Years ago, I visited my brother in Manhattan. At the time, he lived in an apartment above an Italian restaurant. “How’s that Italian place downstairs?” I asked.
His reply: “It’s not that good, but they deliver.” By at least offering delivery service — an absolute essential in New York — the restaurant escaped the deepest of scorn. But food unworthy of a walk down a few steps wasn’t winning it any James Beard awards, either.
So it goes with your finance organization. The fact is, a finance team may not embody the worst practices — glacial closes, manual rekeying of data, triple-digit DSO — but avoiding those obvious signs is by no means a mark of greatness.
So how do you know if you’re running a truly world-class finance department? It’s easy to offer up obvious markers like low cost of capital, accurate forecasts, and financial transparency. Granted, these are important concepts — but they’re also mouthed so often by CFOs and finance consultants that they’ve tended to lose their meaning.
And some experts say that old saws about finance departments can actually be counterproductive. Take the never-ending quest for higher productivity, which most CFOs see as a most noble and worthwhile pursuit. According to John Roberts, a director at the Washington, D.C.-based Working Council for Chief Financial Officers, it ain’t necessarily so. “A lot of CFOs see [the pursuit of productivity] as a trap,” he maintains.
Indeed, the slavish pursuit for ever-greater productivity can actually exhaust — and eventually demoralize — a workforce.
Of course, settling on exactly what constitutes a top-notch finance operation can stir up a heated debate. Nevertheless, we put the matter a group of experts — CFOs, consultants, and executive recruiters — and frankly, we were surprised by their selections.
Not one of our experts mentioned rolling budgets. Or finely turned AP/AR systems. Or thinny-thin GS&A. Instead, our panelists cited more mercurial items — like strategic thinking, knowledge of operations, and companywide visibility. None of which fits neatly into an Excel spreadsheet.
In fact, it would seem that judging by the answers of our panelists, building a first-rate finance department starts with sensitive and self-aware leadership. The catch? Sensitivity and self-awareness are not always strengths for number-loving, empirical finance chiefs.
Even more surprisingly, some of our experts said that a skilled finance chief does not necessarily make for a great finance department. “The most dysfunctional finance department I’ve seen had probably the best CFO I ever saw,” recalls Tom Casey, a partner in human-resources consultancy Buck Consultants. The CFO was a numbers whiz, says Casey, but he didn’t have a clue about running a team of happy, harmonious, high-achieving workers.
And looking at the list below, it would seem that happy, high-achieving workers — workers who are given ownership of their jobs — are crucial to running a first-rate finance department. The bottom line for the bottom-line set? CFOs, no matter how dazzling, are only as good as their cast of supporting characters.
1. Finance Department Employees Know What the Finance Department Does
“Why are we here?”
It’s a question for the ages, pondered by everyone from Martin Heidegger to Woody Allen. Existential crises aside, employees in world-class finance departments understand their roles. And they know that their roles aren’t limited to printing out Excel files.
The reality is, CFOs are no longer numbers cops. Likewise, their team members should have a “line mentality,” says Marge Johnsson, founder of finance consultancy The Johnsson Group. She believes finance staffers should know how the rows of data on their computer screens fit in with a company’s objectives.
Top-notch finance chiefs foster a service-oriented culture in their departments. In an earlier interview with CFO.com, Coach Inc. CFO Mike Devine said, “I’ve always built my finance teams on the theory that finance is a customer service organization, and our customers [include] senior management, the board of directors, and line management.” Added Devine: “I tried to breed that feeling of, ‘We are here to serve.’ “
Ralph Packard, CFO of mutual-fund giant Vanguard Group, takes a similar approach. Packard says he plants the service seed as soon as a new employee starts work. To get a sense of where finance fits in at the company, each new finance staffer goes through a comprehensive orientation process for the finance group, in addition to the general corporate orientation.
In addition, Packard notes that advances in technology over the past five years have allowed finance employees to gain perspective. “Technology has removed a lot of the grunt work,” he says. “Before, they were recording transactions and keeping books, and they didn’t have time to think about what the numbers meant.”
Admittedly, the connection to larger company goals is not as obvious for some finance employees as others. It’s easy for a risk manager, for example, to see how her work is crucial to her employer’s business. But what about the payroll clerk?
That’s where the “why are we here?” question comes in. CFOs who preside over world-class finance departments shape the culture of finance to adopt a prevailing sense of mission. Some, like Packard, even draw up a mission statement for the finance organization.
Not surprisingly, Packard notes that work is more enjoyable for employees when they have a sense of purpose and an awareness that they contribute to greater goals.
2. Other Employees Know What the Finance Department Does
Finance workers may work in back offices, but they should get out a little, too.
Experts agree that employees across a company should see the finance department as a business partner. In fact, image is so important for a finance department that John Wilson, CEO of J. C. Wilson Associates, a San Francisco recruiting firm specializing in finance, scopes it out at the beginning of each CFO search. “If you were to ask other parts of the company what they think of the finance organization,” he often asks clients, “what would they say?”
A common perception is that finance workers are enforcers. Even the job titles associated with finance impart a certain aura of severity — controller, chief auditor, etc. But short of bad press, no perception of finance is worse than indifference.
“Sometimes,” says Wilson, “the [client's] CEO will say, ‘I don’t think anyone notices the finance department.’ That, to me, is the worst condemnation.”
It also tips him off to the skills he should be looking for in candidates. A CFO he places will have to change a finance department’s image, which he says “is hard to do; it takes time. If a CFO can do that, it’s a tremendous achievement.” (Of course, some candidates simply aren’t cut out for the CFO’s job.)
The Working Council’s Roberts offers a quick test to gauge how a finance department is perceived by others. When finance works with another department, he says, do staffers in that department ask, “What have you done for me lately?” If you and your staff hear this question a lot, Roberts believes it could be a sign that your department is not viewed as a true business partner.
3. Non-Finance Employees Understand Finance Stuff
At companies with superior finance departments, employees don’t actually have to work in finance to understand the company’s financial performance. Indeed, world-class finance organizations serve as ambassadors of fiscal understanding throughout a company.
As Roberts puts it, finance should be “supplying the kind of financial thinking and tools that allow the enterprise to make the right business bets.”
Take the case of Active Network, a La Jolla, California-based online network for athletics enthusiasts. Active Network CFO Natalya Smith says she exchanges information between finance and business units by holding regular departmental, managerial, executive, and companywide meetings.
Among these get-togethers is a monthly operations meeting, in which senior managers and line managers review financial results of each business unit. The managers then relay the numbers and their significance to the company’s various departments, including sales and customer service. About every two months, all 60 Active employees convene to get the lowdown on company performance and bone up on company-wide issues, including finance.
According to Smith, the regimen of meetings allows her to disseminate financial knowledge to all employees — and gets them interested in crucial financial concepts. “It piques the curiosity of non-finance people,” she says. “You’ll have the head of IT asking, ‘what exactly is EBITDA?’ “
And as our panel members point out, when line managers know what EBITDA is, they’re that much closer to knowing how to contribute to it.
4. Finance Employees Understand Non-Finance Stuff
There really is more to life than money.
In the best finance organizations, finance staffers know how the company operates — not just how the finance department operates.
At cable network channel Comedy Central, CFO Chris Pergola says finance employees regularly spend about two weeks working outside the finance department getting operations exposure. In addition, each group within the company has a finance liaison who’s familiar with every detail of the group’s business.
So, for instance, someone who has a question about on-air promotions can “talk to the head of that group or the finance person, and they’ll get the same information.”
At Vanguard, CFO Packard also encourages job rotation, ranging from six-to-nine-month internships to assignments of two or more years. He sees the job rotation as a way to “feed the company with future leaders.”
In addition, each finance employee has a development plan, which includes special teams and task forces to participate in. “It’s a given that they should know their job,” Packard says. But he also wants each employee to “become a broader businessperson.”
Having finance workers get out there enhances job satisfaction, too. Pergola says his employees appreciate the “ability to work with people as opposed to work with numbers.”
While a finance team clearly benefits when its staff has some exposure to operations, there’s also a professional-development benefit in working with business units. As the demand for more-rounded finance executives grows, finance managers with operations experience may have a leg up when a company looks to fill senior departmental slots — particularly the CFO post. “A lot of CEOs believe that operational experience is valuable in a CFO because they’ve participated directly in running parts of the business,” explains Wilson.
Harry Silverman, CFO at Domino’s Pizza, believes it’s a good idea for finance chiefs to seek out operational experience. In an interview with CFO.com last year, Silverman noted that, when he joined the pizza retailer, he made a real effort to understand the fundamentals of the business. “I tried to get out into the stores as much as possible and spend all the time I could with the operations people, to really understand what made this business profitable,” he said. “There are a lot of people in high places who don’t spend the time to really figure out what is going on out there.”
Venturing forth can pay off — particularly for a finance chief. Headhunter Wilson adds that, these days, “boards and more CEOs like the potential of upward mobility that an operational CFO has to grow into a COO, or even CEO position.”
5. The Finance Department Is Boring
Remember when CFOs, like accountants and bankers, were boring? As a lot, finance chiefs were conservative, straight-arrow types who’d invariably err on the side of caution and prudence and humility.
But during the 1990′s, CFOs and other finance types got emboldened by the go-go atmosphere of the new economy. They masterminded complicated off-balance-sheet deals and non-GAAP financial reporting. And we all know where that led: Enron, WorldCom, Tyco.
These days, boring is back. And don’t get confused: We don’t mean boring in the sense of invisible (see sign number two). Rather, we mean boring in another sense: “Come to think of it, we never get any nasty surprises from finance — no problems with revenue recognition, no restatements, no Wells noticesÂ ”
While it may seem obvious, it bears mentioning that a good finance department has a strong handle on its internal financial controls (considering Section 404 of Sarbanes-Oxley, it had better). That means no errors, no discoveries of fraud, no earth-shattering restatements — in short, no emergencies. “When there’s a crisis, you get a lot of attention,” notes Johnsson, whose consultancy advises Fortune 500 companies on finance and accounting issues. “If you’re doing your job well, there ought not be any surprise.”
That doesn’t mean the news from finance always has to be good. Far from it. But when the news is not good, a good finance department knows — and lets the CEO know — well ahead of time.
6. Finance Employees Think Strategically
While sound internal controls are the bedrock of a finance department, don’t underestimate the value of adding value. “Finance ought to be leading glimpses into the future,” says Johnsson. “It should be ready to seize opportunities and turn perceived downfalls into advantages.” And, of course, avert potential disaster.
Our experts insist that great finance teams assess situations and analyze them strategically. Casey of Buck Consultants says that first-rate finance staffers ask three essential questions when analyzing data. First, what are the strategy assumptions that can be made from these numbers? Second, what do these numbers say about potential pitfalls, and what recommendations can we make based on them? And finally, do these numbers ring true — that is, do they support the company’s decisions?
Finance department staffers don’t always ask these tough questions, however. Take mergers and acquisitions. By most accounts, the M&A failure rate is somewhere between 70 to 80 percent. In fact, a recent article in the Harvard Business Review puts these stats in harrowing perspective. According to authors Larry Selden and Geoff Colvin, the M&A spree of 1995 to 2000 cost shareholders more money than the entire dot-com meltdown.
This raises the obvious: Where were the finance departments when these dog deals were being done? Not asking the right questions — or, possibly, being ignored.
Consultant Johnsson says the best finance departments are heavily involved in potential deals and always ask the prickly questions. For example: “Finance might notice the acquisition target has severe balance-sheet issues,” offers Johnsson, and ask what the company might do to correct that Other inquiries run in the due-diligence vein. What exactly is the goal of the acquisition? Given that goal, is this acquisition the most cost-effective way of achieving our objective? Do we have an integration strategy — including a headcount plan and estimated integration costs?
While mergers and acquisitions tend to be the pet projects of hard-charging — and often egomaniacal — CEOs, finance departments represent the interests of the owners. According to our panelists, the very best finance staffers aren’t afraid to go speak out against a bad deal, or a bad chief executive.
(Taking a stand against a CEO can be a perilous business for finance staffers, particularly CFOs. The situation can be complicated by the often peculiar relationship between the chief executive and the chief of finance. To get a fuller understanding of that symbiosis — and see how some CFOs have stood up to difficult bosses — read “What Makes CFOs Tick?“.)
7. There’s a Will — and Finance Finds a Way
As the signers of the checks, finance-department staffers not surprisingly tend to guard operating cash the way a Sumo wrestler guards a Kit-Kat bar. But in the pursuit of fiscal responsibility, some finance departments go overboard. In fact, Johnsson observes that poorly run finance organizations often fall into the trap of killing every new idea solely because it costs too much money up front.
Conversely, first-rate finance departments try to find ways to turn a great — but seemingly unprofitable — idea into a money-maker.
Johnsson tells of an experience at a food company that wanted to increase its sales of barbecue sauce. The food business, notes Johnsson, is often governed by “lore” — that is, there’s a lot of “We’ve tried this before, and it doesn’t work for this reason.” At this company, the wisdom held that chicken consumption is linked to barbecue consumption, and yet, chicken consumers weren’t buying barbecue sauce. Maybe people don’t like barbecue sauce?
When a new sauce was proposed by the company, however, the finance team didn’t nix the idea outright. Instead, the team did some research of its own. Through in-depth regression analysis, the finance department found that in fact, the favorite meat of barbecue fans is not chicken — it’s pork. The company was able to increase sales of barbecue sauce by encouraging pork consumption.
8. Your Staff Is Laughing with You, Not at You
For Chris Pergola’s finance staff, a sign of a great workplace is the option of knocking off early for a taping of “The Daily Show.” But then, Pergola’s staff works for Comedy Central.
Still, anyone who’s worked anywhere can attest that a great workplace vibe does wonders for productivity and quality and of work. Work was knee-deep at the Comedy Central finance offices when we spoke to Pergola. The cable network was in the throes of completing a sale of half the company to Viacom (which already owned the other half).
“I’m not exaggerating, because I’m looking at it as I’m talking to you,” CFO Pergola told us in a telephone interview at the time. “There’s a stack of documentation about three feet high — HR documents, employment contracts, vendor contracts, etc. — and it was all put together in one week.” He attributes this accomplishment to the spirit of teamwork and collegiality he’s fostered within his finance department.
Pergola and other Comedy Central executives help maintain this atmosphere with morale-boosting perks such as free coffee, summer hours, company outings, and a softball team. But a key step in cultivating team spirit is a practical one: a two-week operations training program. In addition to fortifying finance with operations experience, the system also creates a backup network within the department by requiring finance workers to pick up the slack for absent colleagues.
“The goal,” explains Pergola, “is that every function can be done by at least one other person in the department.” And now, he adds, “people tend to volunteer and offer to back each other up” when someone’s sick or on vacation.
That spirit of cooperation and accomplishment breeds good vibrations. This doesn’t mean Pergola is arguing for a return of the excesses of the dot-com era; the work comes first. “We want people to have a fun time at work,” says Pergola. “But I wouldn’t say it’s a lax environment. It’s a comfortable environment with high expectations.”
9. Good Chemistry
Generally speaking, superior talent tends to produce superior results. But it’s important to remember that building a great team means more than simply hiring the best resumes. Experts says it’s also about how well the members of a team work together. For example, headhunter Wilson says a candidate’s style and fit are a major consideration in a CFO search assignment.
The same goes for the finance staff. “When we hire, we interview until HR is ready to strangle us,” says Pergola, who once met with 50 candidates for a single financial-analyst position. Prospective employees may have all the right qualifications, he adds, but his real concern is whether they’ll fit in with his team.
Active Network’s Smith sees it the same way: “It’s important to wait till you find the right person. I’ve learned that the hard way — earlier in my career.”
Obsessive cherry-picking has paid off for Pergola. Though he values a diverse workforce, he doesn’t specify preferences in hiring. Yet, his 35-member finance team comprises 18 women and 17 men; about one-third are minorities.
Taking your time when hiring also does wonders for staff continuity; experts say that good fits tend to stay at jobs longer. Pergola himself has been with Comedy Central since its 1991 launch.
But Buck Consultant’s Casey points out that it’s equally important to meet a candidate’s expectations of the position. He offers a checklist of the five key characteristics of an attractive employer: ample learning and training opportunities; extra-competitive pay (that is, more than what the market’s paying, if possible); solid, well-planned mentoring programs; clear career paths within the company; and a well-regarded reputation for ethical standards.
10. Employees Trust You
Human-resources professionals say that worker trust in management is essential to competitiveness, productivity — and shareholder value. Indeed, a recent study by Watson Wyatt showed that three-year total shareholder return is almost three times higher at companies where employee trust is high, compared with companies with low levels of worker trust.
Why is that? Robert Galford and Anne Seibold Drapeau, authors of The Trusted Leader, say trust in senior management fosters focus, passion, and innovation, and helps attract the best talent.
At Comedy Central, a “work hard, play hard” mindset may seem like the party line, handed down by management. But for Pergola, it’s more than lip service; it’s apparent that he takes job satisfaction personally as he recalls a company party at a previous workplace. An hour into the party, he took off his suit jacket. He was asked to put it back on.
But while he’s sincere about having fun, he also expects his staff to work as hard as he does. To that end, it’s important to Pergola that his staff doesn’t perceive a double standard for senior management. “They see me [working],” he says. “I’m the first one in the office in the morning, and I’m working all day.”
Trust is also about open communications. Employees shouldn’t be afraid to point out problems for fear of incurring the CFO’s wrath. “I’m always saying, ‘I want the bad news fast,’ ” says Active Network’s Smith. If the invitation to be frank is sincere, she explains, “people know you’re going to help [when there's a problem], and not overreact.”
Likewise, Vanguard’s Packard avoids lip service. He and other senior executives at the index fund specialist regularly ask the “crew” (as Vanguard calls its workforce) “how life is” through feedback and quarterly surveys through the company intranet. And employees know their opinions are actually heard, not just solicited to make management look good. Special task forces, based on survey results, handle such issues as education and development, employee communications, and work-life balance.
The work has paid off. Vanguard employees seem extremely happy with the jobs. In fact, last year, Vanguard was recognized for the overall performance in a CFO magazine article on the Best Workplaces for Financial Professionals program. Senior editor Roy Harris, who wrote the article, reports that “Vanguard employees say they’d stay at the company even if times were tougher.”
That, perhaps, is the ultimate measure of a great workplace.
(Editor’s note: Be sure to take a look at the flip side of this story — find out the ten sure signs “Your Finance Department Is Second-Rate.”)