Growing the business, improving operational excellence and performance management, and executing business transformation are top priorities and responsibilities for most organizations in 2022. Yet, high degrees of digitalization, complex decision-making, and disruptive delivery models are changing what businesses expect from their finance departments and/or partners.
However, successful CFOs understand the best ways to employ corporate strategies capable of taking advantage of the latest technology trends and how to structure their finance in order to make the most out of their already tight budgets. When it comes to breaking down organizational structures that minimize the advantages of digital finance functions, they pay very close attention to reducing unneeded effort and duplication. They also aim to provide more coordinated support to the business. To that end, a finance function redesign is required.
The Need For Finance Function Redesign
It’s been some time now since the finance department limited itself just to reporting figures. Finance today is increasingly providing operational and enterprise decision support, alongside its other critical responsibilities in areas of governance and oversight. It’s up to the CFOs to determine the best organizational structure that will be able to fulfill both their rule-based activities and meet new demands.
One of the first steps for CFOs in this regard is to settle the matter of centralization. With the ongoing business process of standardization and automation of transactions and finance process and policies, centralization plays a key role. Yet, there is a range of options that serve different purposes. Finance leaders, on average, will place their staff at the corporate center, while anywhere from 10 to 15% are in shared locations. However, as companies grow in size and complexity, as well as their finance functional maturity, the location of corporate finance activities also expands.
Customizing Your Finance Functions
As companies continue to grow and expand, their customers and operations will also spread out geographically. They are also served by a more complex organizational structure. As such, they will tend to put a higher percentage of corporate finance staff in business units. While centralization is important, it’s not always appropriate. In these scenarios, finance leaders should consider which type of service delivery model will best support their business needs.
Some will choose to divide their responsibilities between their corporate and embedded finance teams. Others, on the other hand, may find that a center of excellence (CoE) or shared services will best suit their needs. Whatever the case, the best model for any given organization is one that’s able to perfectly balance the company’s available financial and human resources with the finance’s competing governance and guidance responsibilities.
When it comes to the corporate finance middle-office that owns most of the core accounting work, its impact and complex activity attributes are the most important in terms of identifying which locations will be best suited to balance financial risk and efficiency. Such a framework will allow CFOs to establish a base example for activity location. With some exceptions, low-complexity middle-office activities should be moved into shared locations, while high complexity activities should either be handled by the corporate center or in a joint effort by the center and BU management teams. Even though there is no one-size-fits-all approach, such a model will provide a baseline for considering where certain finance processes and activities will fit across the finance department.
After identifying their degree of centralization, CFOs should go on to redesign other critical aspects of the finance functional organization. They should start by assessing the current finance structure by understanding the company’s staffing, structure, spend, technology, performance, and productivity. These will help identify and anticipate their future business needs. The second step is to identify and select the finance activities that need to be outsourced, as well as the location for outsourcing.
They also need to make sure that the structure is based on functional priorities by clearly defining the scope of activities for each sub function. This will help avoid any unnecessary duplications. Lastly, CFOs will need to establish reporting relationships by choosing the right reporting structure for embedded finance teams and optimizing the control span. Incentives, performance measures, and role definitions will help drive the desired behavior and structural change, more so than simply redrawing reporting lines.
Solving Operational Performance Problems
It’s important to realize that no company is immune to operational performance issues. These are those unanticipated material impacts that affect the business unit profitability and that require corrective action that’s not typically found in the annual plan. Typically, companies experience such performance issues several times a year. They can relate to revenue or costs like unexpected price pressures from new competitors or a sudden change in production costs. Each of these will require a corrective action, where speed is of the essence.
Over the past several years, CFOs have been working on improving the speed and quality of their performance information. Many have also developed good leading indications and predictive financial analytics to anticipate these issues. However, while most businesses are able to identify these problems before they affect their bottom line, only a handful can do anything about it in a timely manner.
Shortening the Remediation Process
To resolve the intra-year performance issues at a low cost and facilitate structural change, finance teams will need to compress the entire remediation process. This goes from spotting the existing issues to helping the company recognize its own materiality, as well as knowing how to respond in a timely manner. Yet, this shortening can pose some challenges, as managing directors often need to be persuaded of the performance issues’ materiality. That said, finance can help remediate the company’s performance issues in two main ways:
- By establishing quicker buy-in around the idea that the issue needs to be remediated.
- By removing any resource constraints that prevent the company from acting faster and more effectively.
How to Establish Quicker Buy-In
The corporate finance department will need to validate the real nature of the performance issue to the business. The majority of CFOs and CEOs will agree that there is too much back and forth between the finance department and the rest of the organization when it comes to identifying the material issue. Such a “stalemate” will tend to lead to the so-called analysis paralysis and needs to be avoided.
In general, there are three major opportunities to reduce this back-and-forth between the company and finance:
- Shortening the time it takes for the business to engage with finance data – While technology can help improve data quality and featured strategic insights, there is no guarantee that the rest of the company will engage with it quickly. To do that, you will need to present your financial information in such a way that it will resonate with the organization. It’s best to use business terms that make it clear about the urgency of various performance issues.
- Increasing your company’s confidence to make decisions with the available data – Many organizations will tend to put off important decisions, stating that they need “perfect data” before initiating a change. In this case, it’s best to use the 80-20 rule (the Pareto principle) to size the issue quickly and determine the root causes of the problem.
- Eliminate requests to test the root causes that appear during the late stage of the process – Effective finance teams will surface and track any latent beliefs about business drivers. By using a catalog of official and off the record drivers can help the finance department quickly draw the attention of the company and generate buy-in regarding performance issues as they emerge.
Removing Any Resource Constraints
Many business leaders feel that a lack of resources limits their ability to take action during the response phase. It’s up to the finance department to resolve these resource constraints. To do so, they need to:
- Have a contingency plan at the start of the year – By building contingency budgets based on multiple scenarios and for different cost categories, the finance department can create funding pools and other mechanisms that will help resources flow towards the business areas that experience performance issues. By using financial risk assessments to determine where to cut spending, finance can pool those extra funds centrally and allocate them throughout the year within the business as needed.
- Freeing up idle funds – Finance should also surface unused funds from growth projects by zero-basing them for midyear reallocation. For example, you can reevaluate and cost them from scratch, instead of based on the existing budget. You should also monitor human capital assumptions from a granular level to uncover any untapped funds.
Consero Global can help ensure that your executive team is making the right moves and implementing the best management and corporate strategies to keep your business growing. Besides our experienced finance management teams, what we bring to the table are cloud computing technologies and advanced financial management solutions that will help you achieve operational efficiency and financial clarity.