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:

Finance operating model
Automation of finance processes and activities
Governance, risk and control (GRC) structures and processes
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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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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Is Your Finance Function Ready For Change?

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