Without Boundaries

"Predictions are hard to make – especially about the future." Samuel Goldwyn's gag notwithstanding, is there a common theme to the trends of 2006 that will have a profound impact on the future of the CFO in the financial services industry? We think there is, and would argue that finance functions are moving towards a more open and collaborative, more flexible and potentially much more influential role in the organisation. The finance universe is expanding.

Three trends support this claim. Firstly, external conditions are giving financial services CFOs greater opportunities to influence business strategy. High levels of M&A activity, more and smarter outsourcing agreements and strategic procurement are examples of where the CFO plays a pivotal role in defining the right strategy.

Mission-critical tasks include managing relationships with external parties, such as service providers, regulators and customers. Not only are the boundaries of finance expanding, they are also becoming more porous.

Secondly, both existing and new compliance requirements continue to be high on the agenda of most CFOs. After undergoing Sarbanes-Oxley, Basel II and MiFiD programmes, finance directors could be forgiven for expressing 'compliance fatigue' and wishing to see the back of such initiatives.

That would be a mistake, since incorporating compliance controls as standard practice into business processes minimises the associated costs and can deliver significant value to the organisation. In this way, compliance programmes provide greater visibility of processes and cross-organisational collaboration and, as such, serve as a catalyst for further change.

Thirdly, pressures on costs persist. In response, transactional processing and standard reporting are becoming increasingly automated. As this trend continues, tools and techniques common to manufacturing, sales and marketing, such as Six Sigma methodologies, will take a foothold in finance and eventually lead to the breakdown of internal process barriers.

Adoption of collaborative technologies – including business process management – will change the face of finance operations and improve the ability of the CFO to monitor, evaluate and manage the performance of the finance function. The increasingly strategic and influential focus of the CFO's role will only become greater.

EMBEDDING COMPLIANCE

Compliance remains one of the highest priorities for businesses and of course, the CFO. The focus will be on deriving high value from existing initiatives and anticipating and planning the necessary actions for forthcoming compliance requirements. Both will have to be managed across the entire organisation.

Many regulatory initiatives, like SOX and Basel II, are still being run as separate projects or programmes. This is highly resource- and cost-intensive, with overlapping requirements and frequent duplication of work.

The CFO will have to guarantee that compliance is achieved and retained, while lowering costs and extracting maximum value from the initiatives. An example of the potential opportunities is SOX, where, following the transition to 'business as usual', controls will forthwith be maintained by process owners.

This creates opportunities to optimise business processes, using the additional transparency and technology tools that have been implemented.

There are several new requirements that finance directors will either be responsible for or over which they will have influence. MiFID is an EU initiative that replaces the Investment Services Directive and supersedes some provisions of the Market Abuse Directive.

It will require significant rewriting of national regulations, such as the UK's FSA Handbook.

Companies will have to redefine both the way in which they conduct their business and their organisational design and configuration. However, the deadline of 1 November 2007 is achievable for organisations that act now and dedicate sufficient resources and budget to MiFID. The estimated cost for the UK to comply with MiFID is £1bn.

M&A BOOMING

The M&A market has demonstrated strong growth this year – in the first quarter of 2006 the value of M&As averaged $10bn a day globally, the highest in six years. This trend should continue throughout the rest of 2006 and, accordingly, CFOs must be prepared – studies have shown that over 50% of mergers fail to create value. In our experience, firms are never fully prepared operationally for M&A activities and have particular problems monitoring the benefits of integration.

The finance function is expected to quickly provide relevant information pre-deal, as well as becoming a key stakeholder in extracting synergies post-deal. CFOs will need to ensure that their assets are optimised and their cost base is streamlined, whether they are an acquirer or a potential target.

THE HUNT FOR NEW BUSINESS

Retail banks in particular are striving to gain market share and deal with customers more efficiently. Changing customer behaviour will take time to understand and will require significant incentives. Banks are looking at ways to reduce operating costs and improve customer intelligence as well as improving transparency to avoid mis-selling.

Over the next period, banks will continue to put customers in control by providing seamless transactions and services across channels. This will allow them to 'help to buy' rather than 'sell to'. UK retail banks have already announced plans to spend nearly £1bn reinvigorating branches.

More specifically, core banking systems will become an increasingly important topic on the CFO's agenda, since in many institutions their replacement has been delayed for several years.

Replacing legacy systems will allow a faster time-to-market, enable more sophisticated product / channel offerings, be typically near real-time and facilitate a single-customer view.

NEW THINKING ON OUTSOURCING

Traditional outsourcing has been relatively successful in delivering cost reduction; however, it has seldom resulted in enhancements or innovation in services and business processes. Research by Dun and Bradstreet shows that 50% of outsourcing deals fail within five years and business stakeholders are increasingly demanding a better balance of cost and quality of service.

Throughout the rest of 2006 we will see a growing number of flexible multi-sourcing agreements that include providers being changed, contracts being renegotiated, and resources, processes and services being brought back in-house.

STRATEGIC PROCUREMENT

As businesses expand, relationships with suppliers evolve alongside marketplace changes and frequent rises in procurement costs (which often go unnoticed), particularly in de-centralised environments. CFOs will in future focus on strategic, cost-driven procurement programmes while maintaining or improving levels of service and quality.

This will typically include strategic alliances, demand management and enabling technologies. These projects have shown payback within 12 months and ROI of 10% to 15%.

PENSION REGULATION

Since 6 April 2006, the UK Government has been implementing changes to simplify the current taxation rules for pension regulations. These changes will change the shape of insurance companies and will have an impact on funding limits, benefits, investment options and flexibility of investments.

Pension providers will have to implement expensive systems and process changes, while facing uncertain future income streams, as margins on future pension products continue to decrease. This reduced income stream may lead to further consolidations in the pensions industry.

INSURANCE

85% of contractual documentation within the insurance industry has to be agreed, in place and received by contracting parties by 1 January 2007. In this new, transparent operating environment, inefficiencies will be apparent to clients, the insurers and the competition.

The leading brokers will be those who combine efficient systems and processes with customer-centric service solutions. Four of the 12 largest Lloyds brokers and six of the 12 largest managing agents had 40% or more of slips failing in at least one item in the full contract certainty checklist.

RESHAPING FINANCE'S FOUNDATIONS

As the CFO assumes a more strategic role, it is even more important that the finance function operates effectively and efficiently across the whole business.

Consequently, there will be an accelerating trend towards technology-driven process change and organisational alignment. Successfully transforming the underpinning information architecture requires close collaboration between CFO, CIO and COO.

The financial services sector is special in that – more than in other industries – its financial systems have been developed through the years by additions and through iterative and often uncoordinated development.

This has led to a high-maintenance cost base, non-transparent information flows and a non value-adding overhead in personnel. In addition, financial systems are increasingly more difficult to adapt to new requirements.

Over the next few years, we will see CFOs taking more steps towards an information architecture based on business logic, rationalised data feeds and high adaptability.

As a result of advances in technology, processes including accounts payable or account reconciliations will be subject to focused optimisation efforts and methods such as Six Sigma's Define, Measure, Analyse, Improve, Control (DMAIC) approach.

Companies that have redefined their finance information architecture have seen closing processes improve drastically and have benefited from up to 50% reduction in headcount costs in certain support functions.

BLACK HOLE OR OPEN UNIVERSE?

In response to the compliance burden and cost pressures, finance teams have become increasingly reactive, in contrast to the stated strategic vision of finance as a business partner. As a result, finance teams are typically ill-aligned with the wider organisation, do not support the business optimally and there is a mismatch between the skills and ambitions of finance staff and the roles they perform.

CFOs need to focus on the creation of a clear strategic vision for the finance team, communicate it effectively and start to implement it without delay. Research over a 25-year period has shown that companies with strong cultures outperform their competitors in sales growth by 15% and in ROI by over 20%. Close interaction with HR is paramount in executing that strategic vision, and is another example of the need to break through organisational barriers.

The next 12 months will see the continuation of existing trends – such as increased operational efficiencies through technology – and a surge of new pressures from markets and regulators. Both require the transformation of the finance function into a more outward-looking, collaborative, dynamic environment, with the CFO as the champion of change.

Planning and prioritisation are required to address the short-term tactical needs while blending the strategic objectives of finance and the wider organisation. While the finance function may not lose its boundaries overnight, its border guards should soon be replaced with welcome committees.