It is possible to successfully transform a finance function in 18-24 months and achieve cost savings of up to 40%, write Amy Ball and Garrett Cronin.
During the sharpest recession in recent history, many finance leaders were forced to deliver a broader range of services with fewer resources as companies scaled back in light of declining revenues. The ever-changing economic conditions therefore forced finance functions to be more agile, and highlighted the need for professionals to take a proactive approach to developing strategies that would help their firms survive and thrive amid future challenges.
In the immediate aftermath of the financial crisis, some organisations were better placed than others to adapt to the challenging economic conditions. Indeed, leading finance functions came into their own during this period and finance leaders repositioned their teams as business partners – advising and challenging their executive teams as they navigated the changing landscape. Such finance leaders leveraged technology to automate transactional activity and restructured the finance function’s operating model to take advantage of centralised shared service teams and centres of excellence. Brave decisions were made on investment in enterprise resource planning (ERP) systems and financial planning and analysis (FP&A) tools, while increased focus was placed on producing consistent real-time data.
These strategies created additional capacity within finance teams to work on strategic activities and drive efficiencies throughout the organisation. These organisations, which adapted well to recessionary times, are now well-placed to capitalise on the ongoing economic recovery.
Real-time analytics
PwC’s recently-published benchmark study, entitled Breaking Away: How Leading Finance Functions are Redefining Excellence, focuses on the factors that distinguish frontrunners across all aspects of finance activity including business insight, efficiency and control.
Analysis of the study’s data, which was obtained from over 5,600 finance teams and 400 organisations globally, shows how the best-performing finance functions have ditched the traditional focus on book-keeping and information-gathering. They instead produce real-time analytics and management information, which is used by other parts of the business to inform their activities.
The study also reveals that finance professionals now spend 50% of their time on analysis as opposed to data gathering, up from 36% just three years ago. In top quartile companies, they spend an average 60% of their time on analysis. The changes signify a demand for a new type of finance professional, one that is able to navigate the new business landscape and interact or partner more meaningfully with other parts of the business. Furthermore, the need for soft skills is reflected in the study. Some 44% of respondents cite collaboration as a priority, while 53% say improvements
in communication processes are most important.
Targeted investment
Technological advances mean that the role of the human is changing quite radically, as automated processes are now carried out using artificial intelligence. In modern business, insight is driven by internal data, which usually supplied by the finance department but increasingly sourced using automated means. This data is then supported by data from specialised external sources.
While data-gathering is an important part of the process, the best finance professionals now produce actionable information, rather than merely circulating numbers that are likely to be out-of-date upon release. The digital revolution also means that finance technology is becoming more advanced, cheaper to acquire, and increasingly interactive.
Data fragmentation still creates difficulty for many businesses. However, the PwC study indicates that targeted investment in digital technologies has resulted in not only cleaner and more accurate real-time data, it has also delivered value in terms of customer satisfaction and speed of innovation. Leading organisations can now understand the drivers of performance and are identifying business opportunities that would not have been visible previously. For example, you will likely know a tablet-carrying CFO who can drill through profit and loss (P&L) data and access key performance indicators (KPIs) on the move, while creating snapshots covering the performance of the entire business using data visualisation tools. Such capabilities enable agile decision-making and allow the CFO and finance team to play a critical role in driving the business.
Economies of scale
As fewer people are needed to run finance departments, the cost of the average finance function as a percentage of revenue has fallen since 2011 by over 10%. However, a combination of automation, shared services, and increased efficiency means that the cost of finance is now a full 40% lower in the best-performing organisations.
Due to economies of scale, the cost of finance as a percentage of revenue in companies with revenues of over €9 billion is less than half that of companies with revenues of under €900 million. However, operating in multiple countries creates a degree of complexity that is expensive for finance departments. The median cost of an average performing finance department in a business operating in more than 10 countries, for example, is more than 2.5 times the cost of operating a finance department in a single country business. Top quartile finance functions, on the other hand, are better able to deal with this complexity and achieve an average cost saving of 30% for international finance operations in 10 countries or more.
There are also significant differences between industries. Complexity and regulation mean that the finance function remains the most costly division within financial services, accounting for 1.32% of revenues for the average organisation. At the other end of the scale, high-volume low-margin businesses can run a lean finance function with the cost of the average finance function in the retail industry accounting for just 0.34% of revenues. Others such as industrial manufacturers (1.18%), technology companies (1.11%), and utilities (0.83%) tend to lie between these extremes.
Embrace change to drive performance
While the cost per fulltime equivalent headcount (FTE) in finance is increasing, especially among top quartile finance functions in business insight areas, companies are making progress in efficiency. As a result, fewer overall FTEs are required. In short, top people cost more but they deliver more and are ultimately worth more.
The best performers harness technology and processes, for example delivering budgets in 80 days compared to an average of 95. Taking three months to close a budget is unsustainable when decision-makers are used to near-real-time data and analytics.
For transactional processes, such as those in the areas of billing and management reporting, more than 40% of time is wasted or spent on activities that could be automated. Efficiency is not always about technology, however. Capacity increases of 15-25% can be achieved within finance functions through process change and excellence in managing teams. Leaders must therefore be willing to embrace wholesale changes in the way finance works and how it interacts with other parts of the business.
Conclusion
The pace of change is accelerating and competition in every market is tougher than ever. It is clear that leading finance functions are not just more efficient than their peers, they now look very different to the majority.
It is possible to successfully transform a finance function in 18-24 months and keep up with the pace of change. For finance professionals, being part of one of these front-running teams offers more interesting challenges and more influence with the business. The enduring challenge for finance leaders, however, is to navigate the business through change and recognise the opportunities that change can bring.
Amy Ball, is Director of Financial Effectiveness in Advisory Consulting at PwC. Garrett Cronin is Partner, Consulting and Financial Effectiveness at PwC.