World-Class Finance

Finance directors are facing their greatest challenge yet – balancing cost and quality in an increasingly competitive market. StatoilHydro's Hans Jakob Hegge and The Hackett Group's Tom Olavi Bangemann explain how to run a world-class finance function.

World-class performance in F&A is defined as a well-balanced solution where companies ‘do the right things, and do them right’. Less than ten percent of companies achieve this ‘CFO’s paradise’, as it requires performing extremely well in many processes at the same time. The only way to meet this target is to pursue it persistently and utilise the best practices available.

StatoilHydro aims to reach world-class standards of F&A service delivery by 2010. Its recent merger with Norsk Hydro has cemented its position as a Fortune 50 company and one of the largest oil and gas producers in the world. Its business support unit, Global Business Services (GBS), includes IT, finance, facilities, HR, communication and procurement. While it ranked in the first-quartile against either efficiency or effectiveness dimensions for each function based on a 2004 Hackett benchmark, it now has less than three years to reach its goal of world-class in all functions by 2010.

WORLD-CLASS F&A

Today, no finance executive can achieve world-class performance without the very best support and reliable metrics, as new regulatory requirements, stakeholder expectations, performance targets and information threaten to overwhelm them.

The finance function is a frontrunner example for metrical steering and long-term optimisation, focusing on efficiency and effectiveness. For Hackett, a world-class company performs among the best 25% (first quartile) companies in effectiveness and efficiency. Based on Hackett’s world-class profile, the best companies have a finance function that is:

• Measurable: the finance function costs about 1% of revenue

• Effective and efficient: they never measure cost vs quality

• Based on shared service: all finance functions of the future will be based on the shared service delivery model

• Includes decision support: 38% of companies in Europe use decision support (controlling) activities in their shared service organisation

• Improving operating results: excellent decision support activities (and excellent controllers) can help multiply operating results up to 2.5 times

For a world-class finance function, the objective is to achieve a balanced solution with a good value proposition for a competitive price and in excellent time.

Best practices are the strongest driver to achieve world-class performance. They are the tangible explanation for the gap between current and target positions. The target must be defined by the company itself, and the goal as well as the timeline to get there depend on the individual ambition levels and the framework (demand drivers) in which a company operates.

Market leaders should aim for world-class performance, because they risk losing position if finance is allowed to hover at third-quartile levels. Leading organisations adopt world-class targets as self-explanatory ambition levels. It is the metrical description of the comprehensive stakeholder expectations.

THE BEST PRACTICES

The two best practices with the highest effect on the performance of the finance function are a standard technology platform and a shared services delivery model.

An organisation that adopts both can reach the second quartile, even with limited best practices in other areas. Yet, by focusing on every other best practice with the exclusion of these two, good performance is impossible.

In general, the finance director or CFO has three generic targets:

1. Top line: how can I improve the top line?

2. Bottom line: how can I improve the improve bottom line?

3. Compliance: how can I stay out of jail?

To achieve these targets, the finance function must improve productivity and wage arbitrage. In Europe, most companies focus on increasing productivity to compensate for higher salaries. This can only be achieved by increasing automation, which is why most process-based best practices include some sort of automation. At the same time, in terms of exploring sourcing and geographical options, companies are getting more adventurous. Most companies now use shared services, and more will do so in the future.

To reach world-class, a company needs to stop running one cost cutting exercise after another. The truly successful approach is to optimise the areas that have potential and really reengineer them.

The future finance function will be a combination of existing units combined with several centres that take over specific parts of the value chain. Centres of expertise will increase rapidly to pool decision-support activities based on a think-tank approach.

STATOILHYDRO: PREPARING ITS WORLD-CLASS FUTURE

Things are looking good for energy giant StatoilHydro. It is pumping 1.2 million barrels a day of oil and gas, prices are at record highs and it recently acquired several companies.

But while StatoilHydro is reporting peak revenues, a growing project portfolio and expanding roster of employees, it is more inspired than ever to keep the changes coming, specifically in GBS, which is the basis of its improvement initiatives.

StatoilHydro knows that the service industry is developing rapidly and that globalisation is leading to increased competition. With a mandate from CEO Helge Lund, the company established a multifunctional global shared services organisation in 2006 with the ambition to be world-class by 2010. GBS has established itself as a cost centre with service level agreements for all customers, clear metrical targets and value-adding services. The unit processes 220,000 invoices and 680,000 payment transactions for the finance function.

A 2004 Hackett Global SG&A benchmark ranks StatoilHydro in the first-quartiles for either efficiency or effectiveness in finance. Hans Jakob Hegge, senior vice president and head of GBS at StatoilHydro, says: "StatoilHydro has a strong position when it comes to business support but it wants to be in that upper corner or world-class overall for all functions."

To instil a culture of continuous improvement, GBS has created the four Cs of improvement with metrical targets:

Compliance: StatoilHydro understands that standardised processes are much easier to control. Through simplification and standardisation of the work process, GBS will achieve improved service quality as well as improve compliance and control.

According to Hegge: "Our Sarbanes-Oxley failure rate should be zero and we should have no significant deficiencies. Our system availability should be 99.5%. Incident resolution time should be above 90% within four days. We should deliver more than nine out of ten projects within time, cost and business specifications."

Competence: StatoilHydro aims to have highly competent and motivated employees who perform and develop. The company is establishing a GBS business school to strengthen competence and increase the expertise of its employees so they can better serve the merged StatoilHydroHydro businesses in 40 countries. Hegge says: "We want to attain a competence utilisation index of 4.5 on a scale of one to six."

Cost: GBS sources selectively and strategically to ensure cost-effective and competitive unit costs on all services. The unit also ranks application consolidation and the ability to supply leading-edge technology as high as automation and self-service. But Hegge believe that the most important thing is to maintain a competitive position over time and build an organisation with a culture based on continuous improvement.

He says: "We will deliver $40m by the end of 2008. We have already reached $35m, and we have targeted unit cost improvements of 5–7% per year."

Common values: GBS will contribute to uniting StatoilHydro and Norsk Hydro to create StatoilHydroHydro through common work processes and systems and a value-driven leadership that sets a framework for behaviour. As Hegge explains: "We value delivery and behaviour equally: on both employee satisfaction and performance culture indices we want to score at least 4.5 on a scale of one to six. We are measuring that through an annual company-wide global people survey."

At the same time, StatoilHydro is ensuring that it keeps up with current technology. The 2004 Hackett benchmark indicates that StatoilHydro has a strong position in this regard. Hegge attributes this in part to the existence of a self-service portal in all services in the StatoilHydro group.

The centre has an ITIL-based common service management process across all functional service areas, making the group that much stronger in technology. Last year, StatoilHydro won IQPC’s prize for the most advanced shared service organisation within automation and self service, and is recognised as a technology front-runner.

Meanwhile, StatoilHydro is also keeping a close eye on employee performance. Last year, GBS implemented a SAP-based system that enables StatoilHydro to link corporate goals with individual employee goals, improve competence and career development plans, strengthen performance appraisals and increase employment satisfaction.

Hegge says: "Monitoring performance and strong support by senior management is stimulating, raising the morale and motivation of our teams. All leaders give feedback and show when they are satisfied."

To symbolise improvements, GBS introduced the ‘tower of savings’, a handmade gauge where savings are indicated and where a bell is rung each time the team realises a benefit.

The world’s best finance functions benchmark themselves against both internal and external peers, and constantly aim to outperform their competitors. At StatoilHydro, GBS is working to survive in a dynamic environment and to remain at the forefront of its industry. For any leading company, this is the only way to maintain a world-class position.