The Renewed Finance Function

The Renewed Finance Function—Extending Performance Management Beyond Finance

A report prepared by CFO Research Services in collaboration with SAP

The Renewed Finance Function—Extending Performance Management Beyond Finance

A report prepared by CFO Research Services in collaboration with SAP

The Renewed Finance Function—Extending Performance Management Beyond Finance is published by CFO Publishing Corp., 253 Summer Street, Boston, MA 02210. Please direct inquiries to Jane Coulter at 617-345-9700, ext. 211 or [email protected]. At CFO Research Services, Elaine Appleton Grant conducted the interview program and wrote the report. Sam Knox directed the research and managed the project. CFO Research Services is the sponsored research group within CFO Publishing Corporation, which produces CFO magazine in the United States, Europe, Asia, and China. CFO Publishing is part of The Economist Group. November 2007 Copyright © 2007 CFO Publishing Corp., which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.

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Contents About this Report

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Executive Summary

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Chapter 1: The Strategic CFO

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Chapter 2: The New Role: A Holistic Leader and Partner—Not Merely a Technician

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Chapter 3: Standardizing and Streamlining

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Chapter 4: Conclusion

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Sponsor’s Perspective

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The Renewed Finance Function— About this Report In August 2007, CFO Research Services (a unit of CFO Publishing Corp.) launched a research program to explore the ways in which the role of the finance team has changed in recent years due to increased oversight from regulators, more active investors, and companyspecific changes in business operations. We wanted to better understand the internal and external forces that are causing these transformations and the steps that companies and their finance teams are taking to respond to these forces. This research program— which includes an electronic survey and a series of interviews among senior finance executives—finds that the finance team is indeed under new pressure from more demanding external stakeholders. This pressure, especially from regulators, has prompted finance teams to document and often repair core finance and operating activities.

Pressure from more demanding external stakeholders has prompted finance teams to document and often repair core finance and operating activities.

This report presents the findings of our online survey of 255 senior finance executives and in-depth interviews with executives at the following companies: • ABB • Bank of Montreal • CB Richard Ellis Group, Inc. • Cengage Learning (formerly Thomson Learning) • Cleveland-Cliffs, Inc. • CMA CGM (America) Inc. • Cox Communications, Inc. • Levi Strauss & Co. • MGM Mirage • Silgan Plastics Corp. • Turbocam • Verigy Ltd. • Wyndham Worldwide Corporation • Executives at several other companies in North America, Europe, and Asia that asked not to be cited by name in this report CFO Research Services and SAP developed the hypotheses for this research jointly. SAP funded the research and publication of our findings, and we would like to acknowledge Erin Halfnight, Barbara Dischner, and Jim D’Addario for their contributions and support. At CFO Research Services, Elaine Appleton Grant conducted the interview program and wrote the report. Sam Knox directed the research and managed the project.

But companies aren’t in business just to comply with regulations. They are in the business of making valuable products, rendering high-quality services, serving customers, and generating value for shareholders. Amid a marked increase in investors’ expectations from companies and their finance teams, executives in this study show new enthusiasm for closer collaboration with business unit management in an effort to improve business performance and lessen risk. By doing so, they will contribute to the core business activities that satisfy customers and shareholders—as well as stakeholders such as regulators, business unit managers, and employees at large.

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© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance

Executive Summary

“When you think about the financial

These are demanding times for senior finance executives. Investors want higher returns. Regulators require more complete documentation of companies’ compliance with stricter requirements. And in the face of stiffer market competition, business managers want more capital to invest in the business and more assistance in making investment and operating decisions for their increasingly complex businesses.

returns from the stock market in the last ten years, they’ve been extremely attractive. Now, CEOs are actually seeking out more financial guidance and partnering because it’s harder to drive superior shareholder return,” says one CFO interviewed for this report.

Companies and their stakeholders have always had high expectations for their finance teams. But this research program reveals that, most recently, these pressures— from regulators, from investors, and from competitors— are pushing companies to look for more from their finance teams in two main, but often conflicting, areas.

Sources interviewed for this study are voluble on the importance of the finance function playing a higher-value role. One CFO says, “I think the business environment is absolutely demanding it. When you think about the financial returns from the stock market in the last ten years, they’ve been extremely attractive. Now, CEOs are actually seeking out more financial guidance and partnering because it’s harder to drive superior shareholder return.” He continues, “As we look at the next ten years, it’s not going to be as easy to drive that type of productivity and value creation. So, I think most businesses are longing for that strategic partner and the insights, so that they can make better decisions, drive transformational productivity, and ensure they’re choosing the right strategies.”

Regulatory pressures, especially the Sarbanes-Oxley Act, push finance teams toward more rigor in their transactional duties of controllership and financial reporting. At the same time, competitive pressures, demands from line-of-business management, and higher expectations from investors pull finance executives toward a more active role in setting, validating, overseeing, and ensuring execution of business strategy. The need for finance executives to play a greater role in business performance management creates the demand for new and different skills among finance management and staff. To use these skills, finance executives need technology and systems that often go beyond standard transaction processing and core accounting. And finance executives need a cultural mandate from business and functional management to work collaboratively on improving performance.

© 2007 CFO PUBLISHING CORP.

Whether or not finance embraces an emerging mandate to contribute more fully to performance management, the finance function remains responsible for companies’ core transaction processing, financial reporting, audit management, and other traditional controllership activities. The demand to keep transactional processes running with close control, improve their efficiency, and lower their cost pushes finance into a continual evolution of its processes and systems. This evolution in processes—sometimes gradual, sometimes rapid— allows the finance team to standardize, streamline, and simplify routine transaction processing. Companies are then able to execute routine activities more quickly and with fewer errors, to free up finance executives’ time to act as a partner to the CEO and operational leaders, and to provide better and faster information for competitive decision making throughout the corporation.

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The Renewed Finance Function— Key Findings • The role of the finance function is changed by three things: Regulations on the one hand, with competition and investor expectations on the other. As a result, the finance function is pulled in two directions. • Most finance executives seem to agree that as the role of the finance professional becomes more strategic, the skills of the new finance employee must become broader—much like those of a CEO, without diluting the technical skills of finance’s traditional controllership role. Finance leaders in this study call for business schools and company-run training programs to provide their finance and operating executives with a broader base in both finance and business support skills. • As the opportunity for top-line growth slows, growth in profitability becomes a more important source of value, and information to support decisions made by operations and functional managers becomes critical. • Companies that have elevated CFOs to strategic leadership positions have done so in part to satisfy the needs of stakeholders, such as investors. CFOs can speak their language. • In order for finance to play a greater role in driving business performance, say executives, it needs to collaborate more closely with business unit and line management. A majority of respondents say such collaboration is underway—although it’s not without challenges—at all levels of the organization, including partnerships with the CEO and Boards of Directors.

• In response to regulatory and internal requirements, companies have focused on documenting, standardizing, streamlining, and automating their accounts receivable (A/R), accounts payable (A/P), and other core financial processes. More than half of the companies in this study have completed or are currently executing projects to standardize their charts of accounts, to streamline their financial close processes, or to simplify/standardize core finance processes. However, while large-scale investments in enterprise IT systems are commonplace, current or recent technology projects are less likely to be dedicated to automating regulatory compliance or to measuring and managing risk. • Finance executives are also seeking to distribute performance management systems to a broader coalition of decision makers. In many cases, they are pushing performance management and measurement systems out into their organizations—thus, distributing financial and operating information in an effort to allow business and functional managers to make more timely decisions in extraordinarily competitive markets.

The role of the finance function is changed by three things: Regulations on the one hand, with competition and investor expectations on the other. As a result, the finance function is pulled in two directions.

• While respondents in this study say the finance function often has broad credibility with business unit managers, finance’s assessment of operations managers’ understanding of finance is far less favorable. Finance executives report that business unit managers do not understand the world of finance as well as they should. More—and more formalized—financial education for business unit managers would help finance executives have better internal dialogue about performance.

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© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance

Chapter 1: The Strategic CFO Over the last decade, finance executives have evolved from serving primarily as chief accountants to becoming more closely engaged with business unit managers. Rather than focusing on keeping a historical record of company activity and performance, CFOs and their teams are providing advice, counsel, and decision support to business managers on a broader array of financial and operating activities. While the role of the finance team varies with the unique requirements of each company, executives in this research program affirm that business activities and the role of the finance function have been altered in recent years by shifts in their competitive environment, increased complexity of business operations, and investors’ scrutiny of company performance. Accordingly, they aspire to contribute more materially to developing business strategy. (See Figure 1.)

> Figure 1. Survey respondents seek a greater role in developing business strategy. Our finance team seeks to play a more active role in determining business strategy. 3%

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46%

40%

■ Agree strongly

■ Disagree somewhat

■ Agree somewhat

■ Disagree strongly

The stringent audit requirements of Sarbanes-Oxley still draw finance teams away from activities that support decision making and presumably generate value for customers and shareholders.

At the same time, regulatory oversight has weighed heavily on companies in recent years. In this survey of more than 200 senior finance executives, fully 38 percent of respondents said “regulatory compliance requirements (e.g., SEC regulations, privacy, security, environmental, trade, labor, and other regulations)” had a “dramatic impact” on their companies’ business activities in the last two years. Although we are now five years beyond the passage of Sarbanes-Oxley, and most companies have concluded their initial investments and internal controls assessments, the stringent audit requirements of Sarbanes-Oxley still draw finance teams away from activities that support decision making and presumably generate value for customers and shareholders. “There are two forces over the last few years that have been pulling in opposite directions,” says Laurie Brlas, chief financial officer of Cleveland-Cliffs, Inc., a $1.9 billion mining company in Cleveland, Ohio. “I think SarbanesOxley has pushed finance executives to be less strategic and more control focused—kind of ‘the cop,’” she says. On the other hand, she adds, “most folks recognize that the skill set and the approach that a finance executive brings to the table are very valuable in strategic decision making, so companies are always pulling in that direction.”

■ Neutral Percentage of all respondents

The Recent Effects of Sarbanes-Oxley

© 2007 CFO PUBLISHING CORP.

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The Renewed Finance Function— The tension between these two roles—strategy and controllership—is significant. At the minimum, it can stretch resources thin. At the extreme, it can go so far as to contribute to decisions to cast off the burdens of SarbanesOxley altogether. “Until six weeks ago, I would have said what kept me up at night was interacting with our external auditors to get compliant with Sarbanes-Oxley,” said a finance executive at a food-service conglomerate earlier this year. He calls the Sarbanes-Oxley work a “nightmare”: “We were not allowed any incremental resources. We had to basically come under compliance with the existing resources that we had.” But this summer, the food-service conglomerate delisted from the NYSE, in part to escape the onerous Sarbanes-Oxley requirements. Still, it will take some time for their finance department to overcome the effects of those resource constraints, the finance executive says, because Sarbanes-Oxley forced the finance team to lessen its role guiding operations management in strategic decisions and moved it into a “more nuts-and-bolts control function,” a move that he says has been “a point of contention.” Other finance executives working for U.S. public companies also say the Sarbanes-Oxley compliance requirements have reduced their abilities—but not the desire nor the need—to contribute to developing, executing, and measuring business strategy. Meeting SarbanesOxley compliance without adding to staff has challenged his team, says Rick Arpin, vice president of financial accounting for gaming company MGM Mirage in Las Vegas. “A project comes up and we say, ‘Who’s going to do this project? Who’s going to look at this changing environment? Who’s going to look at this deal we might do?’ And all the finance and accounting people are busy doing flowcharts and the other work that needs to be done for 404,” he says. Mr. Arpin adds that in the last year the initial work for Sarbanes-Oxley compliance has abated somewhat, and, as a result, the finance and accounting group has been able to reassign some Sarbanes-Oxley compliance duties into other areas of the company, and has been able to take on more strategic projects as a result.

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However, the impact of Sarbanes-Oxley and other regulatory regimens may not be entirely negative, say some executives interviewed for this study. Sarbanes-Oxley “has had a lasting impact on the way we run our finance back office— all the way from a more robust audit program to more disclosure in our forms 10K and 10Q,” says Gil Borok, executive vice president of finance at CB Richard Ellis Group, Inc. (CBRE), a large commercial real estate services company with operations in 50 countries. He continues, “There’s always the argument that the costs don’t justify the benefits, but there are some good things that have come of it. It has made us function differently. The demands have gone up significantly. I think it’s overall good, overall positive.”

While Compliance Requirements Mount, Markets Mature and Become More Competitive The rigors of Sarbanes-Oxley aside, more than one-third of survey respondents and many of the executives we interviewed for this study say that a shifting competitive environment has had a dramatic impact on their companies in recent years. Globalization (of capital, labor, information, and supply chains), new competitors, industry maturation, and M&A each have increased the pace and intensity of competition in many industries. And in response, companies are turning to their finance teams as strategic advisors to help develop business strategies, manage risk more effectively, and extract organic growth from current lines of business. “The trends have to do partly with globalization, which in turn has spurred on the need for discovery of where the next incremental growth and shareholder value will come from,” says Ashish Gupta, vice president of pricing and business initiatives for Cengage Learning’s Academic Group. “Industries mature and consolidate, so the top-line growth from just revenue and business as we’ve known it in the past cannot continue at the pace it used to in most industries.” Mr. Gupta argues that in many industries, finance executives work to bring business unit management to the table. “Growth doesn’t have to always come from top-line sources. Sometimes, it’s the traditional sales channel or could be alternative sales. It could be different ways of structuring your business to get to the desired target.”

© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance

The maturing gaming industry provides a case study. Because the industry is crowded with casinos, gaming companies are beginning to look elsewhere for growth, cash flow, and profits. For instance, rather than using any available real estate to build casinos, companies such as MGM Mirage are experimenting with other value-creation models. “So there’s an option analysis, I guess you might call it, of ‘What should we actually do with these assets and is there a better way than just owning and operating a casino resort?’” Mr. Arpin explains. “Should we own and operate a mixed-use development? Should we partner with someone to do a project? Should we master-plan the property like a real estate company?” As the questions become more complex, MGM Mirage looks to its finance team to help determine which options will create the most value in the future, Mr. Arpin says. Other finance executives, such as Bill Fitzsimmons, vice president of accounting, financial planning, and analysis at Cox Communications, Inc., find themselves in similar positions. For the last several years, the Atlanta-based cable company acquired market share as fast as it could. Now, though, markets are becoming saturated; the pool of prospective customers from which to draw is shrinking; and voice, cable, and data service providers are muscling in on each others’ markets. As a result, the whole telecommunications industry is scrambling for the same customers. Mr. Fitzsimmons says, “It’s going to cost more to acquire [new customers]. We’ve got to really understand our costs of acquisition, whereas in the past that was not as important as just managing volume growth.” As the competitive landscape becomes more complex, operating decisions—for instance, how much to spend on marketing to these scarce customers, for what return, and so on—become more difficult to make and require a greater depth of financial input, such as analysis of marketing campaign costs versus “the ultimate payback” that’s associated with that kind of campaign, including the monthly revenue generated by new customers. “The nature of our industry is getting more competitive and so there’s a greater reliance on the role of finance as an advisor,” Mr. Fitzsimmons says.

© 2007 CFO PUBLISHING CORP.

As the opportunity for top-line growth slows, growth in profitability often becomes a more important source of value. With this in mind, many finance executives are seeking to provide more up-to-date information to operating managers in an effort to support better decision making.

Additional competition from globalization, new market entrants, or industry maturation puts pressure on prices and margins. And as the opportunity for top-line growth slows, growth in profitability often becomes a more important source of value. With this in mind, many finance executives are seeking to provide more up-todate information to operating managers in an effort to support better decision making. Such decisions vary broadly, of course—from near-term tactical spending on marketing programs, to headcount, to investment and asset allocation decisions. At the American subsidiary of CMA CGM S.A., a multibillion dollar privately held container-shipping company headquartered in Marseilles, France, senior vice president and chief financial officer Jim Arnold is driving activities to shrink costs. “We have a lot of rate pressure in the shipping industry, and competition caused rate decreases last year,” he says. To help pull costs out, the new CFO—he’s been there for a year—is sponsoring a data warehouse project that, along with new performance dashboards, will allow operating executives throughout the company to make decisions about shipping and inland transportation routes, pricing, and sourcing much faster than they’ve been able to previously—activities that should improve both margins and competitive position.

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The Renewed Finance Function— Industry maturity and margin erosion—along with access to capital—can breed M&A activity, as companies constrained in stalling markets look to acquisitions for growth or fall prey to others’ acquisition strategies. Opportunities for mergers and acquisitions and the need to make deal decisions quickly also transform the role of the finance executive; many of the executives we spoke with were deeply and regularly involved in analyzing deal opportunities. Some were new to organizations that had recently been spun out of larger companies; others were brought on to help initiate acquisition processes or integrate recent purchases. While the circumstances of each executive we interviewed are different, the finance function plays a pivotal role in M&A targeting, evaluation, and structuring in nearly every instance.

Investor scrutiny has increased the demand for outward-looking CFOs who can speak to the investor community in ways that CEOs, COOs, and other operating executives cannot.

Derek Schmidt, chief financial officer of the Plastic division at Silgan Holdings, Inc., a $2.7 billion manufacturer of metal and plastic food containers, explains how the maturation of his company’s industry drives both acquisitions and an expanded role for the finance function. “The plastics [market] is very fragmented, and there’s a substantial amount of consolidation happening. Organic growth in our industry is typically lower singledigits, so acquisitions represent a viable option to grow more rapidly. As we start to look at acquisitions, not only do we look for [cost] synergies, but we look at whether we can expand our geographical capabilities and get into different consumer segments than we currently have today.”

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A large part of the company’s business strategy, says Mr. Schmidt, hinges on the acquisitions, not just from an operating point of view but also from a financial value perspective. Mr. Schmidt argues for including the business development function within the broader finance function—in part due to finance’s independence and broad analytical capabilities: “We need someone with a strong mindset around value creation who can objectively look at acquisition candidates and choose those that not only have strategic fit but also those where there’s considerable financial value-creation potential.”

Investors Call for More Information and Closer Relations with Finance While globalization, regulation, and competition have driven changes in the role of finance in recent years, investors in companies both public and private now have higher expectations for companies and their finance teams. Queried on investors’ expectations, a solid majority of respondents in our survey say their investors demand more information, more access to the CFO, and better performance from the companies in which they hold shares. (See Figure 2, next page.) The heightened scrutiny has increased the demand for outward-looking CFOs who can speak to the investor community in ways that CEOs, COOs, and other operating executives cannot. When Cleveland-Cliffs’ former CEO—who was also the company’s CFO—left, its board decided the company needed a sitting CFO, in part to have an executive who could communicate with an active investor community, says current chief financial officer Ms. Brlas.

© 2007 CFO PUBLISHING CORP.

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> Figure 2. Investors want more—and they expect to get it from the finance team. Our investors… ...Expect more detailed information on company performance, operations, and strategies than in recent years

...Have higher expectations for company performance than in recent years

...Want more information from and interaction with our CFO and/or finance team

…Have a more sophisticated understanding of our company, its businesses, strategies, and/or competitors than in recent years 0

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40

■ Agree

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■ Disagree

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100%

■ No opinion

Percentage of all respondents

Elsewhere in the survey, a solid majority of respondents say that increased scrutiny from investors has had a moderate-to-dramatic effect on their companies’ business activities. “I think that our investor relations function has needed a lot more support than it might have needed three or four years ago,” says Mr. Borok, of the Los Angeles-based CBRE. “We have a very active investor relations program, which requires us to streamline information, summarize it, and make it user-friendly. We have most of the data, but we have to make it such that it’s easily interpreted by investors and shareholders. And I think that investors ask a lot more questions today than they did years ago and that does put an additional strain on the organization.”

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© 2007 CFO PUBLISHING CORP.

Moreover, a growing flood of acquisitions, buyouts, mergers, and spin-offs creates more demand for information from an investor community that must make buy, sell, and hold decisions on companies they may know little about. About a year ago, Cendant Corporation spun off $3.8 billion Wyndham Worldwide Corporation as a new public company; Virginia Wilson, the Parsippany, New Jersey, company’s executive vice president and chief financial officer, says, “Many of the people in the investing community who ended up owning our shares after the spin-off hadn’t necessarily bought the old Cendant shares because they wanted to be involved in the hospitality space… So there was a big decision for them to make about whether they wanted to continue to own the shares.”

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The Renewed Finance Function— Whether investors are as informed as they would like to be, it is finance’s job to step in and give investors the information they seek. Verigy Ltd., a $778 million semiconductor test manufacturer based in Singapore, was spun off from Agilent Technologies in 2006 (which was itself an offshoot from Hewlett-Packard) and has had a similar experience in managing shareholder relations after a spin-off, albeit with investors more informed about industry performance, says Michael Jung, vice president of corporate financial planning and analysis. “We used to be part of a conglomerate. Now we’re a pure play semiconductor test company, and as a result, we’ve got investors who are familiar with the industry and are more focused.” He says, “These new investors have probably raised the bar a notch, and the rest of the shareholders get more keen insight into Verigy and are likely to drive the bar higher, too.”

Investor Demand for Better Performance Not only do investors want more information, they demand better performance. For instance, as $7.1 billion MGM Mirage reacts to its competitive landscape by moving into new businesses, investors want accelerated rates of activity and of return, says Rick Arpin: “When operating as just a gaming company, it might be okay to open up a property, generate some cash flow, pay down the debt and then say, ‘In five years I’ll open the next property.’ Real estate investors don’t want to hear that. They want to know what land you are buying next and what building is going up next.” Increased expectations for performance can translate into fundamental organization changes, resulting in dramatically new and more encompassing roles for the finance team. In mid-2007, Silgan Plastics, a division of Silgan Holdings in Chesterfield, Missouri, created a new CFO position and hired Derek Schmidt, who now oversees finance, IT, and corporate development. “Our purpose is all about driving shareholder value,” Mr. Schmidt says, “hence the need to combine corporate development and finance. Regarding IT, we have strong technical people, but they had no clear vision, no strategy as to how IT would actually create a competitive advantage for the entire business.” Moreover, he adds, “a lot of the diversity in my role has to do with the fact that we’re in a lower margin, competitive industry, so you can’t necessarily afford to have a CIO, CFO, and chief strategy officer.”

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“When operating as just a gaming company, it might be okay to open up a property, generate some cash flow, pay down the debt and then say, ‘In five years I’ll open the next property.’ Real estate investors don’t want to hear that. They want to know what land you are buying next and what building is going up next,” says Rick Arpin, VP of financial accounting for MGM Mirage.

While investors have always clamored for higher performance and better returns—when wouldn’t they want more from their investments?—investor expectations have driven CFOs and their teams toward enhancing business advisory capabilities, even in the face of daunting compliance requirements. By doing this well, say sources, the finance function can fulfill an expanded mandate as the steward of both controls and company performance. Says Cathy Cranston, senior vice president of financial strategy at the $16 billion Bank of Montreal, “The last few years have been just crazy with governance, with Sarbanes-Oxley, Basel II, and all the rest.” And as a result, her company’s finance team has had to focus on compliance matters more than it would like. She continues, “Our investors are very demanding in terms of the returns they want, and our industry is extremely competitive. Absolutely, the force from investors is pulling us forward to improve our performance. We in finance have a role to play, and it’s a lost opportunity when the full value we can bring to the table isn’t harnessed and leveraged. It’s a huge missed opportunity [to focus on governance at the risk of ignoring performance improvement].”

© 2007 CFO PUBLISHING CORP.

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Extending Performance Management Beyond Finance

Chapter 2: The New Role: A Holistic Leader and Partner— Not Merely a Technician Senior finance executives say they serve as partners to the CEO and to operational leaders as companies strive to improve performance. In some cases, this has been long-standing practice. At CBRE, Gil Borok says his company’s business management seeks out the finance function for “thoughtful analysis and the impact of decisions on their business.” He continues, “I’ve always tried to be client service-oriented, and the lines of business are a client of ours. That’s just what we do. The business comes first. They are the ones generating the revenue. I think that the finance organization here has improved. It has become recognized that we can add value to the businesses, and they come to us more ■ frequently.” In other organizations—including a majority of the companies represented in this survey—the finance team has recently assumed an expanded role as a counselor to functional and business unit leaders. (See Figure 3.)

In a majority of the companies represented in this survey, the finance team has recently assumed an expanded role as a counselor to functional and business unit leaders.

At educational materials publisher Cengage Learning in Belmont, California, Ashish Gupta says finance works on strategic projects more closely with the company’s CEO and Board than it had it the past. This trend, says Mr. Gupta, “spans across industries, but I’ve seen it more in my current position, perhaps because of our recent sale to private equity.” He says, “Finance is a key player in various metrics-driven■projects to analyze where the ■ gaps are in the business, to find opportunities for improving not only revenue but margin, and therefore cash flow, as cash flow becomes extremely important across businesses.”

> Figure 3. Boards of Directors and CEOs want more from the senior finance team—especially in managing business performance. In your opinion, do your CEO and Board of Directors rely on the finance team for decision support more, the same amount, or less than they did two years ago in the following categories?

Analysis and guidance on company performance

Analysis and review of business risk

Developing and validating business strategy

Input on mergers, acquisitions, and divestitures

Investor and debt-holder relations

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© 2007 CFO PUBLISHING CORP.

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The Renewed Finance Function— Cengage Learning is exploring ways to improve yield optimization—for instance, by looking creatively at how to make money in the used textbook market. (The $1.8 billion company, formerly Thomson Learning, was spun off from Thomson Corporation in mid-2007 and was purchased by private equity group Apex Partners.) Mr. Gupta is also exploring ways to improve the bottom line and generate more free cash flow by providing incentives to its distributors to reduce textbook returns. “These kinds of incremental opportunities—and in some cases, quantum opportunities—are the kinds of out-of-the-box scenarios that the Board seems to be more and more interested in,” Mr. Gupta says. Why are Boards and CEOs turning to finance executives for guidance on these sorts of decisions, rather than relying exclusively on operational executives, such as the COO? Our research suggests some fundamental reasons. First, the finance team is often ■ responsible for performance measurement activities and therefore has the metrics-driven knowledge to contribute to decision making at this level. (See Figure 4.)

Simultaneously, investors are demanding more communication with—and a deeper, more strategic level of information from—senior finance executives. According to a U.K.-based senior finance executive for a global chemical company, both investors and analysts expect the CFO to present strategic information, and they also expect the first point of contact to be with the CFO, not the CEO. “If you’re going to go out and represent your company—either to rating agencies, banks, or investors—if you’re looking for funds, I think they need or expect the CFO to have a broader view and a business view that they can represent to these potential stakeholders,” he says. “Has that changed significantly over the years? Perhaps. I just think that with all things, as the Internet has opened up levels of communication, it drives information hunger. People expect more. Certainly, the City [of London] expects more from the CFO.” ■

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> Figure 4. Finance is intimately engaged with a broad array of performance management activities— in close collaboration with business management. In your organization, who is primarily responsible for the following performance measurement activities?

Comparing actual to planned results

Developing plans, budgets, and forecasts

Making investing decisions

Developing performance metrics

Intervening early to avoid poor performance

Making operating decisions 0 20 ■ Finance staff

40 60 ■ Both finance and business unit staff

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© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance ■

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> Figure 5. There is widespread agreement on collaborating more closely with business managers… To what extent do you agree with these statements? Our finance team seeks to play a more active role in determining business strategy. Our business unit and functional leaders seek a greater contribution and closer collaboration with the finance function. ■ Agree strongly

0 ■ Agree somewhat

20 ■ Neutral

40 60 ■ Disagree somewhat

80 100% ■ Disagree strongly

…But there’s a disconnection between finance and business unit knowledge of each others’ worlds. In your opinion, how well do finance staff understand business unit management’s problems, concerns, and priorities? How well do finance staff understand business unit management’s problems, concerns, and priorities? How well do business unit managers understand the finance function’s problems, concerns, and priorities? 0 ■ Excellent understanding

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As investors raise their expectations for performance metrics-driven data, CEOs have begun to turn to finance teams to serve as independent voices within companies that challenge the assumptions of operational leaders, particularly when they assess new opportunities. (In this way, the finance team is acting as a surrogate for the investment community, asking the hard questions that they expect from investors and analysts in the future.) “I tell everyone on my team, ‘I look to you to be the CFO of your team and that doesn’t mean just putting together the numbers. You need to provide the insight, you need to challenge people’s assumptions. You need to really act as though you’re running the organization,’” says Michael Jung, vice president of corporate financial planning and analysis at Verigy, the semiconductor test manufacturer that was spun out of Agilent Technologies in 2006. “By necessity, I need those people to play that devil’s advocate role, to challenge the team and make sure that what comes out of the team is strong.”

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Partnership at Many Levels Finance executives are increasingly partnering with business unit and functional leaders in addition to supporting the Board and CEO. More than 80 percent of respondents to our survey agreed either strongly or somewhat that business unit and functional leaders are seeking a greater contribution from and closer collaboration with the finance team. (See Figure 5.)

CEOs have begun to turn to finance teams to serve as independent voices within companies that challenge the assumptions of operational leaders, particularly when they assess new opportunities.

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> Figure 6. Strong marks from finance—especially for core finance activities. To what extent do you agree or disagree with these statements about your finance team’s relationship with the rest of your organization? Finance team has strong knowledge of core financial, analytical, regulatory, accounting, and risk management matters

Finance team has great credibility with business unit managers

Finance team has strong knowledge of the industry and company operations

Finance team is able to collaborate effectively and build consensus with business management

0 ■ Agree strongly

■ Agree

20 ■ Neutral

40

60 ■ Disagree

80

100%

■ Disagree strongly

Percentage of all respondents

Indeed, survey respondents say that business unit leaders give finance executives high marks for their abilities to contribute to solving a broad range of problems. To do so requires candor, good information, and trust developed over the long term. (See Figure 6.) Says Cathy Cranston of the Bank of Montreal, “I think the onus is on the finance group to earn the right to be at the table. You do that by being good—by bringing useful, actionable information to the table, by being a devil’s advocate, by bringing information forward that sometimes people simply don’t want to hear.” She says finance executives should work to “become trusted advisors, and in some cases, finance people have earned that position. They’ve proven their value.” Conversely, she says, “if finance people stay in the background—just doing what they’re told, producing the numbers but not challenging them— ■ never bringing anything more to the table, they have not earned the right to be at the table, and they won’t be.”

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At a well-known international information aggregator, a vice president of finance points out the change in business managers’ thinking about how to work with the finance team. “Finance was typically a scorekeeper; it produced these reports that would make sure that the rules are followed. I think what the business is saying now is, ‘Look, finance, it’s great that you’re showing me these reports, but they’re not enough. We want you to understand a few things and convey your understanding to us to provide us with insight in business decision making so that we’re more knowledgeable.’” He calls on finance executives to truly master the underlying business: “Understanding the business itself so that you can predict financial results better and more accurately and analyze the mass of information that is out there will help insights into where it can ■ the business have key ■ improve itself.”

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Extending Performance Management Beyond Finance

> Figure 7. Business unit management is usually and routinely held accountable for financial performance. At your company, are business managers held accountable for financial metrics such as budget conformance, profitability, and returns on invested capital?

As a routine component of performance evaluations

In response to negative variances

Through ad hoc reviews

0 20 ■ Frequently

40

60

■ Occasionally

80

100% ■ Seldom

Percentage of all respondents

Collaborating with business leaders to assess potential value-creation opportunities may be CFO Virginia Wilson’s most important role at Wyndham Worldwide. “We’re helping people make decisions about whether there is a greater growth opportunity if you pursue one set of options versus alternatives. Is there risk associated with that? It is important for us to both help guide [business unit leaders] and then to communicate [these opportunities and risks] to our investing community,” Ms. Wilson says.

Less Confidence in Business Management —A Call for Training Emerges Unfortunately for the health of such partnerships, the finance team doesn’t give such high marks to their business unit peers when it comes to understanding finance. In fact, only 2 percent of respondents reported that “business unit managers have an excellent understanding of the finance ■ function.” Recently, says a finance executive at the food■ service conglomerate, “operators have really focused primarily on just ■ performing their duty and keeping their employees happy and almost divested themselves from any financial responsibility because they had a finance guy attached to the hip.” That’s a problem, he continues, because “some of our operators in the field don’t have the ability to see niches and opportunities in the market because they don’t have the full financial pallet available to them.”

© 2007 CFO PUBLISHING CORP.

Yet there is a chasm between finance’s doubts and the actual responsibilities of most business unit managers. Our research shows that business managers are routinely held accountable for performance tied to financial and operating metrics. (See Figure 7.) Executives interviewed for this study confirm this focus on accountability among business managers for performance results. Cathy Cranston at the Bank of Montreal says, “My CEO recently asked my group to create a much better line-of-sight into how we were going to meet our targets for next year, so we had to work across the organization to create metrics and targets at a lower level to really be able to see how we were going to get there, and to be able to track them more rigorously. We already do that; this was sort of an extra effort that was meant to create transparency and accountability.” As a result of this effort, says Ms. Cranston, “we’ve got much better metrics, and that’s because we want to create that transparency to set up the right discussions. It’s not enough to just say at the end of the year ‘Oops, we missed.’ There are monthly performance meetings with every group.”

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> Figure 8. Less than one in three respondents have formal programs in place to teach finance to business unit managers. Does your company have programs in place to teach financial concepts to business unit managers?

29% 37%

34%

■ Yes, formal programs in place ■ Yes, informal program in place ■ No Percentage of all respondents

Despite the need, less than one-third of companies have formalized programs in place to better educate business managers on financial concepts and how to apply them to the business. (See Figure 8.) Such programs for nonfinancial managers are often optional, but, according to our research, companies are starting to put training programs into place to bring financial and analytical expertise to their functional and managerial leaders. Silgan Plastics, for instance, currently has no formal program in place to train business managers in finance—a situation new CFO Derek Schmidt plans to remedy. “That is one of my objectives,” he says. “At the end of the day, it’s the frontline managers within our plants and sales force that are making the decisions, and we need to do our best to equip them with the right knowledge to make great financial choices for the company.” At the food-service conglomerate, the finance team is just beginning to train operations managers in finance. Says a finance executive at the food-service organization, “We want a better, well-rounded operator who not only can interface with a client, who can not only manage the careers of our associates, but who also can analyze and report his own financials.”

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It’s important to note that, at least according to our interviews, finance executives do look critically at their own departments, not just at those of their operations counterparts. In fact, for finance teams that are transforming from transaction-oriented groups into strategic ones, upgrading their talent may be the first order of business. Silgan’s Mr. Schmidt previously worked for Masterbrand Cabinets, which had grown from a $300 million-plus company to a $2 billionplus business in less than ten years via organic growth and acquisitions. “They had grown so fast that the investment in finance talent and IT systems was far behind what a $2 billion organization needed,” Mr. Schmidt says. “I was brought into that role to overhaul talent, implement performance management systems, upgrade key financial processes, and bring more financial partnering to the key business leaders.” Out of a 33-person finance team, he replaced 13 positions “with very strategically minded and savvy business people,” he says. “After repositioning talent, the second most important action was instilling that performance management system and an operational focus around things that truly drove financial success for the business.”

Less than one-third of companies have formalized programs in place to better educate business managers on financial concepts and how to apply them to the business. According to our research, companies are starting to put training programs into place to bring financial and analytical expertise to their functional and managerial leaders.

© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance

Chapter 3: Standardizing and Streamlining Like Y2K before it, the passage of Sarbanes-Oxley in 2002 spurred significant investments in information technology. Five years down the road, most finance executives feel companies have the software and systems that they need, but that companies aren’t using this technology to its full advantage. (Note that there is a significant minority, in certain industries, still suffering with manual processes.) Thus, the finance team has been spending its time and resources standardizing processes, linking systems together for better information flow, introducing more performance measurement resources companywide, and improving upon existing organizational structures. At container shipping company CMA CGM, for instance, Jim Arnold is working on a large, 14-month datawarehousing initiative. He’s using existing technology. “The parent company has most of the systems,” Mr. Arnold says. “It’s just they haven’t always deployed those systems into the subsidiaries in the past. When I came onboard and started probing, [I discovered that] we have all these very robust systems and I said, ‘Well, we’ve got to be able to utilize those systems in the subsidiaries.’ This doesn’t mean the current systems are a data warehouse; it just means the systems that house the data are available and they utilize well-known technology that can be developed to provide the company with real-time decision-making tools.” Similarly, when Derek Schmidt arrived in his new role at Silgan Plastics, he and his team decided to initiate a major project to introduce performance dashboards into all areas of the company so that, eventually, all key employees will have access to information for instantaneous decision making. It’s a phased project that will take two years to complete—but it won’t require major new technology investments. “We [had] already bought the functionality as part of our broader software package. So, there is no incremental expenditure in terms of software purchase,” Mr. Schmidt says. “We’re going to have roughly three or four individuals primarily dedicated to this internally. [And] we’ve already contracted with an outside consulting firm.”

© 2007 CFO PUBLISHING CORP.

Process Improvements Clearly, finance teams are becoming more assertive when it comes to maximizing the technology and the systems at their fingertips. Over the last two years, respondents say, they’ve undertaken or completed significant process changes, mostly intended to ensure that all parts of the organization are using accurate and timely information, and also intended to improve efficiency and accountability (for instance, centralizing certain accounting activities). As one example, well over 60 percent are working on or have completed substantial process review and documentation projects for compliance purposes (an obvious effect of Sarbanes-Oxley); more than 60 percent are working on standardizing their charts of accounts or have completed doing so. (See Figure 9., next page) Most of our interview subjects indicated that by standardizing processes, they and their business unit counterparts can both spend less time and effort on recording transactions and have better information with which to then drive strategy. For instance, Cox Communications, part of $13.3 billion (2006 annual revenue) media company Cox Enterprises, Inc., is a highly decentralized company, says Bill Fitzsimmons. While he acknowledges that decentralization has its strengths on the customer side, for the past six years he has been working on centralizing and standardizing all of the financial procedures, regardless of where they reside in the company. “We standardized how the accounts were structured; we streamlined departments; we got people using a standard chart of accounts consistently. That set up our conversion into a new system,” he says. “Now we’re on a common platform and we have common measurements,” Mr. Fitzsimmons says. By standardizing, he says, “you can draw efficiencies by doing things better and faster and the result is a cleaner and more accurate product. If I were out in the field, I would be grateful for that, because that will allow me to spend more of my time on true analysis as opposed to just cranking through the brute-force number calculations.”

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The Renewed Finance Function— > Figure 9. Document, standardize, streamline, simplify. Has your company made substantial changes in the following areas in the last two years?

Standardizing charts of accounts

Process review and documentation for compliance with regulation

Streamlining and/or standardizing the monthly/quarterly close process

Simplifying and standardizing core finance processes (e.g., A/R, A/P, cash management, etc.) Large-scale investments for enterprise IT systems (e.g., ERP and other transaction systems)

Revising and/or expanding business performance metrics

Technology for automating compliance with regulation

Outsourcing core finance activities (e.g., A/R, A/P, tax, etc.)

Technology for measuring and managing risk 0 ■ Substantial projects completed

■ Substantial projects underway

20

40

60

■ Substantial projects under consideration

80

100%

■ Few if any substantial initiatives

Percentage of all respondents

“If you’re the CFO, efficiency in process has to be the drumbeat that you march to,” says another senior finance executive at a division of a major pharmaceutical company, who recently finished standardizing the organization’s accounts receivable management. The result: The organization can reduce head count by four or five people this year.

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Simply because these initiatives are happening, however, doesn’t mean it’s easy for strategy-minded executives to make them happen, particularly in transaction-oriented cultures. The pharmaceutical executive says, “It’s because we have pushed and pushed, but it takes a lot of effort from the inside of the organization to get that change to happen.”

© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance ■

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> Figure 10. Finance gets the basics rights; business support lags. In your opinion, how well equipped is your corporate finance function to contribute to executing your company’s business strategy over the next three to five years in the following areas?

Well-documented and controlled processes for routine finance activities (e.g., A/R, A/P, cash management, etc.) Number of finance employees at the senior level (e.g., directors, VPs, and above)

Access to timely and accurate information on finance and operating activities

Enterprise IT for transaction processing (e.g., systems for A/P, A/R, financial reporting, etc.)

Processes for planning, budgeting, and forecasting

Number of finance employees at the staff level IT systems for performance management and business planning (including business intelligence and other analytical applications) 0 ■ Very well equipped

20

■ Fairly well equipped

40

60

■ Poorly equipped

80

100%

■ Don’t know/NA

Percentage of all respondents

That acknowledgment nods at a truth within even the highest-performing organizations: There is still much progress to be made in streamlining processes and systems—and making sure the right information is available for various activities. Our research indicates that finance executives feel they are well prepared in some areas to execute on their companies’ business strategies over the next three to five years, but highly unsatisfied in others. (See Figure 10.) Namely, more than 90 percent say they are fairly or very well equipped when it comes to having well-documented and controlled processes for routine finance activities such as A/R, A/P, and so on. That number dips to just over 60 percent when it comes to IT systems for use in performance management and business planning—reflecting, perhaps, the fact that

© 2007 CFO PUBLISHING CORP.

finance teams are truly still in the midst of transforming from the traditional “backwards-looking” finance culture—one schooled in post-mortems—to the 21st century’s forward-looking finance environment.

There is still much progress to be made in streamlining processes and systems—and making sure the right information is available for various activities.

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The Renewed Finance Function— Consider, for example, how some of these issues play out at MGM Mirage. As the gaming company enters new business arenas in response to the industry’s mature, highly competitive environment, it’s incumbent upon finance to gather different information in support of these new arenas (requiring, in fact, some technology investments). But constrained resources mean that finance still lives with some manual processes, reports Rick Arpin. “We’ve been able to find systems that can do what we want in specific areas,” he says. “It’s just that ultimately we’d like to link solutions end-to-end. [Presently] our systems require a manual intervention, taking information from one system and putting it into another. I think that’s a challenge and it probably won’t go away in the near term, but we keep looking for efficiencies in the process.”

A third of our survey respondents call investing in ERP systems their first priority, when it comes to financial applications, over the next two years.

Cengage’s Ashish Gupta acknowledges that systems complexity does sometimes force the finance team to make less-than-perfect decisions. “The optimal business decision needs be balanced with operational and systems complexity. Sometimes, given the 80/20, it’s easier to trade-off elements of the former with ease of implementing, managing and updating [systems],” he says.

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Also at play, of course, is that because the enterprise keeps growing and changing, you cannot find a one-sizefits-all solution and be done. Mergers, acquisitions, and spin-offs force companies to change their processes often, and often drastically. According to Wyndham’s Virginia Wilson, “In connection with our transaction last year [when Wyndham was spun out of Cendant], we essentially had one very large company split into four very large companies and we pretty much had to pull apart all of the technology stuff—telecommunications systems, mainframes, the data center, everything. E-mail, security—all of that had to be re-implemented. So that has been an enormous undertaking over the last 18 months.” Given those two drivers—the difficulty of working with outdated systems and the need for technology i nvestment as a result of M&A activity—it should not be surprising that finance is still making some investments in IT. Of greatest interest is ERP systems: A third of our survey respondents call investing in ERP systems their first priority, when it comes to financial applications, over the next two years. (See Figure 11, next page.)

Performance Measurement and Management Judging from survey and interview research, finance teams that have not yet begun significant performance measurement and management initiatives may do so in the next few years, as the Board, CEOs, and investors search for continuously higher performance in a competitive, global environment. Our research indicates that business managers and finance are “not on the same page,” so to speak, when it comes to accessing critical information. In 50 percent of companies, finance and business managers equally share performancereporting dashboards—and for most companies, that’s not good enough, according to our interview subjects. Business and finance share other applications even less of the time—for instance, they share planning, budgeting, and forecasting applications equally in only 36 percent of organizations. (See Figure 12, next page.)

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> Figure 11. Continued investment is being made in current systems and on business planning and analysis applications. Which of the following finance technologies will receive the greatest investment over the next two years? ERP and transaction processing systems

Business intelligence applications

Planning, budgeting, and forecasting applications

Performance reporting dashboards

■

■ applications Risk management

0 ■ First priority

■ Second priority

■

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20

40

60

80

■ Fourth priority

■ Third priority

100%

■ Fifth priority

Percentage of all respondents

> Figure 12. Use of collaborative technology for business planning may fall short of business unit and finance needs. Who within your company are the primary users of the following types of applications?

Planning, budgeting, and forecasting applications

ERP and transaction processing systems

Business intelligence applications

Performance reporting dashboards

0 ■ Used primarily by finance staff

■ Used primarily by business unit staff

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40

60

80

■ Used equally by finance and business unit staff

100% ■ N/A

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> Figure 13. Risk management is formalized under the CFO at nearly half of respondents’ companies. Does your company have a dedicated risk management department or job function?

28%

48%

24%

■ Yes, risk management reports to the CFO ■ Yes, but risk management does not report to the CFO

■

Smaller companies, too, are beginning to adopt performance measurement tools such as dashboards. Doug Patteson joined Turbocam, a $45 million, privately held manufacturer in Barrington, New Hampshire, two years ago as the company’s first CFO. He was brought on specifically to work as a strategic partner to the CEO, who was readying for a growth spurt (the company has doubled in size since then). Mr. Patteson is an enthusiastic supporter of dashboarding, but can do so only in a limited fashion, because of resource constraints that don’t allow him to purchase necessary systems. “When you talk about transforming what has historically been an infrastructure support function into a strategic one, that may require fairly extensive capital outlays. That’s a hard sell and we’re not there yet,” he says. “So we do [dashboarding] manually,” he says. “But the concept is huge, so let’s do whatever we can to adopt the concept now and then let’s adopt ever-better tools to deliver on [its promise].”

■ No, we don't have a risk management organization Percentage of all respondents

Cox Communications is among those companies rolling dashboards out to all of its professional employees (in nnnnn Cox’s case, to 18 locations). It uses the dashboards, which employ a simple-to-understand graphic, not only to inform operations managers but also to motivate them. “We have what we call a ‘frog in a blender’ analysis,” says Mr. Fitzsimmons. “If you’re in the top third in a given statistic, you’re rated green—you look pretty much like a frog. If you’re in the middle third, you’re rated white and if you’re in the bottom third, you’re red— you’re going to look more like a blended frog,” he says. “So that’s an easy way to see visually where things are and then, obviously, you can drill through into the numbers to really understand [the underlying characteristics driving performance].”

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Sources interviewed for this study maintain that financedriven performance management requires very highquality information from companies’ various IT systems, analyzed and presented with clearly defined business decision making in mind. But they caution that performance management isn’t a pure technology problem— one that can be solved with the ultimate spreadsheet or leading-edge application. The CFO of Levi Strauss & Co., the $4.2 billion global manufacturer and retailer, says, “Finance and business managers have to learn to give and take. The spreadsheet won’t give you the answer. It will give you a number on a piece of paper but then determining what is the right solution is a matter of leadership.” He says finance executives should provide good information and help managers find the right answers themselves. “Once people get the tools they need and keep them simple—and if finance keeps asking the right questions—people will arrive at the answer themselves. Most people prefer to have a clear understanding of why the answer is strategically correct, instead of having finance push the answer to them. I think that’s also about leadership style. Just ask the right questions and then people will come to the right answer themselves.”

© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance

As companies seek to squeeze out better performance from existing resources, they not only must assess opportunities, they must also evaluate potential risk. Our research indicates that 72 percent of organizations have a dedicated risk management function; almost half of all risk managers report to the CFO. (See Figure 13, previous page.) However, there exists the possibility that these dedicated risk managers do not have all of the information they need to perform their jobs optimally, because technology investments in risk assessment are insufficient. Only 8 percent of companies have completed substantial risk management technology projects during the last two years; another 22 percent have significant projects under way. (See Figure 9, page 18.) Sources interviewed for this study suggest that evaluating operating risk—the negative outcomes from business process failures, poor strategic and tactical decisions, and so on—is as much a collaborative mental exercise as it is a scientific analysis of probability and expected values. The finance executive at the information aggregator says this about operating risk management: “The problem with our business is it’s so diverse that we have a knowledge sharing portal, but that’s really it.” Risk management at this international information company, he says, “requires a lot of talking with people, a lot of analysis of information that is out there and available, and then it requires a cognitive process of thinking things through, sort of like thinking of a chess board. ‘What happens if this occurs?’ It’s a very logical, critical-thinking position.” The abstract problems of risk management are best solved, he says, through human analysis based on experience and supported by information technology. This executive cites diagnostic and therapeutic information as an example. “Let’s say you have a doctor with a handheld device,” he says. “The doctor observes that the client has a condition, and through our handheld device, he pulls up information about the patient and his other prescriptions. We provide a recommendation on what dosage of a particular drug to take. Now, if that dosage is wrong, we’re in trouble. So the risks of some of our information and [its use] are critical. They [operating risks] must be well managed.”

© 2007 CFO PUBLISHING CORP.

Other sources cite a risk management model that considers purely financial risks—those that stem from currency fluctuation, interest rate, product liability, and workforce injury, for example—separately from operating risk. At ABB, a global electrical engineering firm based in Switzerland, senior vice president and chief financial officer for North America Herbert Parker says the company has two classes of risk management: major projects and more traditional insurable risk. Says Mr. Parker, “Prior to us signing any large contract of say, $15 million or so, our risk review committee thoroughly reviews the details of contracts while they are still in the proposal stage. During this review, we assess the risk of such items as new technology, country risk (labor, political, safety, etc.), prior experience with the customer, consequential liquidated damages, and any other type of typical risks inherent in large projects.” The finance organization is instrumental, he says, in these reviews. In addition, he says, the company has a separate group for conventional risk management “that’s more on the insurance side, looking at product liability claims and any type of major catastrophes that could happen in a normal business transaction, including large projects.”

Sources interviewed for this study suggest that evaluating operating risk—the negative outcomes from business process failures, poor strategic and tactical decisions, and so on—is as much a collaborative mental exercise as it is a scientific analysis of probability and expected values.

But sources are adamant that their risk review function not inhibit business growth or productivity. Says one European executive, “We realize as a company that without taking risk, we’re not going to get growth. So the businesses in and of themselves are definitely the engine for growth; we in finance just act as a counterbalance to them. They also must manage their own risk and that’s one thing that we demand of them, but there are cases when they’re taking risks that are not in our best interest that we need to highlight.”

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The Renewed Finance Function— Chapter 4: Conclusion Surely the desire for finance executives to become more strategic has existed within companies, and within the finance team, for several years. Over the last two years, the demand for finance to provide strategic guidance in pursuit of corporate performance has accelerated. Pushed by a number of factors—most significantly an increasingly difficult competitive environment, combined with a vigilant and sophisticated investor community— the majority of finance teams have indeed moved further along this continuum, despite a continued need to pay attention to transactions and regulatory compliance.

The skills needed in a strategic finance organization—as counselor to functional and business unit leaders, collaborator with the CEO and the Board, and voice for the investor community—are dramatically different than those required in a transactional finance group.

Why, exactly? Over the last decade, large companies have achieved significant growth and earnings. Therefore, CEOs are seeking creative ways to generate new profits—and they’re looking to finance for help. In addition, the growth of private equity into the acquisition marketplace has placed a new emphasis on the role of cash flow. This new emphasis places demands upon finance executives for metrics-driven analysis of the ways in which organizations use—and tie up—their cash and how to free it up. In sum, these influences are forcing companies to look for growth in other places than the top line. The finance professional, says Cengage’s Mr. Gupta, is the best person to seek those “nontraditional levers that [can] spur the engine of growth.”

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The good news: Finance teams have made significant progress in standardizing and streamlining their systems and processes over the last two years. However, they still have additional responsibility when it comes to implementing performance reporting and measurement applications throughout the organization and in training operations on the functions of the finance team. Furthermore, companies evolving finance into a more strategic role must attract and retain better educated finance executives, because the skills needed in a strategic finance organization—as counselor to functional and business unit leaders, collaborator with the CEO and the Board, and voice for the investor community—are dramatically different than those required in a transactional finance group. “Being a strategic partner requires a whole different skill set,” says a senior finance executive at a division of a global pharmaceutical company. “You have to be more of a holistic thinker. You can’t be just a person who sits in your office and grinds away at the numbers all day.” Says Silgan’s Mr. Schmidt, “They have to understand how technology, purchasing, finance, marketing, sales, and operations all play a critical yet interdependent role in business strategy and execution.” Our interview subjects all indicate that such talent is hard to find, and demographics would indicate that the search for talent will only become more grueling. “That’s going to be our challenge in the next decade and beyond,” Mr. Schmidt says. “It’s very challenging to find an individual who has the capability to either grow into that strategic partner role or who has the breadth of business experience plus the technical finance foundation to play both ends of the spectrum in a truly strategic finance role.”

© 2007 CFO PUBLISHING CORP.

Extending Performance Management Beyond Finance

Sponsor’s Perspective SAP partnered with CFO Research Services on this study as part of our ongoing effort to better serve our customers as well as understand how companies are progressing on their financial transformation journey. We had two major goals in sponsoring this research. First, we wanted to gain insight into the challenges and successes that finance departments are experiencing as they strive to make their operations more efficient and play a more strategic role in the business. Second, we wanted to deepen the knowledge we have gained through both our own research and our 35 years of experience providing financial management solutions to the world’s leading companies. This study confirms what we have learned through that experience as well as through the benchmarking research conducted by SAP’s Value Engineering group: Investments in IT solutions that automate and standardize critical finance processes not only help decrease costs and cycle times but pay additional dividends in the form of strengthened compliance and improved financial returns. Moreover, these benefits are being realized up and down the financial value chain, beyond core accounting and reporting, to encompass broader financial management processes such as payables processing and cash management. From closing the books to straight-through payment processing, technology solutions are helping companies harmonize financial data across systems and organizational units, achieve greater process consistency, minimize manual processing and compliance risk, and enable their finance professionals to apply their expertise to higher value-added work. For example, companies are benefiting from greater automation and strategic insight around the period end financial reporting cycle. Closing the books can be very challenging and time-consuming, especially when data from multiple systems has to be consolidated and tasks must be coordinated across operating units located in different locations and time zones. Businesses can greatly reduce the time and effort required to close the books by investing in technology that helps to standardize, automate, and coordinate the companywide closing

© 2007 CFO PUBLISHING CORP.

process. The right products can enable more consistent processes and better task coordination, collaboration, and workflow needed to efficiently close the books. And when these products allow users to work with familiar office tools such as Excel—and give them graphical web interfaces to centrally manage the closing process and facilitate cross-unit coordination—companies benefit from fast adoption and greater visibility. For example, one customer found that SAP software that supports business planning and consolidation was so easy to use that in the same month that their financial reporting went live, users successfully produced that month's financial reports using the new software. At the same time, it facilitated compliance with US GAAP regulations and condensed their three-month consolidation process to one week. Strategic software investments can improve processes in other areas as well—and realize significant cost savings and higher returns. For example, companies can reduce costs by taking advantage of Internet-based payment networks that streamline invoicing and payment processes and provide real-time visibility into global cash balances needed to manage liquidity effectively. One SAP customer—a $6 billion firm in the oil and gas industry—completely automated its accounts payable and cash management functions, enabling the company to process thousands of payments every month with just two full-time employees. The company also automated its cash management activities, enabling the finance department to perform reconciliations across its numerous banking relationships in just a few hours a day. Because of the automated processes, the company has also reduced its bank fees, lowered its operating costs, and generated higher returns on its cash positions.

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Businesses can also leverage the transformative power of performance management software to model and optimize all drivers affecting profitability, and the strength of governance, risk, and compliance (GRC) to reduce risks and process costs. Using SAP software, some companies have been able to substantially reduce the cycle time needed to gain insight into profitability, as well as dramatically lower their cost of ownership while increasing net profits. From a GRC perspective, companies can significantly lower their external audit fees and increase their internal audit efficiency, which can save them hundreds of thousands of dollars per year. Most also realize significant additional savings adding up to $1 million or more annually, thanks to improved compliance and operational processes.

For more information about how SAP financial management solutions help businesses streamline finance processes, ensure compliance, and equip their finance professionals to provide more strategic value to the company, please visit http://www.sap.com/solutions/index.epx. You’ll discover why the best-run businesses run SAP.

SAP is the world’s leading provider of business software. For more than 35 years, we have provided companies with robust financial management solutions for automating core accounting and reporting functions, optimizing their financial supply chains, and achieving better business performance. More than 30,000 companies worldwide (including many of those mentioned in this report) across over 25 industries depend on SAP financial management solutions. SAP is proud to sponsor this research to help finance professionals gain insight into how their peers in leading companies are transforming their roles and helping their organizations achieve better performance.

NOVEMBER 2007

© 2007 CFO PUBLISHING CORP.