Striking a Balance

Can finance departments be cost-effective and smart at the same time?

At the same time, most companies face an ever-growing list of competitive threats. They can’t afford a finance operation that is merely inexpensive.

An Echo of the Past

There is a good reason why finance transformation is proving to be an uphill fight at many companies. By attempting to consolidate finance processes, CFOs are moving in exactly the opposite direction from the rest of their companies, which are generally becoming more decentralized.

Until about 20 years ago, most businesses and their supporting functions were highly centralized, a legacy of the command-and-control model popular since the days of Henry Ford. Then, beginning in the late 1980s, managers discovered that with the help of new technologies such as E-mail, they could radically decentralize their businesses and dramatically improve business performance. “Companies are finding that in our knowledge-based and innovation-driven economy, the factors for business success are the same as the benefits of decentralization: motivation, flexibility, and innovation,” says Thomas Malone, a professor at the Massachusetts Institute of Technology Sloan School of Management and the author of The Future of Work.

Finance dispersed along with the business units. That wasn’t an accident. “The one word business managers were used to hearing from people who did accounting at the corporate level was ‘no,’” comments Hackett. “So people said, ‘I’m tired of this — I’m responsible for this business unit and will make the investments in it.’ So they hired their own finance staff.”

Such duplication wasn’t cheap. CFOs found that not only were they spending more on finance, they lacked visibility into the various operations of the business. This time, the solution was shared services. Pull routine finance processes away from the businesses, make them the same, and do it in one place, and you would create immediate savings — typically 15 percent. (Additional savings were possible through improving the process and adding technology.)

Today, the Sarbanes-Oxley Act is providing an extra nudge for adopting shared services. “Companies are finding that if you have your key controls in one place as opposed to 300, it is much easier to comply with [Sarbox],” says Gary Moran, managing director of Alvarez & Marsal in New York. In fact, companies with a high use of shared services spend 33 percent less on compliance, according to The Hackett Group. (But some argue there are better means to the same end; see “Kill Your Shared-Services Centers?” at the end of this article.)

Obviously, finance departments aren’t trying to stage a return to the days of the Eisenhower Administration. This time, the idea is to separate the routine work from the “value-added” work, centralize the former, and decentralize the latter. Technology helps by giving business units easy access to centralized information.

Control Problems

But the change still means pushing a certain amount of centralization on an organization that is headed the other way. And just as business managers complained 15 years ago that corporate finance was an obstacle, there is still concern that relinquishing control of even routine processes could create problems. “If you are a business-unit head and you control all parts of the transactional finance process, then you feel issues with suppliers or customers will be resolved with a greater sense of urgency,” says Eric Olsen, CFO of Lafarge North America, a $4 billion construction-materials company. “You know you won’t have a supplier yelling at you to pay your bill.”

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