Next Generation Needs Financial Efficiency to Support Strategic Decision-Making
Achieving the next frontier in finance efficiency and effectiveness will likely require finance executives to shift their thinking from the priorities of the past. Formerly, there existed a trade-off between cost reduction and increased effectiveness of the finance function. Therefore, in the quest to limit organisation’s operating cost so as to make profits, finance executives focused solely on cost reduction activities as against providing value for their stakeholders. This is a false choice and as such demands that finance leaders must begin to develop ways in which cost can be reduced without losing value. Also, attention must be drawn to the fact that the role of finance leaders’ guides strategic decision-making as well as the day to day running and functioning of an entire organisation hence it’s necessary that they deliver far more beyond core financial skills in the execution of their duties.
Leading finance departments are guardians of enterprise value creation, demonstrating stewardship of their own spend by lowering absolute costs and shifting work towards more value-added activities. Value-added activities that finance executives spend a greater portion of their time on to differentiate themselves from others and to move further than their core financial skills to build strong organisations include financial planning and analysis (FP&A), strategic planning, treasury, operational-risk management, and policy setting. This prioritization enables finance leaders to build deeper capabilities in value-additive areas, creating a positive feedback loop that could result in even greater advantages in the future.
For companies to excel and be counted among finance leaders Agrawal, et al, says four imperatives are especially critical for delivering value in the form of greater real-time insights, minimizing human error and biases, and driving speed in workflows and decision-making.
Delineating these Imperatives, first of all, finance leaders must learn to ‘look beyond transactional activities’ such as accounts payable, accounts receivable, and other core accounting areas. While most leading organizations have substantially increased efficiency in transactional functions, there is neglect for efficiency improvements in the more strategic areas of finance, such as FP&A, optimizing capital structures, tax planning, controllership, internal audit, and financial-risk management.
To pursue this imperative, Chief Finance Officers (CFOs) can Shift focus from low-end to high-end automation and align with the wider enterprise. The technical landscape has changed over the past few years with some leading companies applying machine learning and similar advanced technologies in their operations. Having an enterprise-wide strategy on which of the myriad technologies to employ not only allows more focused investments, it also encourages further collaboration between finance and other functions. However, the complexity of these technologies should not be underestimated. It is important that CFOs invest in piloting these technologies to identify the right use cases, and be prepared to change direction if initial experiments fail.
Another line of focus is to equip staff in critical roles with the necessary level of experience, leadership mind-sets, and authority to influence the business as well as make better use of staff time spent on value-added activities. Staff need continual capability building and skills development if they are to successfully perform their roles as advisors and counterweights to senior executives in steering the financial trajectory of the business. CFOs can set specific guidelines on where finance staff spend their time as such instead of performing reactive analyses of historical data to explain past performance, they should focus more on analyses for prescribing future courses of action.
With the growing size, complexity, and importance of data, the second imperative is to ‘help finance lead in data’ because the amount of data in the world is anticipated to reach 175 zettabytes (175 billion terabytes) by 2025. The exponential growth poses a significant challenge for finance teams as they seek to distill ever larger and more complex data sets into a single source of high-quality, trusted data that provides actionable information and insights to the rest of the organization.
Finance departments need a clearly defined master data-management strategy to guide the collection, storage, and interrogation of the rising volume of data needed to perform the types of analytics the business requires.
As part of the function’s responsibility to consolidate, simplify, and control company-wide data, finance leaders can achieve this imperative by prioritizing data quality and consistency, by setting high standards on data structure, entry, aggregation, storage, and protection across the company. By steering the development of data governance and data operating-model decisions, CFOs can reinforce change-management practices not only within the finance organization, but also in adjacent functions that produce much of the data finance consumes.
Next is to Invest in an agile, better-quality, tech-enabled data and help lead data-standard alignment across departments. CFOs can advocate for a data system that is flexible enough to accommodate changing business needs as well as can cross-reference and validate data, which can reduce errors and the time needed to ensure data are correct when ingested. While finance cannot drive enterprise data efforts alone, it can promote collaboration among the leaders of the IT, digital, customer-facing, and operational functions—especially by developing robust business cases that articulate quantifiable returns on investment for the associated improvements in data quality.
The third imperative is to ‘improve decision-making’ by using advanced analytical techniques to solve pressing business problems. Beyond providing analytical insights, the finance department is also responsible for framing discussions on company performance and the actions needed to improve it. To be effective in achieving this imperative, finance leaders require clearer, faster and richer insights to be able to highlight shortfalls against expected outcomes, identify causes of gaps that occur, understand recent performance and make decisions based on more robust datasets from a wider variety of sources including both internal and external data sources. Consequently, CFOs will gain a broader perspective coupled with a more realistic view of likely performance outcomes and reduce the chance that unexpected shocks will render projections inaccurate to change its trajectory quickly and decisively.
Actions then can further help improve insight generation and the decisions it informs include training, particularly in analytical, data-visualization, as well as debiasing techniques and technologies. Also, companies can increase the quality and stature of senior finance business-partnering roles. The people in these positions need deep experience and perspective to drill into the causes of underperformance, and to push back against over-optimistic or unnecessarily conservative financial assumptions that may get baked into business plans. Matching true high performers to these critical roles is an essential component of translating analytic capabilities into realizable business outcomes.
To ‘reimagine the finance operating model with new capabilities’ is the fourth Imperative. This requires not only a different way of organizing how work gets done quickly and dynamically allowing staff to focus on the most pressing topics facing their organization, but also a different type of finance professional.
To reduce the effort involved in operational tasks, the new finance operating model starts from a leaner core, with tighter data standards, new data-management practices, enhanced automation, and integration with a wide range of related digital technologies.
Implementing this model involves a series of changes such as breaking traditional hierarchies into flat networks of teams to deliver deeper insights into business problems. Creating this capacity follows agile working principles and allows finance business partners to draw on a shared pool of analysts, who are assigned to specific work items based on well-defined and agreed-upon business priorities to provide financial analyses that gives insights into business challenges.
Developing finance skills to foster a core of business-savvy finance leaders with the stature to engage company leaders as peers as well as embedding digital skills across the finance organization; this demands supporting career progression, explicit capability-building, and strengthening job rotations, both within finance and between finance and the business, to build a cadre of skilled professionals who can move easily throughout the organization. Here, emphasis is laid on building operational, leadership, and technical finance capabilities.
Additionally, formal and informal incentives are necessary for skill development. Examples include tying incentives to knowledge and capability development, setting explicit targets for internal promotions to finance leadership positions, and explicitly recognizing the accomplishments of managers who foster skill development by coaching their teams.
In conclusion, advances in computing power, machine learning and artificial intelligence (AI), can increasingly be applied to complex tasks to monitor and resolve financial and business-continuity risks and pursue opportunities. For companies to attain the feat of a finance leader, things must be done differently. This requires reaching beyond the transactional activities that have long been the primary focus of attention and concentrating on a wider net for new efficiency opportunities. Another is to boost finance role in managing data and to strengthen decision-making through widespread adoption of data-visualization, advanced-analytics, and debiasing techniques.
Going further, the finance operating model must be reimagined so that it fosters new skills and capabilities. Investing finance-staff capacity to validate and clean data at the point of entry is far more efficient than addressing data-quality issues after they have occurred. In parallel, finance staff will likely need additional capabilities to understand the limitations of data and how to resolve them.
The four imperatives are already enabling companies to join the finance-function elite while cutting audit costs by double-digit percentages, improving data quality and reducing wasteful data-cleaning efforts, up-skilling finance teams, and enabling the function to guide better decisions throughout the enterprise. Through these steps, the next-generation finance function can build the insights, performance, and planning capabilities that leaders will need to support dynamic decision-making through the next decade.