Optimising financial processes

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What is "World Class" Finance?

“The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails.” a quote that probably describes best organisations’ efforts to achieve world class finance.”

Driving business performance is the top agenda item for all areas of the business. It is never simple as the twin goals of efficiency and effectiveness require a delicate balance. Efficiency without effectiveness results in a process which is doing the wrong things at high speed and high productivity!

The finance function is in the process of throwing off the shackles of the ‘bean-counter’ or ‘scorekeeper’ reputation and the best-in-class or world-class (choose your label) finance organisations are all focussed on driving business results rather than just reporting business results (to paraphrase Roy Templin, former CFO of Whirlpool Corporation). The finance function is typically distributed across a large multi-national organisation, with HQ finance and business unit and regional country finance units also. Some management accounting activities are even federated into operational units such as sales, manufacturing and procurement. There is plenty of scope for duplication, complication and obfuscation. These three devils are the enemy of both efficiency and effectiveness.
World Class Finance is generally benchmarked as a best practice state of upper quartile performance against a peer group. It has been claimed that the world-class finance function is one where the cost of finance is close to 0.5% of revenue. This would equate to approximately 50 finance staff for every $1bn of revenue. Surveys report that the leading finance functions have reduced their cost of finance by 40% since 1998 against the general peer group achievement of 19%. Translating these efficiency gains, a Fortune 500 company of $30bn revenue could add $150m to the bottom line. So there is clearly a prize. Of course, such blunt performance targets may be misleading as this may unsettle the efficiency/effectiveness balance. Cost, however, remains one of the key measures.

A more complete view of performance may come from considering the finance function’s impact on four perspectives;

Business Results
Cost of Finance
Optimised Cash Flow
Effective Risk Management

Since finance is not a direct, customer facing organisation, the concept of business-partnering for the greater good (i.e. the organisation’s overall success) is key. Finance must act as a proactive business partner for the operations and leaders of the business, become service oriented in its behaviour and focus on providing value-added, cost effective services to the business, with a culture of continuous improvement and operational excellence. Finance must provide the core capabilities and insights to enable the business as a whole to operate at its optimal performance level, whilst continually challenging its own cost base.

Finance functions seek to achieve World Class Finance by striving for excellence across four interdependent dimensions of support to the business;

      Efficiency – continuous improvement of speed, quality and cost of processes
– Effectiveness – ensuring the co-ordination of core activities, optimising decision making, financial stewardship and risk management
 Relevance – providing the insights and analytical support that operational business leaders need to optimise their performance
– Influence – proactive, strategic business partnering for collaborative outcomes that drive better business performance

But how do we achieve these improvements practically? Through another lens, management need to address these key targets for optimisation;

 Process & performance management – including global process management, standardisation, simplification, measurement of leading and lagging indicators and continuous improvement
– Organisation – including shared services, centres of excellence, selective outsourcing, eliminating redundancy
 People – including clearly defined roles & responsibilities, career path, skills alignment, continuous improvement culture, consultative skills
– Technology – including process based systems, end to end process integration, web and mobile enablement, embedded controls, effective monitoring and data analytics
We can measure ourselves against global and local benchmarks in these areas. But what then? There are best practices that have been learned and developed. We know that we must measure our current performance, establish what is best practice or ‘world-class’, as well as identify what is possible with our current organisational capabilities and develop the roadmap to join these dots.

We also need a continuous improvement approach to ensure this is not a big-bang transformation, but an as-is business process in itself. Much of the work in optimising the finance function over the past 10 years has been focussed on massive transformational change. These programmes can take so long that the benefits become hard to quantify as the goalposts change over time. The costs, of course, are easier to trace and they are rarely in the zone of the original plan. We know from other areas of business that ‘big bang’ change can be a risky, costly road.

We have learned that performance indicators alone are not enough to drive continuous improvement. In the worst examples, key performance indicators (KPIs) are ‘gamed’ to produce an apparently desirable (and rewarded) result. At best, KPIs focus on outcomes and not on the leading process indicators that illuminate improvement opportunities.

The presentation by David Mitchell of The Hackett Group and myself attempts to shed some light on these issues and shares some examples. You can see it here . . .

This set of principles is fundamentally no different than those we have applied to front office functions that drive the revenue cycle, or manufacturing functions that deliver product. The shift of mind-set in the area of finance, however, is a more recent breakthrough. Leading organisations need a healthy, vigorous ‘spine’ of finance. Big challenges exist, but finance and shared services leaders are driving performance to the next level.

Is this new level ‘world-class’? Perhaps the term is less important than our focus and attention to become ‘the best that we can be’ as a function.

Thanks for reading . . .