Building a better finance function*

*This is an expanded version of a summary that appeared in the May 2007 issue of CAmagazine.

How do top-performing organizations organize their finance functions? And what can be learned from their example? Those are two key questions that a recent report seeks to answer.

The report, Being the Best: Insights from Leading Finance Functions, was commissioned by KPMG International and written by the Economist Intelligence Unit. It is based on a global survey of 286 senior executives, 53% of whom came from organizations with more than US$1 billion in annual revenue. Respondents were drawn from a cross-section of industries.

The survey results from top-performing organizations (defined by the Economist Intelligence Unit as those with an EBITDA average growth rate of over 10% in each of the last three years) were analysed and compared with the wider survey sample, to shed light on how the most successful companies have organized their finance functions. To supplement the survey, interviews were conducted with leading CFOs, as well as academics and experts in the field.

The report shows that top-performing businesses do have top-notch finance functions. “When an organization has a leading finance function, it benefits in a number of complex ways but the research shows few finance functions can be referred to as leading,” says Scott Parker, head of financial management at KPMG LLP (UK) in the report.

Here are the some of the main findings.

Top performers spend less time on cost control and more on decision support
Almost 80% of CFOs at average performing companies in the survey see cost control as a major part of finance’s role. In contrast, only 64% of top-performing companies in the survey cite cost control as a key focus and they tend to spend more time on decision support activity. They are also more likely to have a strong vision for the finance function and to have communicated this clearly to the rest of the business.

Forecasting and management information: the two main priorities for improvement
Finance executives in the survey are confident in their ability to deliver historical financial reporting but are much less satisfied with their ability to deliver forward-looking insights. Fully 43% are dissatisfied with their ability to undertake planning, budgeting and forecasting tasks, and 42% express similar concerns over the quality of management information.

Shared service centers, not outsourcing, pave the way to new efficiencies
According to the survey, from 35% to 50% of companies now handle their treasury management, financial reporting and transaction processing within a shared service centre. “In future, routine management reporting will be a particular growth area in the use of shared service centres, as organizations seek to improve the quality of management information,” says the report. It also says that outsourcing strategies for finance are still in their infancy and less popular than other support functions such as IT, but do represent an emerging model for running routine finance processes.

Compliance is a long-term challenge
A full 62% of executives in large organizations say regulatory compliance has absorbed time that could have been spent profitably elsewhere. Says the report: “By investing in better information management and more robust standardized processes, finance functions can prepare the groundwork for future compliance requirements and thus release time for more value-added activities.”

Leading CFOs are spending more time on investor relations
Only 26% of executives from average performing organizations in the survey believe they are excellent at reporting business results to investors. In contrast, 40% of finance executives in top-performing organizations believe they are now excellent when it comes to investor relations. “Leading CFOs espouse better forecasting techniques and the use of value-based management concepts and tools as a vital step forward in improving the quality of investor guidance,” the report says.

Finance faces a skills crunch
More than half (55%) of companies in the survey say they plan to recruit new finance employees in the next two years. The new recruits are expected skills in communication, relationship management, change management and the ability to work in teams. Says the report: “To attract these talented individuals, leading finance functions are providing excellent training and career development opportunities, combined with rotational assignments that enable finance employees to develop a broader knowledge of the business.”

Companies must simplify and consolidate their global finance operations
Instead of having multiple country CFOs acting with a high degree of autonomy, companies are empowering Group CFOs to take command of the global organization. “Regulations such as Sarbanes-Oxley have accelerated this trend, as companies strive to impose standardized, high-quality processes and controls throughout the business,” says the report.

The report notes that today’s leading finance functions have streamlined their traditional finance processes and are already playing a valuable strategic role in the business. “It is no coincidence that the top-performing companies in the survey are those that spend less time on routine finance and more time on delivering strategic insight. By successfully establishing themselves as partners to the business, these CFOs have earned the respect of their peers and their investors and helped their organizations to achieve a significant competitive advantage.”

To access the report, visit www.kpmg.ca/en/services/advisory.