CFOs plan big changes

CFOs can help make their enterprises "smarter" by contributing to more sweeping, strategic concerns such as pricing models and supply chain policies, a new IBM study says

By Todd Genton

*This is an expanded version of a summary originally published in the June/July 2010 issue of CAmagazine.

More than 60% of CFOs plan major changes to respond to the new economic climate, according to a new IBM global study. And providing input to enterprise strategy will be their No. 1 priority.

The 2010 IBM Global CFO Study is the largest sample of CFO sentiment during the worst economic downturn in decades. More than 1,900 CFOs from 81 countries and 35 industries worldwide were polled, including 100-plus Canadians.

The study showed that CFOs and senior finance executives are already feeling intense pressure on three fronts -- reducing the enterprise cost base, making faster, more accurate decisions and providing more transparency to external stakeholders. They expect this pressure to increase dramatically over the next three years.

Despite their emphasis on strategy, however, CFOs believe there is an effectiveness gap in their organizations. Only 50% of those surveyed think their finance organizations are effective in providing the business insight to support broader enterprise priorities.

Certainly the enterprise agenda has dramatically increased in relevance for global and Canadian CFOs over the past five years.
Since IBM’s first CFO study in 2003, CFOs have continually stated their aspirations to shift more focus to analysis and decision support. Yet few have made significant progress on that score. Among the effectiveness gaps, the largest is in the area of driving integration of information across the enterprise. For those surveyed, the importance of driving this integration has increased by 109% since the 2005 study.

The study found that it's no longer sufficient to excel at core finance activities, but in a new economic climate that requires strategic precision, swifter decision-making and greater transparency, CFOs and their organizations must help make their enterprises "smarter" by contributing to more sweeping, strategic concerns, such as pricing models, supply chain policies and production levels.

Value integrators set the pace
One group of CFOs, dubbed “value integrators,” were found to consistently outperform their peers on every financial measure assessed, including return on invested capital (ROIC), revenue growth and earnings before taxes, interest, depreciation and amortization (EBITDA).

This select group of finance organizations executes well in all key financial metrics and also excels at navigating uncertainty. In fact, 75% say their firms anticipate and respond well to external factors. A key reason for such an exceptional track record is their ability to perform well on both essential dimensions of a finance department's capability:

They have good finance efficiency, where strong data, controls and process governance exist across the finance organization and the entire enterprise.
They have strong business insight and more mature analytical capabilities, making them a more effective business partner to drive smarter business decisions.

These leaders deployed the kind of intelligent analytics systems that understand and address problems before they happen.

Rather than looking at "taillights" of financial data, organizations use business analytics as "headlights" to turn ever-increasing streams of financial and operational information into business insight, where decisions are no longer made by intuition, but are based on facts. This approach allows CFOs and their departments to provide leadership and strategic decisions grounded in sophisticated analyses to help their enterprises succeed and excel in these new economic times.

Based on this information, here are tough questions for businesses to consider:

How confident are you on focusing on the right business metrics: those that truly drive business performance? Eighty-eight percent of CFOs say their companies are counting on finance’s advice in selecting these key performance indicators.
How accurate are crucial business forecasts, such as customer demand and unit costs? How much time is spent debating the validity of the analysis, as opposed to discussing its implications and taking action? With more than 41% of CFOs saying they lack sufficient operational and financial data standards and 67% of Canadian enterprises surveyed producing operational metrics manually, generating timely, reliable business insight is challenging.
Do we have sufficient analytical skills? Where should this talent come from? Which decision support processes should be centralized and which should be placed within business units? Currently, less than one-third of the study's respondents have enterprise-wide decision support centers of excellence. As finance departments work to determine the optimal delivery model for decision support, they should consider what is common across the company and what is unique to a particular geography or business unit. Within a planning process, for example, repetitive, rules-based processes could be standardized and consolidated. Locally distinct nuances should stay within business units.
What can our finance department do to break through the transaction processing barrier? Since IBM's 2003 Global CFO Study, finance organizations have been stuck, consistently spending half their time on transaction processing. To combat this trend, one CFO from the group studied continually asks his transaction team: “How can we do this with nobody?” How can CFOs build a winning business case for driving finance efficiency? Finance’s cost as a percentage of revenue is typically only 1% to 3%. The real advantages come from the flexibility, operating speed and reliable insights derived from embedded analytics and a single version of the financial truth.
How can our finance department standardize processes and data across an enterprise that has multiple – sometimes very different – businesses? As one CFO from the consumer products industry pointed out, “We don’t want to destroy what makes us successful, don’t want to destroy the fabric. How do we get the value from standards without giving up entrepreneurial agility?”

Every business may answer these questions with different answers, but one thing is clear: the economic realities of the past year and half mean that CFOs and their finance departments are the "chief stewards" of a company's financial resources. As such, a CFO is ultimately responsible for safeguarding investments and producing the highest return on invested capital. These responsibilities call for a finance organization that provides strong controls, accurate and timely reporting and sound counsel on all financial and operational matters across an organization.

For more information, visit www.ibm.com/cfostudy or www-935.ibm.com/services/us/gbs/bus/html/gbs-2010cfostudy.html.

Todd Genton, CA, is IBM’s global business services partner, financial management