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Five Reasons Why Your Finance Transformation Failed

You focused too much on finance costs and satisfying internal customers, thought of it as a finite project and relied too heavily on consultants.

Apparently, status quo is not a state that big-company finance departments are fond of. In a recent CEB survey, finance leaders at 81 percent of 264 large companies said they were engaged in major finance redesign initiatives.

But they weren’t necessarily getting all the benefits they hoped for. In a more targeted survey of 45 companies that completed transformation projects, only 27 percent reaped the qualitative and quantitative benefits outlined in their business case and sustained a majority of the cost savings for two years post-implementation.

To be sure, “transformation” in a corporate finance setting is a rather ambiguous concept. “We don’t like the term,” says Tim Raiswell, a managing director at CEB (formerly Corporate Executive Board), a membership-based corporate research and advisory firm. “We use it because most finance professionals were trained to use it. Consultants, like the Big Four, use it readily.”

Generally, it means any strategic shift in the purpose or means of executing corporate finance, or major process-level or IT-level changes, according to Raiswell.

Through its research on finance transformations, CEB has identified five common mistakes that CFOs make.

1. Focusing too much on finance costs as a percentage of sales.
In its conversations with finance professionals over the past two years, CEB heard over and over that finance-department operations should cost about 1 percent of company revenue. “We asked where they got 1 percent from,” says Raiswell. “They said it’s an industry standard and that they heard it from consulting firm A or accounting firm B or benchmarking firm C.”

The problem was, CEB was hearing that from companies across all manner of industries, sizes and profit margins. “Isn’t it flawed to think that a very complex piece of your service organization like finance should be configured around a simple cost benchmark?” says Raiswell.

Finance should view itself less as a cost center and more of a profit center, according to Raiswell. Finance makes things, like reports and advice, that the business consumes. It guides business decisions. “If you want to lead a balanced transformation initiative that [creates] a finance organization configured to support the business where it needs support, you need to look beyond costs,” he says.

2. Concentrating too much on customer satisfaction.
Counterintuitive? For sure. But generally speaking, customers possess only some of the information necessary to know what they want and need, while the product or service provider possesses the rest.

Finance departments’ internal customers often make contradictory requests or demand things that finance isn’t capable of producing, says Raiswell. If finance focuses too much on customer satisfaction, judging itself by how much customers are asking for and whether it’s fulfilling all those requests, it “may never actually get to what the customer needs.”

In fact, CEB found that successful transformations are typically marked by a healthy tension between finance and its internal customers. “In a world where finance resources are finite, you can’t provide the same level of services to each business unit,” Raiswell says. Fast-growth units or those with the most growth potential get top-tier service, and vice versa.

“The business manager of the lower-performing business would probably say finance is providing terrible service, while the guy getting the top-tier service would probably say it’s the best finance organization in the world,” says Raiswell.

3. Thinking transformation is a one-time thing.
There may be a psychological need to see a transformation as a finite process, as in the case of a multi-year ERP system implementation that’s left everyone with migraines.

But there is a problem with that thinking. You don’t want to have a culture where creating value is a finite project, Raiswell advises. That takes away from business reality, which is that finance strategy should be built around business strategy. Say the company is being very acquisitive in European emerging markets. “You’d better have some pretty fluid accounting and financial-planning resources so you can build your vision around the reality of that change,” he says.

Again using the ERP example, if you manage to a “go-live” date you won’t extract as much value from that IT as you would hope, according to Raiswell. Organizations that extract more value from finance technology are those that keep engaging end users long after that.

“Keep investing in them by saying, ‘How long did it take you to log on this week? How long does it take to do this or that manual task? Is this system saving you time or costing you time, and if it’s costing you time, why?’ That kind of investigation is low-cost, because you can do it over email, and super-valuable because you uncover lots of ways to improve this thing you paid so many millions of dollars for.”

4. Creating “shadow” costs.
Let’s say part of your transformation is centralizing accounts payable in a shared service center for all global business units. It’s likely that some business leaders will want to keep running their own AP process. They believe they have control over their terms with suppliers and can thereby hold onto cash a little longer, and they don’t trust the shared-service organization to run AP as effectively.

“This is the kind of politics that usually comes with finance transformation,” Raiswell says.

Sure enough, after AP is centralized, there are some kinks in the first few months. Maybe some suppliers don’t get paid, and they call up the business-unit leaders, with whom they have longstanding relationships. A business leader says, “Wait a minute. We’re a $2 billion unit of a multinational corporation. Forget this, I’m going to hire my own accounts payable financial analyst.”

That’s a shadow cost. The corporate finance group thinks that for all intents and purposes it’s standardized AP and thereby saved money for every business unit, but meanwhile new costs are being incurred.

“It’s more commonly something like a budget analyst, who is capable of going a level or two deeper into a unit’s financial data,” says Raiswell. “Really, finance should be footing the bill for managing and training those people, rather than the unit doing its own thing and creating those costs.”

5. Thinking you can’t execute a transformation on your own.
CEB is careful not to call itself a consulting firm, and Raiswell is not short on dismissive commentary about consultants. Here is the difference between a consultant and an adviser, in his view: “You decide you need a new accounts payable process. A consultant says here, we have one, it’s in this box, and to implement it 10 of our best people will unwrap the box, roll it out and after 12 months we’ll leave and you’ll have the best AP process there is.”

What CEB does, he says, is help you learn how to do the work yourself. “You sit down with one of our advisers, put your data into our system and we’ll tell you if your accounts payable system is in fact broken. If it is, we’ll show you the top two or three accounts payable processes used by other companies. Then we’ll advise you how to put together a project team. We can help train and guide that team, but what we won’t do is put bodies in your office for months.”

Under CEB’s business model, its members pay an annual subscription fee to get access to the firm’s ongoing best-practice research, benchmarking database and advisory services. The cost of all that is spread out among CEB’s thousands of clients. “It’s a more cost-conscious model,” Raiswell opines.

A Picture of Success
After considering all those common mistakes, it might be difficult to picture a fully successful finance transformation. But CEB says it has identified some trends about what works, as well as what doesn’t, as shown in the table below.

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6 thoughts on “Five Reasons Why Your Finance Transformation Failed

    • I agree this is a very insightful article. I would like to offer a few comments for consideration.

      1) Whether it is finance initiatives, system implementations, or other major process improvement efforts, it seems like there are always big gaps on average between what is promised and what is realized. This is hardly a new phenomenon. I wonder if there has been any improvement on average over time or if we keep repeating the same mistakes?

      2) For many organizations sustaining an effort over the long haul is very difficult due to turnover in personnel, project fatigue, and changes in the business and management priorities. In my former role in internal auditing I served as an adviser and found in many cases if you didn’t get something in phase 1 you never got it.

      3) Any time I read articles of this type it reminds me of a quote from Machiavelli:
      “And let it be noted that there is no more delicate matter to take in hand, nor more dangerous to conduct, nor more doubtful in its success, than to set up as a leader in the introduction of changes. For he who innovates will have for his enemies all those who are well off under the existing order of things, and only the lukewarm supporters in those who might be better off under the new. This lukewarm temper arises partly from the fear of adversaries who have the laws on their side and partly from the incredulity of mankind, who will never admit the merit of anything new, until they have seen it proved by the event.”

      • Steven, excellent question, “Whether it is finance initiatives, system implementations, or other major process improvement efforts, it seems like there are always big gaps on average between what is promised and what is realized. This is hardly a new phenomenon. I wonder if there has been any improvement on average over time or if we keep repeating the same mistakes?”

        In a recent survey of 172 companies by Panorama, only about half (49%) of respondents said their IT systems delivered less than half of the projected benefits, and more than 1 in 3 (34%) said costs exceeded budget by at least 26%.

        Many Organizations typically don’t review and modify business processes to best align with core system functionality of their IT system. They end up putting good technology over bad process. Others engage in process improvement initiatives without first looking at the interaction between people, process, systems and IT, which is constantly changing in most organizations.

        Within many organizations, human capital is woefully underutilized. By empowering and engaging employees effectively before, during and after a transformation project is initiated, leadership can capitalize on more opportunities to innovate and drive performance improvements.

        The challenge for leadership is to design and implement a framework that effectively empowers and engages employees at every level of the organization before, during and after the organizational transformation.

        Such a framework might look like:

        1) Effective policy management (online policy library)
        2) Ongoing assessments (people, process, systems & technology)
        3) Performance Scorecards (hard & soft metrics)
        4) Event management and reporting (utilizing Failure Modes and Effects Analysis)
        5) Annual certifications to the Code of Conduct (reinforce core values)
        6) Enterprise data analytics (talent & workforce analytics, performance-based job descriptions)

  1. 12.02.2014

    David is right – “Finance is the forerunner of any organization, irrespective of its size. Finance drives the business plan forward and steers the organization towards its mission”.

  2. There are so many complex projects in the world which does not fail or if they fail there are very remote chances like rockets, airlines etc.

    Why this happens in the Business Transformation projects? Is that we don’t give the due diligence to the project, or is that the demands are more impractical, or we don’t hire the talented people for the projects..???

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