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31 Dec 08

If you can’t stand the heat, a first step might be to find out where it’s coming from. Trevor Hatton and Andrew Weir are surprised by finance executives’ lack of understanding and control of their organisations

by Andrew Weir and Trevor Hatton

The priority has been to put out the fire. It may not yet be the time for lecturing about the dangers of smoking in bed. Nevertheless,in the current global economic crisis, understanding our faults is as important as understanding our strengths.

Globalisation has introduced multiple centres of economic power and activity which have challenged business as never before to drive high performance. Indeed, the speed with which world markets can change, the volatility imposed by a myriad of currencies and the sheer complexity of operating in countries at varying stages of development have presented extraordinary demands.

But some organisations will manage to rise above the pressures of this multipolar world. They are led by what we now call the “finance masters”: those who are adopting structures and strategies to provide financial leadership.

The challenge confronting finance executives today is enormous. They must therefore take the leadership role to optimise processes and achieve the highest possible levels of success for their businesses in order to remain competitive and to maximise shareholder value.

Their performance and capabilities depend on robust organisation and a flow of information designed to control and contain costs. These are the characteristics that distinguish finance masters and will enable them to produce enviable results.

 

It is against this backdrop that our company, Accenture, conducted its third High-Performance Finance Study since 2004. Our aim was to explore the most pressing challenges facing 350 finance executives in 30 countries across more than 20 industry sectors. To augment our findings, we also conducted in-depth interviews to discover how these executives were dealing with the challenges facing their organisations. The study’s conclusions highlight the areas where businesses are falling down.

Few executives believe their finance organisation performs at the highest level

Many confirmed they lack processes, information, tools, structures, governance and skilled workforces. Yet these are what they need to capitalise on the new markets and the opportunities that the global economy offers. Perhaps more troubling, we found that in many instances executives know they need to improve their finance organisation, but are not sure where to begin.

A majority of those surveyed said that they did not understand their underlying cost structure and therefore could not determine their annual costs and related cost drivers. This lack of insight and information, accompanied by an inability to measure performance, makes it very difficult, if not impossible, to identify where and how improvements can be made and what level of investment is required.

These difficulties are exacerbated by a scarcity of benchmarking initiatives conducted by finance organisations, a shortcoming that was prevalent among the survey participants. Without proper benchmarking, CFOs may be driving their businesses, but they are doing so without a road map.

In fact, our research found that in many organisations, there is a lack of alignment between what finance executives say is most important to them and the initiatives they were undertaking in the next two years. This suggests that companies have not developed a strong enough finance strategy to ensure that they are building the finance capabilities that are truly important to the business.

Indeed, our survey found that only about half of participating companies have in the past two years implemented a financial strategy that addresses organisation, processes and technology that is aligned to their enterprise’s strategies.

A large proportion of our survey focused on the key areas that are critical to every finance department’s ability to support today’s modern, global aspirations. These are enterprise performance management (EPM), enterprise risks management (ERM) and the quality of the finance workforce. Accenture discovered that a large percentage of businesses admitted falling short of high performance in developing these capabilities.

Only 20 per cent of companies surveyed described their EPM abilities as “advanced”

This makes it difficult for executives to identify the key metrics that will enable them to evaluate and tune overall enterprise performance. There is further evidence that companies are lagging behind, although they face an increasingly pervasive risk as they expand their operations across the world.

Only 8 per cent of companies surveyed said they had a centralised fully integrated risk management capability to support that expansion, while 17 per cent indicated that they were close to approaching such a capability

There were more disappointing results when we asked companies about the need to attract and retain talent.

While they agreed that this was one of their most critical challenges over the next two years, most companies lag in implementing strategies to build and keep an effective finance workforce. Companies were especially trailing in encouraging communication between supervisors and staff.

In particular, there is an inability to document business processes in a way that employees fully understand. There is not enough investment in training and mentoring and few processes to encourage staff to share innovative ideas that will preserve institutional knowledge.

The Accenture survey was not all bad news. We also found evidence of advanced practices in a number of businesses which participated in our research. Some have excelled in adopting enterprise resource planning (ERP). This consolidates operations, reduces complexity and produces a streamlined and co-ordinated flow of financial information which makes it easier to drive enterprise value.

Some have introduced workforce programmes that help the company address the challenge of managing talent across developed and emerging economies. A global healthcare company we interviewed has developed robust systems to ensure that senior executives are comfortable that the right governance, marketing, compliance and reporting practices are in place.

But it is mature financial capabilities that generate results and this is where our survey explored those finance masters. The most intriguing characteristic that distinguishes masters from the others is that they recognise that they do not need to excel at everything and, in fact, they do not.

To achieve the biggest return on sometimes scarce resources and to drive the greatest value to the overall business, finance masters simply focus on the areas that count. They are highly adept at identifying those critical structures and processes to support the business in its pursuit of high performance. They pinpoint where they fall short of what is required and aggressively apply resources to fill the gaps.

Finance executives around the world continue to grapple with how they can effectively support their businesses. They must do so while maintaining control of costs and dealing with increased speed, complexity, competition and risk. Our research concludes that they must adhere to three important concepts:

• Strategy matters a lot. Without it, there is no way to know which finance capabilities are most relevant and which consume scarce resources unnecessarily.

• Superior finance practices can change the game. Finance organisations that can keep pace with the speed of change and deal with complex issues effectively can drive substantial bottom-line results.

• The status quo will not work. The role of the CFO today is broader and more complex than ever. This requires finance executives to develop new approaches to manage their organisation and interact with the business at large or risk being left behind.

Finance executives who are prepared to learn from the finance masters can adopt these concepts and align their initiatives with their priorities to lead their organisations to driving high performance. n

TREVOR HATTON is managing director for Accenture Scotland, and ANDREW WEIR is a senior manager with its financial services practice.

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