Ask any CFO if his or her role has changed in the last decade, and you’ll likely hear the same answer: Yes, in a big way.
Not so long ago, the finance chief was charged primarily with keeping the company legal, allocating financial resources, and measuring how well shareholder capital is used to generate new shareholder value. Today’s CFO still wears the stewardship hat, but he or she also carries the flag of disciplined growth.
The CFO is now a central figure in strategic planning: He or she is expected to explain in clear terms the relative strengths and probable risks of competing options for strategic investments. The CFO today wields facts that are hard to dispute and enforces cool-headed decision making. No more acquisitions based on CEO instinct. No more diving into a new market because the competition is doing so. No more risk analysis after a strategic direction has been decided.
Strategic work aside, CFOs are still expected to do more with less, however. In other words, automate on the cheap, move more work into shared services centers, cut headcount wherever possible, and drive down the cost of financial operations.
Yet gauged in terms of Total Cost of the Finance Function as a Percentage of Revenue, the first APQC Metric of the Month (an ongoing CFO feature), many organizations are, sadly, still wasting hundreds of thousands or even millions of revenue dollars on inefficient finance operations (Figure 1).
This data reflects the relative cost profiles of 543 organizations that completed an APQC benchmarking assessment for the finance organization as a whole. Total cost includes personnel, systems, overhead, and any other costs necessary for day-to-day operation of the finance organization. The data shown in Figure 1 are calculated as follows: total finance cost divided by total business entity revenue, which is then (for display purposes) multiplied by 100. The individuals that supply APQC, a non-profit business-research firm with this kind of data tend to be senior finance executives, typically controllers and directors of finance.
The organizations that are called top performers are those those that spend about one third less than the other organizations that provided data for this particular benchmarking exercise. The top performers are designated as those at or below the 25th percentile in a range of benchmarks that address the total cost of the finance function as a percentage of revenue. At the 75th percentile are the bottom performers, which are those spending at least three times more than the top performers.
Disappointment at the Bottom
Over the past decade, CFOs in general have made progress in reducing the overall cost of finance. Ten years ago, the typical large company (APQC defines large as having more than $100 million in annual revenues) spent about 1.5% of its revenue on running its finance organization. Today, the best companies spend 0.6% or less.
Still, it’s disheartening to find the bottom performers in the current snap-shot still spending 2% or more of their revenues on finance.
What could the inefficient organizations do to shape up? There are many dimensions to finance function transformation, but one big thrust involves working to drive down operational costs by using available information systems wisely. APQC research has found that companies with relatively lower finance-function costs have worked hard to boost the productivity of core transaction processing.
That means, among other things, simplifying the enterprise resource planning environment — reducing the number of disparate vendors and software instances and keeping ERP system proliferation under strict control. Doing so allows for effective standardization of key business processes and less need for manual intervention. Given that the labor component of total finance cost is, on average, 60%, the less people you have doing manual data processing, the lower the cost. In all fairness, though, a growth strategy that calls for a steady string of acquisitions tends to make ERP complexity unavoidable.
Many of the most cost-conscious CFOs who responded to the questionnaire have also standardized their companies’ global financial data models and charts of accounts, so that all operations around the world speak the same financial language. They have automated routine transaction processing in accounts payable, accounts receivable, and general accounting. They have adopted a performance-driven culture at every level, measuring and re-measuring the cost of processing everything from remittances to reimbursement requests. And they have reduced the number of budget line items, shaking the habit of tracking performance data for things that don’t really matter.
These smart finance organizations have also redirected some of the money they have saved to hiring and developing accounting team members who excel at planning, analysis, and statistics — people who aren’t shy about shattering long-held assumptions by pinpointing cost performance patterns and breaking down the drivers of cost. These skilled employees stay because the companies invest in their career paths and take pains to reduce turnover.
Of course, there are still plenty of companies lagging behind in terms of cutting the costs of their finance functions. In upcoming Metric of the Month columns, we’ll delve into some finance sub-processes into which companies have invested sweat equity and hard dollars to drive process improvement and automation.