A Plan for World Class Finance Beyond 2010

In February 2000 The Times newspaper carried an article by a leading US consultancy defining world-class finance functions. The consultancy researched 1,400 global businesses in every business sector and reached the conclusion that finance functions could claim to be world class if "costs of finance were no more than 0.5% of turnover".

This percentage, it was claimed, would equate to approximately 50 finance people for every $1bn of turnover.

A decade on and, according to updated research, it now appears that consultancies have set the world-class benchmark at between 0.75-1% costs ratio to turnover.

The obvious question beckons: why is it, when every business function in virtually every industry has been transformed by increased productivity over the past 10 years, finance productivity appears to have worsened by between 50-100%?

Increased cost of compliance would immediately spring to the mind of finance leaders, but even then – aside from the fact that compliance has also affected every other segment of business – even finance leaders would struggle to argue that costs of compliance would be 50-100% more expensive than their routine finance functions.

So, in today's ever competitive world where fractions of margins make a difference, what has gone wrong in finance, and how can the 0.5% benchmark be restored?

1. Vision

Every business has its core vision, be it return on capital employed, return on sales or market share. This is the vision, which is very easily measurable, that is cascaded into sub-visions throughout the business.

Finance functions with measurable visions that impact directly on the bottom line are rarities. Indeed, as a measurable vision there is nothing better than using a cost measure as a percentage of sales. Of course, it goes without saying that quality and professionalism in finance cannot be compromised as a result. It’s all too easy for finance functions to cite generic statements, have complex service level agreements or cite regulation and corporate governance as justification for extra cost. Without such defined cost benchmarks, the incentive to be creative is missing, and complacency and bureaucracy are easily embedded in the culture. Finance professionals tend to be very conservative in nature and their comfort zones are generally carefully managed. Finance leaders need a mindset change for their functions; they need to be measured in equal terms with the rest of the business.

2. System methodologies and continuous improvement

During the past 10 years, the majority of finance functions will have attempted some sort of systems development either through service centre implementations or internally in continuous improvement programmes. Typically, the detailed specification of such projects will have been abdicated to relatively junior and lower skill users, but this approach is fundamentally flawed. This will have placed an extremely high focus on such users to define the outcome of the project. After all, the theory says, users have the most extensive knowledge of particular tasks. However, this approach is almost always a mistake. In order to incorporate the mindset of real change, real efficiency and elimination of non-valued-added activities, it would have been essential for finance leadership to take direct responsibility and accountability for the specification to ensure alignment with the vision. Not having done this, at best, new processes and practices will simply have been automated versions of the old, with a few bells and whistles, but really little with real added value. At worst, bureaucratic monsters will have emerged stifling any new creativity and further process improvement.

Consider this: do check-in operators at airports, as principle users, define the specification of their systems? Do check-out operators in supermarkets do likewise?

The accounting software can take some blame for this. Technology has developed in leaps and bounds in the past 20 years, but the irony is that finance systems in 2010 are functionally identical to the finance systems of 1990. What has been transformed during this time beyond recognition is hyper-faster processing aided by colourful and easy-to-use user tools. The IT industry has performed the perfect marketing trick of convincing finance functions to pay over the odds for its specification and its systems.

3. Scope of general ledger

The general ledger is the repository for all transactions. For most businesses in recent years technology has played a huge part in automating and integrating all sub-ledgers. By definition this would mean that general ledgers will have reduced in its volume of transactions. But the reality is somewhat different. Compared to 10 years ago, general ledgers in the majority of businesses have become monoliths with multitudes of duplicating accounts and reversible transactions, to the extent that trial balances and corresponding financial statements become a morass of numbers. What happened to the 'right first time' principle? Significantly, at month end, there is constant dialogue between the centre and the business. The process is totally inefficient and significantly increases non-valued-added activity for the business as a whole.

A mindset change to 'less is more' in general ledger scoping would ensure massive leaps in productivity.

4. Transaction processing

Technology has ensured that the high-volume low-skill task of transaction processing be the ideal fodder for efficiencies in systems development. Of course, great strides have been made to reduce paperwork and increase automation, especially in purchase to pay processes. However, stripping the processes back to bare bones, it is arguable that not a lot has changed fundamentally in recent years. Yes, we have some more automation, we have reduced the paper flow, but we still operate in corporate silos, one corporate entity against the other. We still have ordering, receiving, invoicing, authorising and paying systems. Clearly lacking has been real creativity across the full extent of the supply chain.

One example of great creativity is self billing, which was pioneered 25 years ago by the UK automotive industry. As many would believe, this concept is not just shifting the onus of billing from supplier to customer, which in itself does very little to reduce overall cost, but fundamentally altering customer-supplier relationships. The concept is amazingly simple: 1,000 cars off line signifies 1,000 steering wheels paid to one supplier, 5,000 wheels trims paid to another supplier, 4,000 seats paid to another supplier etc, etc. It is indeed a one-stop process dependent on one piece of data. Logistics functions have little trouble in the management and support of the concept. However, finance functions see such creativity as infringing on their control and influence; what about components scrapped, what if deliveries are higher, what about inventory? The negativity goes on and on.

Such closed thinking is not conducive to the spirit of continuous improvement and efficiency across the whole supply chain. This concept not only reduces the overall cost of processing transactions but even makes good business sense as a competitive advantage. Other industries are ideally set up to take advantage of this concept. One such example is the supermarket industry through its electronic point-of-sale transaction records.

5. Scope of service centres

Shared service centres has been one tool where finance functions have looked to improved processing efficiency and reduce cost. Typically, the organisational arrangement in shared service centres ensures the processing of all transactions at the service centre, and this is usually inclusive of the production of the financial statements. A business support function exists simultaneously at the manufacturing plant or local business entity. Such arrangements create series of inefficiencies, unnecessary non-valued-added activities and huge hidden costs of communication throughout the whole information and management supply chain.

To achieve a world-class status and minimise total overall cost, the scoping of the service centre within the context of the whole business is crucial. If the service centre does indeed have the maximum scope including the production of financial statements, then it is absurd that it does not also take full responsibility for business measurement and support. After all, the service centre is the custodian of all relevant data.

If a business support function does exist at the local business entity and it is indeed necessary for it to be responsible for business measurement and performance, then the scope of the service centre should be reduced considerably. The scope of the service centre should be limited entirely, in this case, to the high-volume repeatable, low-value added activities, such as purchase-to-pay processes, where the full benefits of automation can be optimised.

The hybrid service centre version of mixing and matching responsibilities and doubling up of resource does little more than add cost for activities that ultimately are do not add value. It would appear that finance leaders have delegated the scoping of service centres to consultancies that have their own vested interest for scoping complexity into their processes.

6. Business support

During the past 10 years finance functions have not been immune to continuous improvement programmes. The recurring theme of these programmes has been standardisation; standardisation of P&Ls, ratio analysis, reporting etc. In fact, standardisation of everything. This paranoia with standardisation across different business models and in different geographies eventually creates a culture whereby the process of collecting numbers is more important than the numbers themselves. The bigger the consolidation, the more dilution exists in the meaningfulness of numbers.

Every business has a few critical KPIs that define monthly performance. In fact, such KPIs can crucially change from month to month as the business environment dictates. Yet our finance functions continue to have unhealthy fixations with standardisation, especially P&Ls, and almost abhor any variability in measurement, to the detriment of focussing on the meaningful drivers of business performance.

To achieve world-class performance it is essential that senior finance leaders reassess the effectiveness of their central functions as well as the level of business support at local business level. They would only have to ask their business leaders, ultimately responsible for profitability, for their forthright views.

7. The annual budget process

In many businesses the annual budget process begins about six months into the financial year. It is a common theme, a bottom-up process of sales volumes, materials costs, labour productivity, overhead and capital expenditure. Almost without exception finance leaders and managers continue to claim that the process is too long, that there are too many revisions, and budgets are outdated before the new financial year begins. Yet these are the same leaders and managers who for some reason are paralysed to change. The resource applied in budget preparation usually far outweighs the usefulness and result of the process. If a budget process were to be evaluated in cost terms in a conventional manner, business leaders would be horrified at the result.

It is difficult to understand why finance functions, in business environments that are rapidly changing, persevere with a process, which by definition is designed to last as far out as 18 months, as a measuring tool. The irony is that in most businesses, monthly or quarterly forecasting has evolved into the ideal measuring tools for actual performance, in many cases even when full budgets have been completed and even before the budget year has begun. To the non-finance manager such processes seem crazy and wasteful.

The forecast process is generally very efficient, certainly no less accurate than a budget, easier to understand and better manageable by other business functions.

By adopting a world-class approach as a competitive measure, finance leaders might just be brave enough to abandon their historic budget process to get closer to their target measures.

Conclusion

It really pains me that base processes in finance functions have changed little in my 36 years as a professional finance leader and interim while finance behaviour and measurement of business performance has remained dormant, particularly in the past 10 years. Technology has, of course, transformed capability, but while manufacturing (which is unrecognisable from a decade ago), logistics (which has embraced technology to the full), energy management (which has been transformed) and other business functions (which have been forced to change in outlook and scope), finance functions, it seems, continue to sleep walk in their comfort zones.