TagFinance Effectiveness

The Finance Function of the Future

McKinsey has published an interesting piece that merits the attention of finance leaders and professionals.

Finance 2030: Four Imperatives for the Next Decade makes some good points:

  • Leading finance departments are guardians of enterprise value creation, demonstrating stewardship of their own spend by lowering absolute costs and shifting work towards more value-added activities.
  • Finance leaders further differentiate themselves by spending a greater portion of their time on value-added activities, such as financial planning and analysis (FP&A), strategic planning, treasury, operational-risk management, and policy setting.
  • Achieving the next frontier in finance efficiency and effectiveness will likely require finance executives to shift their thinking from the priorities of the past.
  • Finance staff’s time is valuable, and best devoted to analyses that drive actual business performance.
  • Equip staff in critical roles with the necessary level of experience, leadership mind-sets, and authority to influence the business.
  • Finance departments need a clearly defined master data-management strategy to guide the collection, storage, and interrogation of the rising volume of data needed to perform the types of analytics the business requires.
  • Owing to its central role, the finance function is uniquely positioned to help define the master data strategy for the enterprise.
  • Beyond providing analytical insights, the finance department is also responsible for framing discussions on company performance and the actions needed to improve it.
  • Reimagine the finance operating model with new capabilities. This requires not only a different way of organizing how work gets done, but also a different type of finance professional.
  • Embed digital skills across the finance organization. These capabilities may include programing bot algorithms, using analytics software, or learning how to translate business data into actionable insights
  • Develop a core of business-savvy finance leaders with the stature to engage company leaders as peers.

These are all good points. My thoughts:

  • Over the last decade, finance has progressed significantly in terms of delivering value-added activities. Much of this progress can be attributed to advancements in automation and analytical technologies which are reducing time spent on performing routine, transactional activities. There is still a lot of progress to be made to improve the time spent on FP&A and business partnering in laggard organizations.
  • Achieving the next frontier in finance efficiency is very important. However, when we talk of efficiency it’s imperative to clarify at what. Many organizations have succumbed to the seduction of efficiency resulting in efficiency becoming an end in itself. Efficiency, when it is understood correctly as the best possible use of scarce resources to achieve a valued end, is undoubtedly important.
  • I agree entirely with the need to make sure finance devotes more time to analyses that impacts actual business performance. More often, finance teams are wasting time and resources producing reports that serve little to no purpose at all. Decision makers want to understand the key drivers of business performance and how these can be influenced to achieve enterprise objectives, but, they are bombarded with more analyses on what happened, and less on what could happen, how, when and why. Reporting is about communicating. Rather than communicate what you want to say, tell decision makers what they need to know.
  • Data types, data sources and the speed at which data is generated are all continuously increasing at alarming levels, therefore a more effective and efficient enterprise data management strategy is critical. Build a central data repository (to make sure there is one version of the truth) where data is securely stored and can be updated, accessed or shared in real-time to perform the types of analytics the business requires. Erroneous data is practically useless and even possibly harmful to the business because if management teams are making critical decisions based on inaccurate data, the outcomes could be costly.
  • The idea of framing discussions on company performance and the actions needed to improve it is challenging for many finance professionals. Our training has taught us to solve problems using a logical approach or deductive thinking. The problem with this process is that there is just one possible solution or a limited set of correct solutions, and does not take full advantage of the creativity within us. We need to embrace both deductive and inductive reasoning, start asking questions on company performance that have never been asked before, challenge rigid rules and tired frameworks, and consider risks worth taking that we would otherwise not take when thinking deductively.
  • I agree entirely with the need to reimagine the finance operating model with new capabilities. To achieve this, finance leaders need to cultivate a culture of continuous improvement. A culture that is always questioning the status quo, and promotes testing of new processes, tools and operating models, including learning from mistakes. Further, traditional accounting and finance skill sets alone are no longer sufficient today to build an effective value-adding finance organization. Instead, cross pollination of individuals with varying backgrounds is necessary.
  • The ideas of embedding digital skills across the finance organization, and building business-savvy finance leaders are both positive ones. Nevertheless, development of other soft skills such as collaboration, communication, problem-solving, critical-thinking, adaptability, emotional intelligence and persuasion should not be neglected.

How Finance Can Help Improve the Company’s Operating Performance

Today’s CFO is more than a numbers person. In addition to fulfilling the traditional oversight function, the finance executive is also now a key business performance manager mandated to achieve operational excellence.

He or she has to make sure that the business is getting the operations right the first time and meeting operating targets – optimized processes, reduced error rates, lower costs, higher quality products and services etc.

In today’s constantly changing business environment, this might look easier said than done, but they key to operational success is ensuring that the business operating model is aligned with the new economic realities.

This is how we have always done business no longer cuts it through in our current industrialized and digitized economy. New technologies and innovation are disrupting business models. Customer behaviours and spending habits are constantly shifting. Geopolitical risk across the globe is at its peak. Growth in developed economies is stagnating while in emerging economies it is fraught with severe challenges. Competition is intensifying.

In short, the world is now extremely volatile, uncertain, complex and ambiguous (VUCA).

Such changes are exerting immense pressure on the operational performance of the business. Thus, to survive and improve performance in this dynamic environment, businesses must learn to adapt, become agile and innovative.

Finance can play an important role in improving the company’s operating performance by helping the business navigate around these challenges.

Develop and strengthen relationships with operating managers

The ability to forge positive long lasting relationships with business unit managers is now a critical skill necessary to achieve finance effectiveness. Finance can longer sit comfortably in the back office, and expect to add value to the business.

Instead, finance needs to obtain front-line and hands-on operational experience. For instance, join operational teams on site visits or other external stakeholder meetings. It is through these interactions that finance can develop and demonstrate own understanding of the business and how it works.

The function will be able to acquire knowledge on the operating unit’s markets, competition, customers, supply chain and risks. This information is necessary for developing and implementing reliable and meaningful performance measurement metrics and ensure that everyone is on the same page. It will also help determine whether or not any business-related changes being made will have a positive or negative impact on the company.

Gaining knowledge of operations and the business is not an overnight process. Thus, finance needs to work with operations more closely and more frequently. Regularly maintaining contact and discussing business performance with operating managers is key to developing trust and strengthening the relationship between finance and operations.

On the other hand, infrequent contact with business unit managers will unfortunately hinder finance’s progress of becoming the business’s trusted advisor.

Finance effectiveness goes beyond simply publishing the numbers

In addition to reporting the numbers, finance must also be able to tell the story behind the numbers. What is driving the numbers? Can the numbers be maintained? Are they trustworthy?

Decision makers are always looking for information that is objective, insightful, relevant and usable so that they can understand the financial implications of their decisions and actions. In other words, one version of the truth.

Unfortunately, for many finance organizations, they are failing to provide information and insights operating managers need. Rather, they are providing what finance thinks they need. This in itself is a recipe for disastrous decision-making processes.

To avoid falling into this trap, finance must regularly meet with business managers and discuss their information needs. This will ensure the function is providing relevant information and insights on performance drivers as well as factors that will have the most impact on the business.

How often does your organization’s finance team discuss performance issues with business unit managers? Daily, weekly, monthly, quarterly or there is no regular discussion about metrics and performance? How influential is finance in defining improvement goals? What role does finance play in measuring, managing and monitoring performance?

By leveraging data analytics technologies, finance can help optimize operations and provide business managers with reliable information on what happened, why it happened, what will happen in the future and how it will happen.

Instead of relying on hindsight and insight to optimize operations, business managers will develop foresight about the future and improve their decision-making processes.

Recognize the need to do more

Finance must show a continued interest in helping the business achieve operational excellence.

It is important to note that finance business partnering is not an occasional process whereby finance shows an interest in improving operations, fades away for a while, comes back into the picture, disappears again and the cycle continues like this. Rather, the focus should be on continuous improvement.

Although some organizations have already started transforming their finance organizations, the gap between finance’s actual and desired involvement in operations is still enormous. Closing this gap requires finance to recognize the need to do more.There must be a hunger to add value to the business and become a critical player.

Finance must continuously evolve and become a learning organization. It must adapt its operating model and embrace the important role it plays in helping the business advance its operational performance. It is common to encounter significant hurdles during the transformation process but this must not act as a trigger to give up.

The focus should be on becoming better and making performance improvement an everyday mandate. Identify a few operational targets, processes and critical reporting and analysis that are in dire need of improving and focus on these.

Once you have worked on these and are happy with the progress made, you then move to the next areas of improvement. Sometimes it is better to start small and celebrate small wins than not start at all.

Finance can only do more if the corporate culture and senior executives support the collaboration of finance with the rest of the business. Thus, the type of an organization the CFO works for can influence the role that finance plays.

If the organization is traditional, slow to change and lacks executive support, finance will forever play the oversight and reporting role.

On the other hand, if the organization is adaptive, innovative and executives rely on information to drive decisions, then finance will play the key strategic advisory role.

I welcome your thoughts and comments

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