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Raising the Internal Profile for Finance

Businesses today are operating in an increasingly complex, volatile, uncertain and competitive environment. To cope with these challenges, organizations are increasingly calling on their finance teams to move beyond their traditional role of historical performance reporting and start providing more forward-looking decision support.

In the past, businesses have focused more on lean accounting practices to achieve profitability growth. However, there is a tipping point for these measures.

Organizations are realizing that they can cut costs only up to a certain level and for a certain period. In the long-term, cost cutting alone is not sustainable.

Because of this, there is increased pressure on the organization to find other ways of stimulating growth, for example, expand into new and unfamiliar markets.

Unfortunately, organizations cannot nosedive into a new market without first understanding its strategic and operational dynamics. A deeper understanding of the markets and the competitive landscape is necessary.

Finance can play that important role of providing enriched, reliable and objective information to senior management to enable them make successful strategic investment decisions.

To successfully play this strategic business partnering role, finance personnel must start working towards raising their profile within the organization.

The perception that finance is a back office function is still large, and for this to change, finance must increasingly support business managers and contribute to company performance.

Finance is a lot more than measuring income and costs

Finance teams are under pressure to improve business performance and help the company grow in the midst of the current economic conditions and challenges.  To be able achieve this, finance personnel need to recognize that their responsibility goes beyond the realms of number crunching.

There is a difference, for example, between reporting the revenues made by the business and understanding the key performance drivers of those revenues.

Revenue is more than a number. For instance, do you have an understanding of the level of risk that is being taken by the business against this revenue? Also, how much capital is being allocated for this revenue?

It is therefore critical that finance develops a detailed understanding of the revenue drivers, and move beyond evaluating past financial performance and help the business grow by providing high quality analysis and actionable recommendations that are fact-based and real-time.

The starting point for finance executives is to perform a thorough and objective analysis of their finance talent mix.

Whereas in the past it was ideal for the finance function to only be filled by accountants and auditors who are naturally transaction-oriented, the modern finance function requires a different skills composition.

There is need of personnel with more capabilities in strategy setting and execution, operational experience, advanced analytics and a broad business perspective.

How can finance expect to provide good advice and decision support to the business if it lacks enough knowledge about its business, industry and the competitive landscape?

Finance must take a supportive approach to the business

It is no secret that in many organizations the image of the finance function is tainted. There is a large perception that finance stifles business growth by constantly looking for problems and saying “no” to strategic investment decisions. By taking a supportive approach to the business, finance can create a positive image for itself.

Instead of being viewed as the policemen of the organization, finance personnel must strive to improve their identity and become the trusted strategic advisors of the business.

Business leaders are constantly looking for information capable of helping them get a better understanding of the profitability of each customer, segment, market or geography they operate in and how they can improve that performance.

Finance can act as a source of this information. It is therefore important for these leaders to find the analysis, information and recommendations produced by finance useful.

To avoid being labelled “bearers of bad news”, finance must learn to bring objectivity to the discussion table. In other words, finance must bring a different perspective and help business managers view the future differently.

For example, leveraging on the function’s analytical rigour, finance can help forecast trends and conduct business reviews aimed at anticipating market movements, future disruption and opportunities.

This in turn helps the organization allocate resources more effectively and effectively, and drive value creation.

Create Centres of Excellence

Many finance functions across the globe are not adding strategic value to the business as much as they would love to. This is mainly because of their current focus. Findings from numerous studies have revealed that finance executives are spending the majority of their time on non-value add transaction recording and reporting processes.

However, some finance organizations have managed to get it right. In order to free up time on value-add activities, they have created and implemented shared-service centres that bring together certain functions (e.g. procurement, customer services, audit, payroll, tax, treasury etc.) under one roof and also created Centres of Excellence aimed at improving future performance, for example, Financial Planning and Analysis (FP&A).

This integration of different functions enables finance not only to reduce costs but also to collaborate more with the business and supply high quality and more timely information.

By spending more time with the business, finance can move beyond simply observing the impact of decisions made by business managers and be directly involved in the creation of that value.

Routine transactions and processes are being automated via Robotic Process Automation (RPA) technologies. At the same time, our current data-driven economy is leading companies to invest in advanced analytics.

This is also freeing up time for finance to focus more on data analysis and insight generation. However, business leaders must understand that investing in technology alone is not enough.

The organization still needs trained and experienced analytically finance personnel to bring the best out of the system.

I welcome your thoughts and comments

Thanks for sharing:

Related posts:

  1. Developing the Organization’s Risk Profile
  2. Creating A Value-Adding Finance Function
  3. The Finance Function: A Business Growth Partner or Detractor?
  4. How Finance Can Help Improve the Company’s Operating Performance
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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.

Thanks for sharing:

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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?

Thanks for sharing:

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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?

Thanks for sharing:

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