The “superior financial agility” and lower costs enjoyed by world-class finance organisations is among the themes regularly examined by consultancy The Hackett Group, which advises global companies on enterprise benchmarking and best practices implementation.
World-class finance organisations are classified by the group as those that achieve top-quartile performance in both efficiency and effectiveness, based on an array of weighted metrics. Among the data in Hackett’s most recent research, released in late August, was that these organisations currently operate at 42% lower cost than typical companies, while achieving greater effectiveness. They also require 48% fewer full-time employees per billion dollars of revenue. By excelling at cost reduction and greater efficiency they deliver up to US$44m in savings annually for a company with revenue of US$10bn and above.
The largest cost gaps between world-class and typical finance organisations are in transactional areas, such as customer billing (an 85% gap), travel and expense (70%) and accounts payable (68%). Both world-class and typical finance organisations have cut costs by about 18% over the past decade. A more unexpected finding is that more recently world-class finance organisations have apparently found it hard to maintain this level of cost reduction, experiencing a drop of just 3% over the past five years.
Three key areas
Hackett suggests that to work effectively with the business, finance organisations need to focus internal resources on higher-value activities that provoke growth – a task made harder by tighter finance budgets, typically decreasing by an annual average of 0.1%.
Its research suggests that world-class finance organisations are focusing on three key areas to achieve operational excellence by getting the most from their resources and concentrating on processes that support business objectives:
- Agile service execution
Activities within the traditional remit of finance are still important, but there are opportunities to seize responsibility and add value beyond transaction and risk.
Identifying money-saving opportunities within the finance organisation can entail redistributing internal resources, streamlining processes, or using software to automate time-consuming tasks (highly automated time and efficiency (T& E) groups record 41% fewer errors). This will involve looking at assets that could be used more effectively: training and development for end-users or staff, or policies that are too complex. With the right improvements, finance can self-fund efforts to implement agile service execution.
Improving invoicing, for example, may not translate to more savings on the balance sheet, but by stimulating quicker collections and removing rework, it can increase revenues indirectly. Using best practice in areas such as accounts payable (AP) – and teaming with HR to develop an effective talent management strategy – will demonstrate commitment to cost reduction across the organisation and the wider enterprise.
When finance is leaner, it should seek opportunities to collaborate with other organisations to improve processes and increase cost savings; this will position finance as an influential business partner.
- Enterprise performance management (EPM)
When finance is in good shape, it should take initiative and provide its insights to the wider enterprise. This encompasses (but isn’t limited to) EPM: finance organisations should establish information needed for business-wide decision-making, and then find ways to deliver it. Technology is especially useful for this, and particularly when properly integrated with clean, consistent data: the best performing organisations are three-to-four times as likely to have deployed EPM-enabling systems business-wide.
Once delivered, this specialist knowledge of planning, forecasting and financial reporting could well provide value to areas like procurement and HR, and reframe finance as a strategic leader within the organisation. For finance to achieve this, HR in particular will be essential: introducing skills such as predictive modelling and data analytics will assist the transition towards more knowledge-based services.
Also necessary is to select realistic key performance indicators (KPIs) that complement the business strategy. 90% of the best performing EPM organisations are confident that they have the right KPIs in place, but the peer group is less assured. Strategic alignment of goals is essential to actually achieving them: it ensures focus and improves decision-making.
- Adaptive finance
Finance has a reputation as a ‘left-brained’ entity lacking in imaginative power. In order to make further improvements to performance it needs to disprove this perception. Creating a more flexible organisation will require finding staff with the correct skillsets, increasing capability, and introducing a viable finance operating model. Activity should be structured according to volume, type, and complexity to enable work to flow effectively – and in a fashion that accounts for shifting business demands.
When introducing best practices, world-class organisations ensure that staff members understand the interrelated nature of finance’s service delivery and the goals of the wider business – as well as their own accountabilities within that framework.
According to Hackett, just over three in four finance organisations also hire internal agents of change to take charge of departmental transformation: typically these individuals report to the chief financial officer (CFO) or controller and fill clearly defined roles, such as providing process expertise or hiring advice. As regards the latter, top performers deem their teams to be twice as good as counterparts in the peer group – so investment in change management is a must. They’re also important in terms of easing the burden on project managers: by lifting day-to-day responsibilities, they give them more opportunity to focus on outcome.
The future of finance organisations
These three steps are key for finance teams looking to reduce costs and better performance. Introducing large-scale change requires a shift in culture, vision and objectives, but is doable. Changing attitudes, setting realistic goals, and establishing a pattern for business success should be the priority for finance teams looking to improve results over coming years.
“In today’s business world, finance needs to dramatically improve its agility, so that it can respond quickly to changes in the business environment and deliver greater value to the enterprise,” says The Hackett Group global finance advisory programme practice leader Jim O’Connor. “This is a significant challenge, and requires changes that don’t always come naturally to finance executives.
“At the same time, cost-cutting remains a primary focus for most finance organisations. At typical companies, there’s still significant room for opportunity here. Transformation efforts will have to be self-funded, and that means improving efficiency, largely by reducing costs in transactional areas.”
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