What is The Role of Finance? And What Exactly is Decision Support?2 June 2008 Phil Searle
Phil Searle, founder and MD of Chazey Partners Ltd, examines the role of the finance function and decision support.
The overall goal of any finance function striving to be the best should be to achieve the triple benefit of:
- World class support services to the business
- At lowest possible cost
- Underpinned by an effective control environment
The worst performing finance organisations often believe that to achieve one of these three there has to be an almost equal offset against another. In fact, this is not the case as these are not mutually exclusive for the best finance teams. Indeed, all three can be achieved at the same time.
Broadly speaking, the best finance organisations provide three main ‘groups’ of services:
- Corporate services
- Financial shared services
- Finance business services
This article touches on the first two of these but then focuses on finance business services, as this is where the role of the finance function has often been misunderstood and sub-optimised.
These are services and/or functions which directly relate to corporate governance, contact and communication with external investors and key stakeholders, overall company policy and strategy, and company culture.
Examples here include:
- Internal controls
- External/SEC reporting
- Investor relations
- GAAP accounting/financial guidelines
- Sarbanes-Oxley compliance
- Policies and procedures
FINANCIAL SHARED SERVICES
Every finance team in every company has to provide transactional, administrative and compliance (legal, statutory, tax) support services to the business. Without these no company is able to operate. However, the world’s best finance organisations, and indeed very many others on the improvement trail, have looked to shared services and business process outsourcing to improve the effectiveness and efficiency of the provision of these transactional, administrative and compliance services to the business.
FINANCE BUSINESS SERVICES
This covers both decision support and financial planning and reporting (FP&R) services that directly support and influence the company’s core competencies (sales, marketing, business and product development). Business services will often sit alongside the business, although they should be pooled where possible to leverage economies of scale and eliminate duplication of roles and effort, especially in FP&R.
These services are critical to supporting the core business. In most companies, this means supporting the sales, product and services marketing, research and development and business development teams, as these core functions are what ultimately differentiate a business from other industries and from competitors.
The December 2006 Finance and Accounting (F&A) Transformation Survey, conducted in association with HP, supports the views that there is a growing emphasis in F&A to focus on the strategic value from finance, alongside the efficient provision of back office services.
As part of the survey respondents were asked to list a range of key drivers for embarking on finance transformation. Whilst the most cited key driver for F&A transformation in both years was cost reduction, the percentage of respondents highlighting this reason dropped very significantly from 73.6% in 2005 to 54.2% in 2006.
The greater emphasis on the requirement for finance to add more value is also illustrated by the increase in the number of respondents in 2006 over 2005 pointing to the desire for finance to become more strategic (rising from 30% in 2005 to 37% in 2006).
Further, in the 2006 results, 15% of respondents highlighted the desire to "change the role of the F&A function" and 22% to "change the role of the controller".
Despite this aspiration to move the finance organisation up the value chain, the reality in many cases has been somewhat different. While costs have undoubtedly been significantly reduced by successful F&A transformation efforts, and service levels for the provision of back-office services have greatly improved, some organisations have failed to provide enough focus on the other critical roles of finance – most notably in commercial and strategic decision support.
This is not to underplay the achievements of F&A transformation in establishing a strong framework and foundation to support the business through the provision of efficient and effective back office services. Indeed, this is a prerequisite to enabling finance to move up the value chain. Nevertheless, today’s CFOs need to understand the importance of shared services and BPO as ‘enablers’ to providing truly effective decision making and strategic support to the business and not necessarily as ends in themselves. Organisations that look to transform their back office functions without looking at the entire end-to-end finance function, including finance business services, are missing a large part or the requirement and indeed the opportunity.
It is also very important to note the difference between FP&R and FP&A? This question is critical to understanding the services being provided and where and how best to provide these services. The key to answering this question is in the ‘A’ and the ‘R’: A = Analysis, R = Reporting.
Remember that reporting, planning and analysis happens at both the corporate level and the operational level.
Decision support requires analysis and interpretation of results, including ‘what if’ analysis, testing of assumptions and modeling. This has to be closely aligned with the business and the needs of the business. In other words, in simple terms, the ‘A’ in FP&A = analysis = decision support.
Financial planning and reporting establishes the framework for reporting and sets the rules in terms of format, timelines, content and platform and produces certain reports in an agreed format for use by the business. Decision support then analyses, comments on and manipulates the data and information within these repositories and reports to aid the making of actual decisions.
Now let’s take a more detailed look at financial planning and reporting (FP&R) and decision support.
(a) Financial Planning & Reporting
Periodic, standardised planning and reporting, at an agreed set of levels, should be provided by the FP&R team. This should include responsibility for: Owning the planning and forecasting calendar, as well as the process, coordination and communication around this.
- Coordinating, consolidating and analysing plans, forecasts, projections across the whole company at the consolidated level (e.g. total company, total region).
- Development of standardised P&L and Balance Sheet monthly, quarterly and annual management reports of actual results. These reports are then made available to the decision support and the business for drill down, analysis, projections, interpretation and commentary.
- Submission of these management reports to corporate finance, ensuring integrity in the interpretation and commentary provided to support the submission.
- Engaging with decision support to institute and operationalise plans to improve company performance based on the output of this reporting.
- Producing consolidated monthly projections against forecast, plan and prior periods.
- Providing and maintaining daily flash reports – to perhaps incorporate certain rolled up commentary on variances and explanations of assumptions (including identification of economic, cultural, industrial and political as well as business specific factors).
(b) Finance Decision Support
So what exactly is the role of the decision support function within finance?
The Compact Oxford English Dictionary defines a ‘decision’ as:
- a conclusion or resolution reached after consideration
- the action or process of deciding
The same dictionary defines ‘support’ as:
- give assistance, encouragement, or approval to
- confirm or back up
Decision support could therefore be defined as: "The assistance given to help consider, reach and confirm a particular conclusion or resolution".
Decision support should operate to support a company’s commercial and strategic functions and goals. The role of finance decision support requires strong financial acumen that helps the business to make better informed decisions. Decision support should be able to carry out fast and accurate analysis of, and commentary on, key business drivers and parameters that impact future profit and revenue growth. The function should be able to challenge and validate assumptions made, and provide ‘what if"-type of analysis on expenditure and investment proposals.
It is really important that decision support does not become what I often refer to as "decision rubber stamping". This is where no additional value is added to a decision but rather there is just a form of finance sign off without any real challenging and testing of a decision and without additional thoughts and recommendations being provided to the ultimate decision maker on how the desired outcome might be best achieved.
It is very important to remember that a company has to invest in providing decision support services. There is no specific set of legal or tax reasons why there has to be a decision support function and set of services. Suppliers and employees will still get paid and money will be collected from customers without it. Indeed some organisations operate with little or no decision support and just leave the decision solely with the business without any decision support from finance (or with HR and procurement across the other key support functions).
The key is therefore to maximise the return on the investment in providing decision support, just like with any investment. And copying numbers from one spreadsheet into another and hiring a qualified, experienced Finance professional to do this does not provide a good return on investment.
Companies want a strong, value adding, decision support function. This is clearly highlighted by a 2004 Accenture study. When asked which finance activities contribute most to the overall success of the business, more than two-thirds of respondents to this Accenture study chose "enabling senior management to make the best business decisions." Yet only about 37% said that their finance department does a good job in this area.
Among the study's other findings:
- Nearly 80% of respondents selected "strategic financial thinking" as one of the top three qualities they would look for in a CFO.
- They placed much less emphasis on transaction-oriented qualities.
- 28% said their company lacks performance metrics for its finance department.
(Source: 2004 Accenture survey of more than 180 executives and senior managers. Originally printed in the August 2004 issue of Business Finance).
Finance decision support could be responsible for some or all of the following services to the business:
- Financial and operational planning, budgeting, forecasting and analysis at the operational level business unit, product line, region)
- Detailed performance commentary on results
- Margin, profitability and variance analysis
- Business case analysis for new products, markets, marketing plans
- Expenditure and capital investment decision support
- Resource optimisation
- Support for long term strategic decisions
- Sales incentive plan design and control
- Discount approvals, pricing analysis, and approval of rebates or other claims programs
- ‘What if" and sensitivity analysis
- Operational ownership of master data hierarchy (profit centers, cost centers)
- Finance support for merger and acquisition due diligence and post close integration
Just as with the more back office functions, FP&R and decision support should also be assisted and enabled by relevant supporting technologies. These technologies should preferably be integrated closely with the back office reporting platform to ensure integrity of underlying actual data.
However, remember that having effective, efficient and truly value adding finance business services is not simply about implementing another new planning tool. It is about clearly defining roles and responsibilities, organisational alignment, understanding the business needs, recruiting and developing the skills required and focusing on specific activities that add value and not just cost.
UNDERSTANDING THE ROLE OF FINANCE
Finance really needs to understand its wide ranging role and set of responsibilities more clearly, and then make this relevant to the business that it operates in.
The reality is that the finance function provides a broad range of different services to meet corporate, legal, statutory, tax and compliance requirements, to provide transactional, administrative, professional and technical services to the business, and to deliver financial and management reporting and value add decision support.
It is critical that each requirement is clearly understood and that organisational and specific job roles, responsibilities and activities are clearly defined and aligned appropriately. Only then can the finance function across all its responsibilities really achieve the triple benefit of world class service levels, at lowest possible cost, while ensuring an effective and efficient enterprise wide control environment.
The ‘front-office’ business services of FP&R and decision support have sometimes been left alone, or ‘out of scope’, when looking at finance transformation, with the focus instead being on the more transactional, administrative and compliance functions, and optimisation through implementing new enterprise resource planning (ERP) technologies, shared services and outsourcing.
While this has undoubtedly added significant value, this is missing much of the real benefit that can be achieved from understanding the broader role of finance and the specific requirements and benefits that can be obtained from effective financial planning and reporting and decision support. The opportunity is there. Many organisations and companies have recognised this and have achieved truly world class status and continue to improve year after year.