will determine the future of your business:

  • What is at the core of your strategy?
  • Are you in touch with the customers you want to serve? When customers give you negative feedback, how often do you listen and act on it?
  • Are you operating your business on the premise that you know what is best for your customers therefore they are supposed to buy whatever product or service you offer them?
  • Are you keeping up with market shifts or you only know how to grow under one set of conditions or products and services, but not how to survive and strive under another?
  • How robust and flexible is your IT infrastructure to help you innovate, perform your company’s Jobs To Be Done, and scale your business?
  • Are you creating a strong culture that is focused on customers, including a culture that not only embraces change but seeks it out?

Given our world is changing faster, it’s imperative to continuously look for signs that things are changing and think about how those shifts would play out in the short-term, medium-term, and long-term, not forgetting the impact on the execution of your strategy and enterprise performance.

The signs can reveal individually. At times, they are part of a wider trend.

Nonetheless, how you adapt will determine whether you succeed or fail. Keep learning. Learn about innovations in your industry and beyond. Try out new business models and technologies and embrace a philosophy of constant change.

Once you understand how the market is changing and evolving, you can develop the right product or service and strategy that will help you achieve your desired outcomes.

We often talk of the ability to “connect the dots” and “take a helicopter view of the business” as key ingredients for success. But how often are business leaders and their teams doing this?

Across the organization, a culture of “them versus us” prevails. Important decisions are made at a functional level with little or no consideration of their impact at the enterprise level.

Having the ability to grasp the big picture and see how different trends intersect is essential for determining the right path or course of action to pursue.

So, how do you spot market transitions and develop a clear sense of where the market is going?

  • Be curious and hungry for new ideas. Continuously ask tons of key performance questions and pay attention to what’s around you.
  • From time to time, challenge conventional wisdom. It’s easy to stick with what you know about your business model, customers, competitors, markets, or industry but dare to pivot when conditions change.
  • Don’t be nostalgic about the past or worried about protecting what you’ve built in the present. Always be curious about the future and develop a willingness to take calculated risks.
  • Ask existing and would-be customers how they feel about your company’s products, services, and strategy. Instead of turning to sources that reinforce your existing point of view, seek multiple perspectives and cross-reference them as new facts come in.
  • Develop an ability to handle multiple random data points at once. This will help you generate critical market, customer, and business performance insights and make smarter, informed decisions. Be careful to distinguish between the signal and the noise since data can be deceiving, especially when you’re looking for “confirmation” that protects your business model.

Data might not tell you why something is happening, but it does tell you what’s going on.

  • Look for patterns and abnormalities that might suggest something is going on, including any interdependencies.
  • Anticipate all the various scenarios of what could happen.
  • Plan your course of action in response to what’s happening in real time.

As the signals of a market shift increase, the need to act becomes more imperative. Note, monitoring and identifying market shifts, and effectively taking the appropriate course of action is a matter of timing.

If you continue doing the right thing for too long and lack the boldness to disrupt both the market and your own organization, you risk being disrupted and left behind. There is no company that is too big to fail. Neither is there a startup that is too small to succeed.

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How Feasible Are Your Strategic Objectives?

Every organization sets out its goals and objectives, to accomplish its mission and vision. The two often seem like two interchangeable phrases but there is a distinction.

A goal is a desired result you want to achieve and is typically broad and vague. An objective, on the other hand, defines the specific, measurable actions each employee must take to achieve the overall goal.

It is every leader’s job to create a coherent set of feasible objectives or what Richard Rumelt calls proximate objectives. Objectives that define targets the organization is fairly expected to achieve, even overwhelm.

This is essential for ensuring energy and resources are focused on one, or a very few, critical objectives whose accomplishment will lead to a cascade of positive outcomes.

An effective strategy defines a critical challenge or opportunity and clearly articulates how the organization is going to play to win or perform customers’ Jobs to Be Done.

Thus, the objectives an effective strategy sets should stand a good chance of being accomplished, given existing resources and competence.

On the contrary, a bad strategy results in the setting of bad strategic objectives.

Long lists of “things to be done,” are often labeled wrongly as strategies or objectives. Or the desired outcome is simply rehashed with no explanation of how this will be accomplished.

It doesn’t matter how well-thought your strategy is in response to an identified challenge or opportunity. If the resultant strategic objectives are merely a list of things to do, or just as difficult to achieve as the identified key challenge, there has been little value added by the strategy.

In today’s highly competitive, uncertain, dynamic, and complex environment in which a leader’s ability to look further ahead is diminished, it is better to focus on a few pivotal items through taking strong positions, creating options, and building advantage.

First identify the key challenges or opportunities for the business. Look very closely at the changes happening within your business, where you might get an added advantage over competition.

Next, create a list of the issues, including the actions your company should take.

Then, trim the original list to a noticeably short list of pivotal issues and proximate objectives by identifying one or two feasible objective(s), when achieved, would make the biggest difference. Remember, the identified objectives should be more like tasks and less like goals.

Now, focus on the objectives by channeling skills and available resources to accomplish the overall goal.

Once accomplished, new opportunities will open up resulting in the creation of more ambitious objectives. This cycle will help you develop a system that enables the setting of feasible strategic objectives.

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