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
Finance is increasingly taking an important role as the business partner. Thanks to digital and technology advancements, CFOs and their teams are now able to expand expectations beyond the traditional accounting and compliance functions. Routine finance and accounting activities are now automated thereby freeing up more time for finance executives to spend on strategic issues.
In high performing organizations, finance is collaborating more with the business and making a deeper impact on critical business decisions. Instead of taking the back seat, the function is playing a leading role supporting change initiatives and driving performance improvements.
Increased regulatory demands, competitive pressures, volatility, uncertainty and shifting customer behaviours are posing immense challenges on the day-to-day running of the business. In order to succeed and grow in this world, businesses must adapt to change and become forward-looking. Thus, managers and executives are calling on their finance executives to help shape the future of their companies.
With many expectations before them, it is no longer enough for finance to focus on scorekeeping and reporting the past. Finance must help business managers understand the current results, predict future performance based on different scenarios and provide insightful recommendations on how to run the business better and propel the business forward. Business managers are constantly looking for real-time information that will help them make informed decisions and finance can successfully act as the source of support.
Finance must embrace change.
Finance cannot continue to do things the same way repeatedly. To succeed in the current environment you need to change your processes, systems and periodically review your finance operating model and strategy. Many finance organizations are still reliant on legacy systems and outdated processes that are stifling the much needed innovation and growth.
Despite advanced developments in financial technologies, low performing organizations have not automated routine accounting and finance activities; these are still manual. These organizations are spending the majority of their time manually gathering, manipulating, consolidating and reporting historical performance. Budgeting and forecasting processes are also manual. Very little time is spend on performance analysis, risk analysis, strategy review and predicting the future. As a result, decision makers are lacking critical insights that drive robust decision-making processes.
Finance needs to embrace modern technologies, innovative and agile business models in order to improve the function’s effectiveness and efficiency. Strategies that have worked in the past will not automatically take you to the highest rank of success. Thus, as the business environment changes you also need to review and adjust your finance strategy. The finance strategy must be aligned with the business strategy of the organization. It doesn’t help for finance to do its own thing and the business to do theirs.
Finance must step up and prove its value
Although the expectations on finance to play a strategic role and improve business performance are high, the function must prove its value and that it deserves a seat around the table.
Making critical decisions such as which markets to play, improving the company’s product and service offerings, improving profitability and selecting mergers and acquisitions targets all require finance’s informational capabilities and analytical expertise. Finance must therefore understand the needs of the business and apply its expertise to those activities that are linked directly to the company’s success or failure in the marketplace.
The challenge for many finance leaders is that business managers are not completely trusting of the information provided by finance. When there is no trust in the source of information, it is difficult for the manager to act on that particular information. Finance must therefore collaborate more with business units to build and strengthen partnerships with their operational colleagues.
Rather than stand in the path of progress, finance must act as a navigator and help steer the business in the right direction. For instance, instead of blocking investment proposals and constantly saying NO to business managers, finance need to first understand competitive and environmental dynamics, model decisions under different scenarios, evaluate their financial impact and then explain to decision makers the revenue, cost and profit implications of their decisions.
If the decisions proposed by business unit managers and other executives have a negative financial impact, finance must be able to find and propose alternative opportunities to improve operational performance.
By continuously collaborating with the business and providing decision makers with actionable recommendations, finance will be offered a seat around the table.
Finance must become a trusted advisor and risk taker.
Good business decisions often depend on insights that emerge from good data analysis. Basing decisions on wrong assumptions and information often results in loses and devastating consequences for the business.
Thus, in order to become a trusted advisor finance must base its recommendations on facts and not gut feel. Finance must help the company get value from the data it currently owns. In today’s world of big data and analytics, organizations that are able to mine this data and find meaning will have an enormous advantage over those that do not.
Successfully executing a business growth strategy comes with both benefits and costs. Unfortunately, the majority of finance professionals are risk averse and fail to look at the bigger picture. Growing and succeeding in the current economic environment requires the business to develop a risk appetite and take calculated risks. Remember high risk, high returns.
However, this does not mean that all decisions should be taken lightly with no consideration of risk at all. Instead, finance should help articulate the company’s risk appetite to the business and ensure that all activities and investments undertaken are within the approved limit levels.
I welcome your thoughts and comments.
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
One of the challenges facing today’s finance executives in transforming the finance organization from a back office function into a successful front office strategic advisory role is a shortage of talented finance professionals and leaders. Without the necessary finance talent and an operating model to support finance transformation initiatives, it is increasingly difficult for CFOs and their teams to become effective business partners.
Have An Effective Finance Talent Strategy
The skills required for successfully executing the Finance Business Partnering role are different from the skills required to fulfill finance’s stewardship and operator roles. It is therefore critical for CFOs to take stock of the current talent and evaluate whether the available talent is capable of moving the business forward.
Although in most organizations the HR function is responsible for overseeing the overall talent strategy of the organization, it is critical for the CFO to partner with HR to determine Finance talent needs and allocation with the function. The CFO is in a better position than the HR Manager to know and understand the skills required to drive Finance effectiveness.
In one of their CFO Insights publication, Deloitte identifies critical questions that Finance leaders must answer prior developing their organization’s finance talent strategy:
- What knowledge, skills, abilities, and experiences do we need now? Where do we need them? How many do we need? When do we need them?
- Which skills will be most critical to our business in the next three years? Five years? Longer term? How are these skills and skill mix changing?
- What are the specific competencies that we need to develop in our finance workforce, from both the technical and leadership perspective? Are there new competencies required in both finance and the business generally?
- What are the “people” or talent programs, policies, and practices necessary to realize both those technical and managerial competencies? Can we leverage or build upon what HR already provides, or do we need something new or unique?
- Why would somebody join our company’s finance department, given the high demand of finance professionals? Why would they stay? What makes our finance function a career destination rather than a career way station?
- What is my role and those of our finance leaders and C-suite colleagues in fostering a talent experience within finance that emphasizes the right combination of development, opportunity, and work-life balance?
Honestly answering the questions above will help you identify strengths and weaknesses in your current talent strategy and act as a starting point for a successful transformation journey. You need to have an effective strategy that not only supports Finance, but also the broader strategy of the business.
Finance Business Partnering is More Than Number-Crunching
Finance professionals must also be able to extract meaning from the numbers and influence business decisions. This requires the function to increase its commercial acumen as well as improve its leadership and influencing behaviours. The CFOs role is more than producing management accounts. It is not about putting data together but asking the right questions. The CFO must be able to interpret the numbers produced, have a good understanding of all the facets of the business and be solution-focused.
Thus, Finance needs to stop focusing on historical backward looking data (descriptive analytics), and leverage predictive and prescriptive analytics for better decision-making. Are you looking to the future through the use of leading key performance indicators? You need to be a good story-teller and help executives understand the drivers of the numbers and map the future and its outcomes. Are you helping your CEO look at the future differently? Reporting on the past alone is not enough.
Finance Transformation is a Journey, Celebrate Small Wins
Transforming the finance organization into a successful strategic advisor is a journey and not a once-off initiative. There will always be room for improvement. It is therefore imperative that CFOs take a strategic approach to adding value. Instead of tackling all partnering opportunities at once, they need to collaborate with the business and identify requirements, challenges, priority areas and activities. By focusing on these priority activities, Finance will be able to focus attention on what is critical, allocate resources accordingly, deliver real value and prove the function’s add-on value to the business.
As a Finance leader, care must be taken that you are engaging your team in many activities at once as this will probably cause your team to lose focus and produce sub-optimal results, which in turn will relegate Finance back to the back office. Small business partnering wins will result in further partnering opportunities in the future.
Get the Basics Right the First Time
If the numbers are not right the first time, then it becomes difficult for the CFO to build credibility and become a strategic partner. Although there is increased demand on the CFOs to be more strategic in their approach, stewardship and operator roles still remain critical and must never be regarded as non-critical. These roles still play a critical role in delivering the broader Finance strategy of the business.
I welcome your thoughts and comments
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.
The traditional role of the finance function is that of ensuring accurate processing, accounting and reporting of financial transactions. However, in today’s volatile, uncertain, complex and ambiguous economic environment, reporting on the past is no longer enough. New advanced technologies are disrupting business models at the speed of lightning. For example, digital innovations such as artificial intelligence, machine learning, collaborative technologies and advanced analytics are already transforming the traditional role of the finance professional. Routine accounting operations and transaction processes are getting automated freeing up time for finance professionals to focus more on value-adding activities.
In this second machine age, finance professionals have to adapt and embrace the opportunities brought by this new wave of technologies. Digital technologies have the potential of transforming the finance organization into an analytics powerhouse capable of deriving strategic insights from large data sets and improve decision-making processes. Gone are the days of producing reports that are backward-looking and performance variance reports that are lacking actionable insights and recommendations. In order to drive business performance and help inform decision-making, the finance function has to improve and increase its influence across the business. One way of doing this is initiating conversations with others in the business, ask the right questions, identify root causes of existing problems and provide solutions in a collaborative way.
In many organizations, the majority of senior finance professionals have an accounting background and because of the article-ship training they went through, most of them are inclined to a rules-based thinking. Everything has to add up and the level of risk taking is significantly low. Unfortunately, this mind-set is a hindrance to breakthrough performance. In addition to their technical skills, today’s finance professionals must also develop a strategic mind-set. Successfully playing the business partnering role requires the finance professional to support the broader business strategy as opposed to focusing on narrow accounting objectives alone. in other words, finance has to drive business outcomes rather than simply report them.
To transition from history keepers to future story tellers, it is imperative that finance professionals have a clearer understanding of all the numbers they are reporting on. The value of analysis provided by finance is only as good as the business’ ability to interpret and act on it. If decision makers and other stakeholders lack trust and have no or minimal confidence relying on information supplied by finance to support decision-making, it means finance is failing to play its role. Finance needs to get deep into the numbers to really understand the various performance drivers of the business and ensure it manages the right things and sets the right goals.
Big Data and analytics are playing a critical role in helping organizations make sound decisions, improve performance and gain a competitive advantage. However, some organizations have been delusional to think that by collecting and storing huge data sets, they have found a killer recipe for success. Unfortunately, this is just wishful thinking. There is value in data when the right type and amount of data is collected, correctly stored, properly analyzed and insights gathered to inform strategic decision-making. By acquiring new analytical skills, finance professionals will be able to mine and analyze large data sets, bring out a story out of this analysis, provide an explanation of what has happened, what is driving the numbers, and how they affect the future.
If finance is to succeed in this storytelling role, the function has to definitely move from away from the practice of providing one view of the future. It is embarrassing, to say the least, that in today’s ambiguous and continually changing environment, some organizations are still relying on the annual budgeting process to manage and monitor performance. The annual budget is static and cannot be relied upon. Using rolling forecasts and scenario planning can help the finance function overcome this problem. Finance ought to gain complete visibility into the performance of the business, be a problem solver and provide solutions to these questions:
- What happened?
- Why did it happen?
- What is going to happen?
- What should we do about it?
In other words, finance must be able to anticipate alternative performance scenarios by performing what-if-analysis, identify the triggers of each scenario, evaluate the business impact of each scenario and execute a contingency plan. Performing this exercise will help identify new business opportunities and the ways the business can profit from them, as well as weigh the potential risks and their financial, operational and strategic implications.
There is nothing wrong in looking at history, since history also provides a platform for learning and a baseline for planning. Although it is difficult to predict the future with certainty, decision makers cannot afford to run the business by ignoring future risks. Naturally, most finance professionals are risk averse and have a low appetite for risk. The problem with looking at only the downside of risk is that the business is bound to miss on strategic investment opportunities.
Finance professionals need to increase their appetite for risk, at the same time ensure this is not detrimental to the successful running of the business. Instead of saying no most of the time, finance professionals have to embrace strategic risk taking and evaluate what opportunities are bound to be missed if the organization fails to align its risk and business strategies.
Having finance professionals who are storytellers requires a different talent acquisition and retention strategy. As most routine accounting operations continue to get automated, the organization needs to map out its current skills, document future finance skills need and identify the gap, design an effective talent strategy and execute on the plan. Also, the organization must strive to build a team around people with diverse backgrounds. For example, including people with social and behavioural skills can help the organization model changes in customer and competitor behaviour and describe the financial implications.
Is your finance organization doing enough to help you navigate through this VUCA environment?
There has never been an interesting time to be in finance than now. The role of finance has significantly transformed over the past years from being a back office function responsible for reporting past performance to more of a front office strategic role responsible for delivering strategic insights that enable effective decision making.
Although some high performing organizations have managed to transform their finance teams into value-adding strategic partners, the story is different in many organizations. In these entities, finance is still regarded a back office function responsible only for preparing reports and reporting on past performance. In order to successfully transform their finance teams into strategic business partners; finance needs to build new capabilities, get involved in the operational side of the business and take the lead in corporate strategy and business stewardship.
Although cost management and financial performance still remain crucial , in today’s increasingly uncertain and competitive business environment, the finance organization is required to take a more strategic role, provide solutions to the numerous challenges facing the business, manage risks effectively and efficiently, create sustainable value and steer the business in the right direction.
In his book Good to Great, Jim Collins talks about first getting the right people on the bus and the wrong people off the bus. Great vision without great people is irrelevant. It is therefore critical for CFOs to attract, retain and develop talent capable of building an effectively and efficiently well run and valued finance function. It is all about having a balanced skill set within the finance function. For example, some people are good at cost control while others are good at treasury management, management reporting and analytics, strategic planning and forecasting, performance measurement and management etc. The CFO ought to have the ability to match the right individual with the right job and resources.
To be an effective catalyst for change within the organization and transition to a value-adding business partnering role, the finance function of today must move and act beyond financials, in other words, resist focusing on numbers alone to drive business performance. This in itself does not mean that the function must lose its corporate stewardship role. Producing business financials with the highest possible level of integrity still remains a critical role of the function. Perhaps it would be ideal for the CFO to hire a strong financial controller so that he or she is freed to focus more on strategic issues. In order to be able to provide strategic advice that helps steer the organization through times of uncertainty and complexity, finance needs to obtain deeper insights of the industry in which the business operates, assess and redesign the operating model and respond with agility and innovation.
Today’s business environment is increasingly characterized by ongoing disruption which requires management and their organizations to respond quickly with smart effective strategies. Failure to do so is a sure recipe for disaster. Take for instance digitization. Digital transformation is arguably one of the most disruptive forces organizations are facing today. Digital has revolutionized entire business models and sectors and at the same time transformed a number of businesses from market leaders to nobodies in a very short space of time.
To survive and flourish in these extraordinary times ( achieve top-line growth and business model innovation), it is imperative that CFOs and their teams are constantly challenging the status quo. It is so sad that in many organizations people have gotten used to working and producing results the same way over and over again. Continuous improvement is very unheard of and it is a taboo to suggest new ways of delivering performance. This culture must be changed and create one that is always looking for better ways to achieve excellence.
Digital transformation is a great enabler of strategy execution and business performance improvement. It is high time that CFOs leverage new digital technologies within the finance function instead of operating on yesterday’s business models and outdated technologies. As a CFO or finance professional you need to understand how digital ( Cloud Computing, Analytics, In-memory Computing, IoT etc) can help you exploit growth opportunities and create new sources of value. Is your organization’s business strategy fit for the digital world? Playing catch-up in a competitive environment is by no means a successful strategy. Digital has rewritten the rules of competition and blurred traditional sector boundaries. Because of technological disruption, barriers to entry have significantly been removed in almost every sector. This has significantly intensified the level of competition.
To avoid lagging behind competitors, finance plays a critical role in helping the organization adapt to digital within the core economic business model. Leveraging its analytical capabilities; finance can help evaluate a range of new risks and opportunities for the organization, measure and balance the risk and return of any changes to help inform the right approach and develop proactive strategic responses that enable the management team to make better and faster decisions that improve business performance, manage risks and protect the company’s reputation and brand. By ensuring effective risk management and embedding enterprise risk management in strategic planning and performance reporting, new opportunities and threats can quickly be identified. This will in turn challenge senior management to ask the right strategic questions and rethink the business operating model as a whole.
As the role of the finance function continues to transform into more of a strategic one, in addition to developing and executing strategy, there is also need on the part of CFOs to have the ability to measure performance against strategy. Effective performance measurement and management looks beyond financial. As well as traditional financial measures , the organization must measure and manage non-financial metrics that matter. Thus scorecards need to include metrics relating to performance against the purpose of the organization.
The starting point in getting this right is for CFOs to consider the needs of the difference audiences. Many at times the focus of performance measurement is on growing shareholder value at the expense of various stakeholder experiences. For example, by listening to the voices of its customers, measuring customer experience and assessing that experience, the organization will be able to identify areas of improvement, build trust and loyalty, reduce churn, increase sales and improve bottom-line value. How much time are you currently spending on broader strategic issues that relate to the organization’s overall performance than on financial management?
Measuring performance against strategy also requires CFOs and their teams to balance hindsight with foresight. It is good to know where you are coming from but great to know where you are going. In many organizations, the majority of performance measurement programs are backward looking. Management are spending a greater part of their time and resources on the past. There is little focus on the future. In today’s world of analytics, the finance function need to have the ability to mine performance data for forward-looking information and interpret the data so that executives do not miss strategic opportunities. The FP&A team must be able to generate real-time insights on what the business should do and not do in order to manage performance in the future. This kind of analysis also requires finance to keep pace with big data technology capabilities.
The modern finance professional is also required to help the business grow and create sustainable value. Exploiting growth opportunities can be achieved organically or through M&A activities. The former involves expanding the business through increased output, increased customer base or new product development. The later involves acquiring new businesses by way of mergers, acquisitions and take-overs to increase business growth and sales. Because of the disruptive impact of new digital technologies, many companies are now making use of M&A to create new business models and a technology-driven competitive advantage.
Thus in analyzing potential M&A targets, the CFO must have the ability to analyze exactly areas of value creation within the transaction as well as how the transactions align with the other growth drivers of the business. Today’s finance function must possess the right skills, knowledge and capabilities to develop and execute the organization’s M&A strategy.
As the role of the finance function continues to evolve, in order to create value in today’s VUCA economic environment, organizational CFOs need to balance control with growth opportunities and focus on business model transformation rather than only on cost management. Ask the right strategic questions and always review the business operating model. This will help you identify any areas of the operating model that are not aligned with the corporate strategy, identify the implications of change in one aspect of the operating model on another, redesign the business model and execute strategy successfully.
Employees play an important role in helping the organization achieve its mission, vision and objectives. Today, many businesses are relying on their employees to drive business performance and remain competitive. This is contrary to decades ago where fixed assets where regarded as the main drivers of superior performance and returns.
As the value and contribution of intangibles continue to increase, it is critical for managers to have the ability to assess the real impact of employees on financial business performance. Measuring, managing and monitoring the following five KPIs help managers just to do that.
- Human Value Capital Added (HVCA): In addition to being the most vital assets of the business and enablers of future success, employees are also one of the largest expense or rather investment. Measuring HVCA helps managers determine how much value is being added by employees to the bottom line. By subtracting all the non-employee related costs from the revenue generated and dividing the result by the number of full time employees, you will be able to establish each employee’s profitability. The higher the profitability figure per employee, the better.
- Employee Satisfaction Index: This measure helps to express to what extent employees are happy and fulfilling their desires and needs at work. There is a financial causal linkage between employee satisfaction and customer satisfaction. If employees are happy, they are more likely to deliver better customer service which in turn improves customer loyalty and financial performance. To what extent are your employees satisfied with the organization’s leadership and direction, communications, staff development, company working culture, facilities and environment and conditions of service?
- Employment Engagement Level: This measure goes a step further than the satisfaction index and tells a bigger story about the employee. An employee might be satisfied because he or she has an easy job, is not stretched or receives an excellent package. Just because an employee is satisfied does not necessarily mean that he or she is committed to delivering to the vision and mission of the organization. The opposite also holds true. Some dissatisfied employees are the most performance-oriented and do everything within their power to deliver to the organizational vision and mission. Measuring employee engagement helps an organization to understand what drives performance and measures commitment, loyalty, trust and those behavioural traits which inspire employees to perform to their ultimate capacity. This ultimately enables it to generate more marketplace power and higher shareholder returns than its competitors.
- Employee Churn Rate: How well you attracting, recruiting, training and retaining talented staff? Replacing employees is a very expensive exercise. Talented employees move around with their knowledge and supposedly a key employee leaves the organization, replacing him or her with a similar individual might take time, if at all. Thus once you have recruited and trained employees, you need to focus on keeping them as opposed to showing them the door quickly. Monitoring employee churn rate helps managers to gain insights about the number of employees leaving the company in a given time period compared to the overall number of employees. When calculating the employee churn rate, it is important to take into consideration wider economic, competitive and other influences that might influence the final figure and explain any major deviations from prior periods.
- Salary Competitiveness Ratio (SCR): In today’s competitive markets, in order to attract and retain talented employees, offering an attractive salary package is important. Although pay is not the only element that matters, understanding the level of salaries your company pays compared to the salaries competitors pay to their employees for similar job grades in the same area or market will help you discover the attractiveness of your company as a potential employer or the risk of key talent switching over to your competitors. To calculate your company’s competitor and industry SCR for a particular job group, divide the salary (base + commission + bonus) offered by your company by the salary offered by your competitor or the average salary offered in the industry or sector. A ratio of 1 or 1:1 is a good benchmark. If your company is already attractive, a ratio of 0.9 or 1 is a possible benchmark. The aim of SCR is to ensure that your company offers salaries that are fair and competitive without unnecessarily overpaying.
What other employee measures can you add to the list?
I welcome your thoughts and comments.
In the previous post I touched on the benefits of understanding your organization’s critical success factors. In this post i will look at the key tasks involved in identifying organization wide CSFs. In order to establish the CSFs, management need to first identify and list all the success factors. Normally, this initial process of investigating the business success factors often results in a long list of issues deemed critical for the continued success of the organization. However, analysis of better performing organizations has revealed that these organizations have between five and ten CSFs that they focus more on.
After identifying all the organizational success factors, it is important to trim down the list as this is key to successful enterprise performance management and the alignment of daily operational activities to the business strategy. Since the relationship between CSFs and KPIs is vital, if you get the CSFs right, it becomes easy to identify and establish organization wide KPIs that are linked to the business strategy.
There is a difference between success factors and CSFs. Critical success factors have the following characteristics:
- They are worded in a way that is easy for employees to comprehend and deduce what is expected of them.
- They apply to more than one balanced scorecard perspective and impact nearly all the BSC perspectives of the business.
- They have a great influence on other success factors.
- They are focused on a specific area of the business as opposed to being broad statements that lack any form of clarity.
When identifying the organization’s CSFs the following is key to success:
- Determine the existing identified success factors. This can be done through reviewing and analyzing all the strategic documents in the organization as well as interviewing all the knowledgeable employees across the business and all the senior management team. You can also utilize the services of outside consultants who possess valuable knowledge about your organization’s industry, sector, products or services to come up with a list success factors. Success factors and CSFs must link back to the organization’s strategic issues and initiatives.
- Conduct a CSFs workshop. This workshop plays a critical role of developing the organization’s CSFs and establishing the way to use them in order to successfully execute the overall strategy of the business. All the knowledgeable employees from the different functions of the organization, senior management team, KPI project team and the external facilitator (if one is appointed) should attend this workshop. The benefits of conducting such a workshop is that it helps the organization to revisit its success factors, map the cause-and-effect relationship between the various success factors, identify the critical few success factors that link back to strategy, brainstorm the relevant performance measures on the CSFs and determine how these performance measures will be reported.
- Consult with all the organizational stakeholders before finalization. The CSFs workshop is a platform to identify the organization’s CSFs and prepare drafts for wider review by the other stakeholders who did not attend. These stakeholders include senior management team members, board of directors, key customers, key suppliers, employee focus groups, employee union representatives etc. A wider consultation on the organization’s CSFs helps stimulate discussion and facilitate agreement. Without entity wide buy-in, successful strategy execution is compromised because various stakeholders will focus only on certain areas of the business they think are critical for the continued success of the organization and exploit others. This lack of agreement on the organization’s CSFs often leads to resource wastage, duplication of effort and sub-optimal performance.
- Communicate the CSFs to all employees. Once the final CSFs have been agreed on, they must be communicated to all management teams and their subordinates. If staff members know what is important, they can align their daily activities and maximise their contribution towards successful strategy execution.
I welcome your thoughts and comments.
In today’s competitive environment knowing and understanding your organization’s CSFs is key to survival and success. Critical success factors (CSFs) and their performance measures play an important role of linking daily operational activities to the organization’s strategies. Without thorough and complete knowledge of its CSFs, the organization’s performance management system will not produce the expected results.
Although most organizations are aware of their success factors, few of them have identified and defined their critical success factors appropriately; separated success factors from their strategic objectives and communicated the CSFs to all employees. Identifying and understanding CSFs will help the organization to focus and allocate resources on those activities that create and add long lasting value.
On the contrary, a lack of comprehending the CSFs will result in performance measurement, monitoring and reporting becoming just another random process that produces a long list of measures and reports not aligned to the overall business strategy.
When selecting the critical success factors of the business, it is important to have senior management commitment to ensure the effectiveness and usefulness of the chosen CSFs. In other words, active leadership by senior management is not an option but mandatory.
Knowing, communicating and evaluating the progress of the organization’s CSFs has the following advantages:
- It helps the organization to discover the most important KPIs that are aligned to the organization’s strategies.
- It helps eliminate performance measures that are unrelated to the organization’s CSFs or those measures that do not positively impact the CSFs.
- CSFs help senior management and their employees to prioritize their actions and resource allocations which in turn help align performance management and strategy.
- By focusing on the critical success factors, performance measurement; monitoring and reporting will become more focused on what matters most. This therefore means senior management will not be bombarded with numerous or irrelevant reports.
- It encourages clearer summary reports to the board and those charged with governance based on progress in the CSFs.
Although the selection of the CSFs is very subjective exercise, the effectiveness and usefulness of the chosen CSFs are highly dependent on the analytical skill of the team involved. It is important to ensure that the wording of the CSFs is clear and easily understandable to all employees. Avoid using broad statements whose meaning is not clear to employees.
Watch out for my next post on identifying organization-wide critical success factors.
I welcome your thoughts and comments.