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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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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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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