Contents
* Executive summary
* Managing performance and risk beyond traditional business boundaries
* Doing the deal right, or doing the right deal?
* Elevating finance’s role in building trust and strategic communications
* Filling the information gap
* Conclusion
* Sponsor’s perspective
Executive summary
In an increasingly global economy, collaboration with other businesses is becoming more widespread and more important to a company’s business strategy, whether to control costs, enter new markets, or expand product and service offerings. Accordingly, the finance function is being called upon more and more to evaluate and monitor an entire range of different business relationships with third parties, from traditional sourcing and procurement agreements to business process outsourcing to alliances and joint ventures in sales and marketing, R&D, and production and delivery.
In June 2008, CFO Research Services (a unit of CFO Publishing Corp.) conducted a research program among senior finance executives in the United States, Europe, Asia, and Australia to examine these shifts. Through an electronic survey and a series of interviews in each region, we looked at what kinds of alliances companies are forming, and how finance sees itself working with internal and external partners to establish and assess successful alliances. Our research revealed three major themes:
Companies are managing performance and risk beyond traditional business boundaries. We found that the vast majority of companies use third-party business alliances as part of their business strategy—regardless of how big the companies are, where they are located, where they do business, or what business they are in. In addition, we found that finance typically is closely involved in evaluating business opportunity and risk, and in helping to implement and manage these relationships. We also found that finance executives see their involvement growing even more over the next two years, as much of corporate performance depends on the successful execution and mitigation of risk in these business partnerships.
Finance’s role in building trust and strategic communications is being elevated. Finance’s expanding role calls for an expanded set of education, communication, and collaboration skills as well. The finance executives in our study say that one of the most important factors for a successful alliance is to develop trust in working relationships. Thorough and fact-based communication, grounded in a common understanding of objectives and transparent metrics among all the parties involved, is critical in building the trust necessary for a successful partnership. Consequently, finance executives are fi nding that they really are in the communication business with both internal and external partners.
Dedicated business and IT resources are important for managing alliances well. Finally, we found that finance executives report they are more effective at developing and managing alliances when they have resources formally dedicated to alliances and technology that supports their decision making. Companies that dedicate an individual or a team to be responsible for alliances typically are better able to identify, evaluate, and execute alliances than are companies without a dedicated resource. And companies that have standardized their IT platforms for finance systems report that their finance functions are more involved with, and are more effective at, developing and managing alliances.
Managing performance and risk beyond traditional business boundaries
In a world increasingly reliant on networks of electronic connections to dissolve barriers and strengthen relationships, the use of business collaborations is on the rise for many companies. CFO Research Services conducted a research program to examine how senior finance executives see finance’s role changing as companies increasingly form these networks of business relationships. In this study, we defi ned a business alliance as any type of formal arrangement or agreement a company has for working collaboratively with external partners to execute its business model. These arrangements may include partnerships, joint ventures, licensing agreements, co-development arrangements, contracted services, outsourcing, preferred vendor programs, and other types of relationships that allow a company to tap external expertise to provide a value-added business activity. While businesses have always relied on other companies for supplies or services, we found that, today, the number and importance of these relationships are greater than ever. The vast majority of finance executives in our survey (89%) say that third-party business alliances are an important part of their business strategy, and slightly more than half (51%) expect their companies to have more alliances in two years’ time than they do today.
About one-quarter (24%) of the companies in the survey can be considered to be active practitioners—those whose finance executives agree strongly that alliances are important to their business strategy. These companies use alliances at far higher rates than others: 66% of the respondents from active practitioners report that their companies have more alliances now than two years ago, compared with only 35% for everybody else; in addition, 71% of the most active practitioners expect their companies to have more alliances in two years’ time, compared with 45% for everybody else. (See Figure 1.)
Business collaborations are on the rise—the use of alliances is not limited by how big a company is, where it does business, or what business it is in.
For these active practitioners, collaboration is at the core of their business model. "We proudly, and sometimes jokingly, say that one of our core competencies is being a good partner," says Bharat Doshi, executive director and group CFO of Mahindra & Mahindra Limited, an Indian industrial giant that last year had revenue of $6.7 billion. Mr. Doshi notes his company has been executing substantial and successful business alliances for more than six decades, commenting, "Maintaining relationships with alliance partners is in the DNA of the company."
However, the growing importance of business alliances is not limited to these active practitioners. As shown in Figure 1, even among those who did not "strongly agree" that alliances are important to their companies’ business strategy, 45% still see their companies entering into more alliances two years from now. And all of the companies in our survey use a wide range of collaborative arrangements to accomplish many different business objectives. The use of alliances is not limited by how big the companies are, where they do business, or what business they are in.
Collaboration is important across the board
The very largest companies in our survey (those with more than $10 billion in annual revenue) are more likely to be active practitioners than companies smaller than $10 billion; higher percentages of finance executives from the largest companies agree strongly that alliances are important to their business strategy and anticipate growth in alliances over the next two years.
But respondents from midsize companies ($500 million–$1 billion in annual revenue) seem to be somewhat more active than others in identifying and evaluating collaborative opportunities. They report that they are involved in assessing alliance risk and developing alliance agreements more frequently than their peers at other companies. They also tend to rate themselves more frequently as being excellent in identifying and evaluating alliance opportunities—35% of respondents from midsize companies give their finance staffs high marks in this area, compared with 27% of respondents from the largest companies (more than $10 billion in annual revenue) and only 12% of respondents from companies in the $1 billion-$5 billion range.
Business collaboration is not restricted to particular industries: for every type of arrangement we asked about—from preferred vendors to joint ventures—more than half of the survey respondents in each industry segment reported that their companies employed that type of alliance at least occasionally. But collaboration appears to be particularly ingrained in two of the industry sectors: health care/life sciences, and business/ professional/information services. Practically all of the respondents from both sectors (more than 90%) say that alliances are an important part of their business strategies. Interviews with health care executives provide insight into why such relationships are so commonplace in the industry. (See "Reducing costs and complexity in the health care industry," page 6.)
Collaboration takes many different forms
The alliances established by the companies in our study take a variety of forms—everything from formal joint ventures to outsourcing routine administrative tasks, such as payroll. The use of the different types of collaboration is fairly well distributed—each kind of alliance we asked about is employed by at least 40% of the companies in our survey.
Preferred vendor relationships and business process outsourcing are most often cited as being frequently employed in all regions (the United States, Europe, and Asia/Australia), while exclusive sourcing arrangements and joint ventures are cited least often. This difference may refl ect the relatively straightforward nature of preferred vendor programs and outsourcing agreements—they are just easier to do. For example, deciding whether a company should be in the real estate or payroll business is relatively straightforward compared with assessing an alliance involving marketing or R&D. Often, it is also easier to fi nd the right partner for these types of services nearby; 45% of respondents note that their administrative activities are primarily domestic in nature, and potential partners may be found just around the corner rather than halfway around the globe. (A notable exception may be in China, where international alliances may be more common than domestic ones. See "Growing pains in China," page 7.)
Companies around the world report that they are establishing alliances in all areas of business activity: product and service development, production and delivery, sales and marketing, and administration. Alliances for administrative activities are seen as somewhat less important than alliances in the other areas, but companies are by no means neglecting collaboration in this area. Administrative alliances can be especially useful as companies look to control costs and focus resources on their core competencies.
Reducing costs and complexity in the health care industry
The health care/life sciences industry shows the most growth by far in its use of collaborative arrangements, with 71% of respondents from this sector saying they have more alliances now than two years ago. According to these respondents, within the past two years their companies have established collaborative relationships of every type at much higher rates than any other industry sector in our study. And this trend is likely to continue: 90% of the health care/life sciences executives in our survey expect their companies to increase the number of alliances they have over the coming two years.
In our interviews, one representative from the health care industry discussed how health care providers form purchasing groups that give them greater leverage when negotiating discounts with manufacturers, distributors, and other vendors. This allows even relatively small health care fi rms to gain advantages previously limited to only the largest organizations. According to the Health Industry Group Purchasing Association, there are more than 600 health care organizations in the United States that participate in some form of group purchasing.
"The thing that’s interesting about health care providers is that we can [form purchasing groups] on a national perspective," says Phil Geissinger, executive director of primary-care operations for CMC-North- East Physician Network, a North Carolina hospital and clinic. "We can be in our system here and somebody that’s in Atlanta and somebody in Florida can all be part of that alliance. It is basically purchasing at the local level but negotiating on a global scale." Concerns over increasing costs and increasing competition in the health care industry may be refl ected in these companies’ signifi cantly higherthan- average use of alliances to cut costs (82% vs. 48% for all sectors combined) and to focus on competitive advantage (64% vs. 41%). The complexity of regulatory requirements, supplier relationships, and business models—not to mention operating activities—throughout the industry makes it diffi cult, if not impossible, for a single organization to house all the capabilities it needs. "We cannot afford all of the expertise on an in-house basis," says Mr. Geissinger. "Thus, the more alliances we have, the more we can leverage those relationships."
Because health care providers are so regional in scope, they may have advantages over other organizations when it comes to negotiating and assessing alliances. "I think our industry has a lot more [alliances] because of the fact that you do not have inter-state competitive relationships," says Mr. Geissinger. "So I can pick up the phone and call somebody in Atlanta and say, ‘What do you think about vendor X?’ And they are willing to share all of their information because it does not affect them other than they’re sharing information."
Companies collaborate for many different reasons
The companies in our survey seek out collaboration for a wide variety of reasons; no one rationale or objective dominates. (See Figure 2, page 8.) Of the top four reasons respondents cite for having established an alliance within the past two years, two target growth (gaining access to new customer segments, gaining access to technology or expertise) and two target effi ciency (improving production and delivery, achieving cost savings).
This refl ects the two main reasons for entering into an arrangement with another company—either to do something the company can’t do alone (extending its reach into new markets or into additional products and services) or to do it cheaper or better than the company can itself.
For example, Mr. Doshi at Mahindra describes his company’s successful partnership with Ford Motor Company, which lasted for almost a decade and in which each partner capitalized on the strengths of the other. "Ford wanted accelerated entry into India [following liberalization], and we were looking for a partner for passenger cars," he explains. "We had been manufacturing the four-wheel drive and SUV but had never made a passenger car, and we wanted to learn how. And they wanted to gain an understanding of the Indian market, as well as a manufacturing facility to make the Ford Escort their fi rst product in India."
Another example comes from the transportation industry and illustrates the opposite end of the spectrum, where a company looks to alliances for a level of expertise in a fi eld that is not related to its core products or services. As Kevin Schick, senior vice president and CFO at Con-way Inc., a $4.7 billion freight transportation and logistics services company based in San Mateo, California, notes, "Some of these disciplines—like claims adjudication—have become so complex that there was just no way we could keep up with all the accountability, controls, checks, and balances. It just made good sense to stick to what we do best in terms of transportation and logistics and work those aspects, and in some of these other areas [worker’s compensation and casualty claims assessment], defer to outside providers who have the expertise."
Growing pains in China
The Chinese market may be poised for growth in partnerships as the country continues to develop its internal business infrastructure. Many Chinese companies already have alliances with international businesses, such as for the manufacturing of products that are then sold in the United States under the brand of a company that is based elsewhere. However, many services that are provided via partnership in other nations have yet to be developed in China.
"Many of the disciplines in China are new," says Erick Haskell, CFO for greater China for sporting-goods manufacturer adidas, which had more than $16 billion in worldwide sales in 2007. "For example, with law you don’t have hundreds of years of legal training to rely on [here]. Yet the country is just growing so fast and demand is growing so fast for these kinds of things, they can’t develop the people quickly enough."
While China goes through these growing pains, Mr. Haskell fi nds that he is constantly surprised at some of the types of challenges finance must manage. "In all my experience in the United States, no retail company would insource the performance of their inventory in the stores," he says. "In China, there is no opportunity to outsource this. It is all done internally and usually by the finance department. We will sit down and argue with people every night and do inventory in retail stores, which is something I have never seen elsewhere or thought would be possible."
Scott Goble is the CFO of Alliance Flooring, a Chattanooga, Tennessee, retail-licensing group representing more than 450 retail fl ooring locations across the United States with more than $1 billion in annual sales. He comments, "I try to outsource where possible so that we can concentrate more on our core functions."
However, Colin Storrie, CFO of Qantas Airways Limited, Australia’s largest airline, sounds a caution about forming an alliance for the wrong reasons. "If you haven’t got control either over the fi nancials or the process, it is not a good idea to give it to someone else," he warns. "If you don’t have a good handle on your own costs and specifi cations, controlling them when they’re in someone else’s hands only makes it that much more diffi cult. You end up outsourcing the problems. Some of where we’re seeing relationships go wrong is where we’ve got a problem on our hands, and we try to give it to somebody else and expect them to sort it out." Mr. Storrie concludes, "Our principle has always been if we have a process or a function that we want to outsource, we have to make sure that we understand it well, we understand the economics of what’s being performed, and it is a process that is under control."
Collaboration is strong and growing in all regions.
Even fi rms that have long been wary of venturing outside their corporate boundaries now see collaboration as essential in today’s business environment. "The core business of Nokia is being owner of its own manufacturing supply chain," says Javier Pineyro, a senior controller for risk management based in the United States for the Finnish wireless giant, which had $75 billion in sales in 2007. "But these days they realize that this is a different game, and you cannot have in-house all these skills and capabilities.... Rather than waiting for people to come to us, we’re actually seeking out opportunities in the United States, Asia, and Europe."
A global phenomenon
Finally, collaboration is strong and growing in all the regions we targeted in our study, with 85% of respondents from Europe, 90% from the United States, and 93% from Asia/Australia saying that alliances are important to their companies’ business strategies. Alliance activity in Asia/Australia may grow faster than in the other two regions, especially as companies in countries such as India, China, and Australia seek the economic advantages of business relationships with their counterparts in Europe and North America as well as with Pacifi c Rim countries closer to home. In Asia/Australia, 63% of executives in our survey expect their use of third-party alliances to increase over the next two years, compared with 50% in the United States and 46% in Europe.
The respondents from Asia/Australia also have the highest percentage of alliances formed to gain access to new customer segments (60%), whereas U.S. companies, for example, are more likely than companies in the other two regions to collaborate with others simply to cut costs. Our survey shows that U.S. companies tend to stay at home more often for administrative activities and for sales and marketing activities, but third-party relationships in these two areas are just as important to them as to their peers in Europe and Asia/Australia. It may be that U.S. companies have more opportunity to form domestic alliances, given the relative size and stage of development of the U.S. economy.
Overall, however, we see little distinction in responses among the three regions. The increasing importance of collaboration truly appears to be a global phenomenon.
Doing the deal right, or doing the right deal?
As collaboration between companies becomes more widespread, the demands on finance grow as well. In this regard, the finance executives in our study see themselves as having a critical responsibility: making sure the alliance works.
In our survey, finance executives indicate how involved they are in activities needed to develop and manage alliances. Their list, ranked from involved most often to least often, is seen in Figure 3. Not surprisingly, the areas where finance is involved most frequently—monitoring performance, assessing risk, and developing metrics— are largely the things that can be measured, the traditional realm of finance.
Strategic fi t is paramount
But the fact remains that one can’t know the right things to measure without knowing the strategy behind the numbers. In a different survey question, finance executives say that misaligned strategic objectives and poorly defi ned strategic objectives are two of the top four challenges their companies face in establishing successful alliances. (See Figure 4.) They recognize that strategy must drive execution— making sure the engine is running smoothly without knowing where you’re going is just a waste of gas.
One problem finance executives note in interviews is that proposals for alliances or partnerships sometimes are based on nothing more than a desire to work with a particular company or get access to a hot, new technology. The idea for a new alliance can come from anywhere. Although more than half of all respondents in our survey (56%) say their companies’ alliances originate at the corporate level, the other 44% say alliances originate with the business units. "Quite often it happens that the business-line people who are interested in the alliance will approach the managing director of the company," says Mahindra’s Mr. Doshi.
A key to successful collaboration is "searching for win-win, not win-lose or even win-neutral results," advises one CFO.
"Someone will tell me, ‘This is a great vendor. We ought to work with them,’" comments Phil Geissinger, executive director of primary-care operations for CMC-NorthEast Physician Network, a North Carolina hospital and clinic. "[My response is], ‘Okay, how do you know them?’ ‘Oh. Well I just met them last week at a conference.’" In which case, it is up to finance to work toward developing the business case for this specifi c alliance, so that decisions can be based on fact, not feeling or anecdotal information.
The finance executives in our interviews underscore the folly of developing an agreement with a partner without knowing why the alliance is being undertaken or what both sides hope to get from it. Martin Nov�k, CFO of ? CEZ Group—the largest power generator in the Czech Republic, and among the ten largest in Europe— notes that, when considering a new partnership, "what immediately raises a red fl ag is real non-compatibility of the objectives. On the other hand, if both parties have compatible objectives and the joint venture is the way to achieve what they both truly want, then the probability of succeeding is very high."
One finance executive in our survey, responding to an open-text question, notes that a key to success is "searching for win-win, not win-lose or even win-neutral results." Mr. Schick at Con-way explains: "We realize they [i.e., potential partners] have to run their numbers and see what kinds of returns there are. We realize that they’re in business to make money, just like we are, so there’s just a healthy respect on both sides." If there isn’t an upside for both parties, the alliance is all but guaranteed to fail. That’s because one party will quickly realize there is no reason for them to contribute to it.
Getting in the game early
Finance must fully understand the strategic objectives underlying an alliance in terms that make business sense—that is, in terms that can be used to measure the impact on the two businesses—and may even participate in the formation of those objectives to help alliances succeed. For this reason, in many of our interviews the finance executives stressed the importance of being involved earlier rather than later. "It is important to be involved early enough, to be involved in the whole business model," says J�rg Vandreier, CFO of IDS Scheer AG, a German provider of business-process management software and services with 2007 revenues of $616 million. "This lets us really focus on what is the benefi t to the partners, and what is the benefi t to us." Mr. Vandreier says being involved from the start allows finance to make the most of an alliance in terms of IDS Scheer’s P&L.
Johann Murray, CFO of Hilton Grand Vacations Club (HGVC), which operates time-share resorts for Hilton Hotels, notes that letting finance weigh in early on bottom-line issues gives other units an idea of how much time and effort they should be investing in a business relationship. The alternative, which happens all too frequently, is having corporate or business units trying to decide whether or not working with another company was actually a good thing after the effort had already been expended. Being excluded from the front end means finance is frequently asked to decide if the numbers work without being given the full context of the problem.
One senior finance executive (who asked not to be identifi ed) said this is a regular problem for him: "The most diffi cult part is people coming to us with preconceived notions, looking to us to support what they’ve already decided they’re going to do. What they really want is for us to fi nd the numbers that justify this concept."
Mr. Storrie at Qantas makes a similar point: "That’s why you want to make sure you’re in there with the business when the whole thing develops as opposed to coming in at the back end and just saying, ‘No. This doesn’t meet our fi nancial criteria or this doesn’t meet our technical or business or strategic objective.’ When you get involved at the back end, that’s where the business units get upset because they’ve invested a lot of time, and we get upset because it’s almost too diffi cult to change the momentum of the particular project."
But finance needs to involve itself judiciously. "You can get too many chefs in the kitchen," cautions Robert Cotton, senior director of finance at BMC Software, Inc., a Houston-based provider of business software and services with $1.8 billion in revenues. Mr. Cotton and others believe that it is up to the business unit originating the alliance to make the case for it, and that the finance role is to review the business cases and arguments made by the operational or marketing departments, provide fi nancial expertise, and act as advisor.
Even when ideas for collaboration originate within the business unit, our interviewees note that it is important for finance staff to be involved early in the process. For example, at WSP Group plc in the United Kingdom, Malcolm Paul, the group finance director, describes the evaluation process at this global design, engineering, and management consultancy. Any joint venture over a certain size requires signoff from either the CEO or the CFO. Even though Mr. Paul reserves his personal involvement until the end of the evaluation process, his finance staff works closely with business managers to develop the case for or against a proposed project and delivers a robust package of information on which he bases his own "yes/no" decision. "It’s a mixture of operational and finance people who are fully involved from the minute [the evaluation of a proposed alliance] starts," he says. "I get a full business case, and a full fi nancial out-turn. [My role is] as a checker, an approver, a tester. I am the guy who says, ‘Well, how does this work? You explain it to me, and [then we can decide] if we want to do it.’"
Finance’s role in assessing "the right deal" does not end once the relationship is established, however. The leading finance organizations are also involved with monitoring the performance of alliances and ensuring that they keep making business sense for the partners. The executives we talked to recognize that the world changes around them, and sometimes so does the rationale for partnering.
The leading finance organizations use the same type of fact-based assessment of strategy and performance to continually monitor the usefulness of alliances. "Because we’ve always done it that way" is no reason to continue with a relationship that has outlived its usefulness; in many companies, it is up to finance to pull the plug. "If something does not make economic sense, then the chances of survival are reduced," says Mr. Doshi of Mahindra. Things always change—the economics of the alliance, the strategies of the partners, the performance of the partner—and Mr. Doshi notes that finance must continuously keep on top of the situation and recommend changing the alliance structure or even discontinuing the alliance to adapt as circumstances dictate.
Elevating finance’s role in building trust and strategic communications
According to BMC’s Mr. Cotton, finance’s strength lies in its ability to use the facts to identify information gaps and help fi ll them in. "On the R&D side, you can get a little emotional with, ‘Hey, I really want to build this product,’ or ‘I want to do this project,’" he says. "We [in finance] can take the role of unbiased, unemotional third party, listen and evaluate without a pre-set agenda. We don’t write code. We don’t know how this all comes together. We can understand the dynamics of the proposed product, quantify the possible impact to performance targets, etc. Finance should be saying, ‘But it seems to me, here are your gaps or here are some problems that you’re not talking about, so how do we address these?’ Thus, being a partner rather than arbitrator."
Mr. Doshi at Mahindra also comments on the value of keeping focused on the facts. "The CFO has the job of bringing objectivity to this discussion in terms of deciding whether an alliance continues to make fi nancial sense," he says. "And also at what point is the company overstretching"; that is, in helping to distinguish what a company or a business unit is well prepared to do, and what may strain the fabric of the organization’s abilities.
Understandably, finance sometimes fi nds itself at odds with business units that may seek to stake out their own territory. "In general, people think that you will be a more short-term, black-and-white kind of person," says Nokia’s Mr. Pineyro. "They think that you will not understand qualitative things like brand awareness, brand preference, or segmentation."
The finance executives we talked to are eager to correct this misapprehension. "It takes a village to raise a child," notes Mr. Murray of HGVC, "and it takes a village to run a company. Everybody [in the company’s other functions] is an expert in his or her own area of specialty, but it is very important to get everybody involved in the front end because everybody looks at problems from different angles."
For this reason, finance’s ability to communicate well— both internally (with other functions and business units) and externally (with partners)—is a critical success element. It is common sense that all relationships—business or otherwise—live and die by how well those involved communicate, and our survey results back up this view. Some 93% of those surveyed say communication between partners has at least a moderate impact on the success of alliances, and fully 60% of the respondents say it has a substantial impact. (See Figure 5, next page.) Common strategic objectives also appear high on the list; these are the only two selections for which the percentage of respondents saying these issues have a "substantial" impact is higher than the percentage saying they have a "moderate" impact.
However, finance seldom seems to get credit for its communication skills. Communication is perceived as a "soft" skill, not a quantifi able one. It is an expertise that many in management seem to think resides in other departments, such as marketing. For most business units, communicating is primarily about talking or writing.
For finance, effective communication means something more—communications are much more likely to be judged on the basis of whether or not they are analytically sound and verifi able. Finance is constantly asking if the record supports the claim. This may help explain why finance executives in our survey tend to view their ability to communicate with other internal functions as being excellent more often than they do other abilities associated with developing and managing alliances. (See Figure 6, page 16.)
Because finance has to make sure of the connection between words and performance, it has a leg up on other parts of the business. Finance’s effectiveness in communicating with partners is grounded in the facts. "The numbers tell the fi nancial story to give you the insight as to how the alliance is working or might work in the future," says Mr. Murray. "This is clearly an advantage over those business units that do not have or do not understand the records and numbers."
Mr. Storrie at Qantas comments, "I don’t think it’s productive to just say, ‘This is the way that it is, and that’s it.’ I think you always have to consult with the business and make sure that you’ve got a healthy relationship. You want to make sure that the relationship is constructive enough so that the communication fl ows freely between the two groups." He explains how the airline’s matrix organization aids finance’s ability to communicate effectively: "We have a small central [finance] group, but we also have a very strong presence down in the line businesses. The finance functions in the line are very close to the businesses, and they’re dealing with them on a dayto- day basis. [So when a difference arises,] generally we will consult with the line managers and explain why we have a difference. In some cases, it can be that they’re just not aware of some of the other implications of what we’re doing. [Finance] gets a view right across the group, whereas a business unit might only specifi cally understand what they’re doing in their part."
The more communication is verifi ed by the facts, the better the relationship with external partners as well. The survey responses indicate that the ability to have faith in your partner is a make-or-break item for collaboration. Given the opportunity to tell us in their own words what they consider the vital success factor for alliances, finance executives in our study most often cite trust. In an open-response question, one survey respondent put it succinctly when asked what was needed to assure a successful partnership: "Trust, trust, trust."
The basis for a good working relationship and trust is information. Do the companies agree on the objectives for the alliance? Are the partners willing and able to share risk as well as rewards? Is it a win-win—equally benefi cial to both partners? As Mr. Nov�k, the CFO at the Czech energy company ?CEZ, explains, "You know, it’s very important to understand where [the partner is] coming from, where they see the value of the joint business. It’s all about open communication— you have to discuss things in depth so that you are perfectly aware of what the other party expects, and you just have to sit down and [align] those expectations. And then do the deal in the end. That’s how it works."
Mr. Doshi at Mahindra puts it this way: "You help build credibility and that’s where finance can play a greater role. In a situation of crisis of confi dence and trust, finance can act as the glue by being transparent."
Filling the information gap
However, our survey also reveals a worrisome problem when it comes to assessing and monitoring collaborations: Many companies seem to be making decisions in the absence of truly reliable numbers. Indeed, our survey shows just how often companies lack robust and comprehensive data on which to make decisions. Only 3 out of 10 respondents (30%) say they use a rigorous set of metrics when looking at an alliance’s fi nancial performance. Even fewer say they use a rigorous set of operational metrics, such as error rates, product quality, customer satisfaction, and process speed. In qualitative issues—such as ease of doing business, improved managerial focus, and corporate or brand reputation—the number drops further. In fact, for qualitative assessments more respondents say they use few, if any, metrics than say they have a rigorous set of metrics. (See Figure 7.)
The problem is underscored by the relatively high percentage of companies that evaluate alliance risks only informally. To make sure their companies are doing "the right deal," finance executives need to know what assumptions are underlying any proposed alliance, and what risks can threaten those assumptions. Yet a large number of companies in our survey lack formal, documented processes for evaluating such basic categories as fi nancial or regulatory risk. (See Figure 8, next page.) Other areas of risk management fare even worse.
Few companies in our research program are well equipped to construct a comprehensive and holistic analysis of performance and risk associated with alliances. The consequences are underscored by HGVC’s Mr. Murray: "At the end of the day, it’s hard to put a cost on tarnishing your image."
As noted earlier, some companies—the active practitioners— are simply better at collaboration than others. These companies also tend to be good at the information game. They report that they use formal, documented evaluations in all risk categories at much higher rates than others do. They also use rigorous sets of fi nancial, operating, and qualitative metrics to evaluate alliances at substantially higher rates than others. (See Figure 9.)
Our survey shows that two factors correlate to better use of information and more effective decision making in developing and managing collaborations: one is whether or not a company has explicitly designated resources for the responsibility of managing alliances; the other is whether a company has standardized the IT systems its finance function uses to gather data and make decisions. Finance executives in our study show that they are more effective at developing and managing third-party relationships when they have resources formally dedicated to alliances and technology that supports their decision making.
A dedicated resource makes a difference
Having a dedicated resource—a person or team—responsible for an alliance from planning through execution is positively correlated with several measures of how well a company manages its working relationships with other companies.
Three-quarters of respondents say responsibility for alliances at their companies is centralized in some way. This result holds true whether a company originates alliances primarily at the corporate level or at the business unit level. One-third of respondents (33%) report their companies have a dedicated team focusing on alliances, and another 17% say their companies have designated an alliance offi cer or other individual to take responsibility for alliances. One-fi fth (21%) say alliances are the responsibility of the executive team at their companies.
Our study shows that finance executives develop and manage third-party relationships better— and consider a wider range of opportunities—when the resources and technology are in place to support effective decision making.
Companies employing some form of dedicated management or oversight of alliances report establishing collaborative relationships of all types more often than companies without dedicated resources, and they also consider a wider range of opportunities. The finance functions at these companies consistently are more involved in alliance activities, and typically use formal, documented evaluations of alliance opportunities more often. They are also more likely to conduct qualitative evaluations of alliances.
Respondents from these companies rate their finance functions as either "adequate" or "excellent" in all activities at higher rates than do their peers at companies without dedicated resources. They also indicate that they manage alliances more effectively.
The power of consistent information
There is a difference between centralization and standardization of responsibility for alliances, however. Most of the executives interviewed for this report say that even when responsibility is centralized, the process and the people involved in it usually vary according to the dictates of the situation. (See "Hitting a moving target," page 21.) At Nokia, for example, all the signifi cant alliances are examined at the corporate level, but the actual owner of the relationship may vary according to the business unit involved. "There is a group of people sitting in Helsinki [Finland] who are like the base point for every task force involved in that alliance activity; however, many or all participants in that task force might be sitting around the world," explains Mr. Pineyro. "But, in many cases, they are just making the checks and balances of the activity. They might not really be the owner of the business or the alliance."
The fact that each alliance is unique only increases the need for information that is as standardized as possible. In order to assess any part of an alliance—from doable to done—finance has to be assured that it is not in a position of comparing apples and oranges. Doing that requires an IT platform that is standardized across the enterprise.
Companies that have standardized their IT platforms for finance systems report that their finance functions are more involved with and are more effective at developing and managing alliances. First of all, these companies are much more likely to agree that they have the IT systems and software solutions they need to support alliances. Seven out of 10 (71%) survey respondents from companies with standardized IT platforms say their companies have the right software solutions in place to support alliances, compared with only 51% of respondents from companies without a single platform. The companies with standardized IT are also more likely to say that they are able to implement or integrate the IT systems needed to support alliances.
Hitting a moving target
What makes assessing alliances so challenging for finance is the fact that no two are really alike. This means that being asked to assess the risk on an alliance often doesn’t mean the same thing twice.
"It is hard to establish, in my opinion, a standard form because the goals are so different," says Scott Goble of Alliance Flooring. "It’s not always a direct value or profi t-maximizing proposition on the table. Sometimes we’re going to do things just because they’re right for our membership. Not every decision criterion falls neatly within the constraints of traditional fi nancial analyses. Forcing such analyses as a matter of form is a time-waster in a best-case scenario and leads to poor decisions and costly delay in worst cases."
Assessment can also mean assessing ROI. What is the risk that a company will be wasting its money? This is frequently the point on which finance and marketing tangle the most. Perhaps to its own surprise, finance is fi nding that it can pay to accept some very soft measures of success.
Kevin Schick of Con-way points to his company’s marketing agreement with NASCAR (the National Association for Stock Car Auto Racing), which he was not happy about at fi rst. Marketing argued that the sponsorship deal had several soft benefi ts, such as increased visibility and building morale among Con-way’s truck drivers who have a strong affi nity for NASCAR. Mr. Schick’s fi rst reaction was to want proof that those things were worth the price. Eventually, he came around and decided the returns were worth the risk.
"There’s no question, and quite honestly, I have to admit that our drivers and their families seem to really get engaged in NASCAR," he says. "In a case like that, you’re not going to box us in with hard numbers. I have to recognize the fact that you can’t put everything into a balance sheet or a P&L and glean all the results from it."
Mr. Goble says that standardizing the process works only when you are doing the same things over and over, such as when you conduct credit checks. But activities such as acquisitions or major third-party relationship-building require "a very open mind. Once you document a process and say that we’re going to do A through Z, someone is going to become married to that concept and you’re going to have a diffi cult time divorcing it in order to allow for the unique analysis necessary," he says.
Aside from the capabilities of the information systems themselves, finance executives from companies with standardized IT platforms also report more frequently that finance is "always involved" with the entire range of tasks associated with implementing and managing alliances. And these companies are more likely to consider, evaluate, and implement a complete range of alliances than companies that haven’t standardized finance’s IT platforms. Finally, companies with standardized IT platforms much more frequently rate their finance functions as being "excellent" at the complete range of tasks involved with identifying, establishing, and managing alliances.
These trends suggest that companies with a better handle on managing the information they collect and use also are better equipped to apply that information to evaluate their alliances. The better a company is at collecting and analyzing the relevant data, the more likely it is to pursue and establish alliances of all kinds, and the more likely it is to feel comfortable that it is making good decisions.
Conclusion
"When we’re looking at any alliance or any supplier, we always ensure that we have the right to have a look at their systems and processes and controls. Otherwise, it’s a bit of a black box."—Colin Storrie, CFO, Qantas Airways
"It’s about education. It’s about explaining the bigger picture, about explaining to [your business partners] how their piece fi ts into the overall whole."—Johann Murray, CFO, Hilton Grand Vacations Club
Finance needs to be part of the strategic discussions around alliances in order to fulfi ll its assessment and monitoring responsibilities. Key to finance’s ability to do this is what might be called "hard" communication—the ability to verify the accuracy of what it is told, and to use those facts to bring everybody onto the same page.
The current global economic instability means organizations are having to quickly adapt to mercurial business conditions. This uncertainty could increase companies’ reliance on alliances to provide as-needed skills, resources, services, and products. Even if specifi c areas are—or become—less volatile economically, such stability is unlikely to diminish the ubiquitousness and usefulness of alliances of all types.
Every alliance an enterprise looks at requires finance to do additional work by assessing the potential partnership, negotiating its terms, and then monitoring it. This job is made easier when finance comes into the alliance discussion as early as possible; however, other units are frequently hesitant to bring finance on because of preconceived notions about what finance does or is willing to do.
Survey respondents say fi nancial risk is the area that is most often subject to a formal, documented process (54%), followed by regulatory risk (48%) and operational risk (44%). The relatively high percentage of companies formally documenting operational risk suggests the need for increased operational expertise or knowledge on the part of finance. In this way, finance will be able to come up with new, creative, and responsible methods for assessing situations and opportunities. Only by approaching peers on their own terms will finance be able to educate them on the necessity of an expanded role and communicate analyses clearly and convincingly.
Finance’s real value in developing and managing alliances depends on the quality of the information it uses and communicates.
Clearly, something has to change if finance is to get the information it needs and the access to strategic-level discussions it deserves. That change must involve how other business units view what finance brings to the table. This perception will not change on its own: finance has to show it is able to work closely with business units and external parties in a variety of situations. Such challenges will sometimes push it outside of its traditional comfort zone of assessing fi nancial risk.
Finance’s success in establishing itself in this role is enhanced when it is seen as being the keeper of the "real" numbers—the measures that make the most difference for the business and its strategy. Our study fi nds that finance’s real value depends on the quality of the information it uses and communicates, and the best information comes when a team or person dedicated to handling alliances can work with consistent data provided by a standardized IT platform.
Sponsor’s Perspective
Tear Down this Wall, Mr. CFO!
Prepared by Jonathan Becher, Senior Vice President of Marketing at Business Objects, an SAP company
Executive Summary
The title is a reference to the historic moment when U.S. President Ronald Reagan beseeches the USSR’s Secretary General Mikhail Gorbachev to "tear down this wall" and end the Cold War, prophetically ushering in decades of global productivity through collaboration across national boundaries. Similarly, business leaders now need to step up and tear down the barriers that inhibit corporate performance today—those that separate boardroom strategy from execution in the trenches and those that prevent a company from taking advantage of its business network for faster co-innovation, better customer experience, and quicker market access in emerging regions. As primary custodians of corporate performance, CFOs must help make finance a forward-looking strategic function, closing the loop between strategy and execution across the business network. IT can play a crucial role in boosting performance when strategic planning is tied to insights from optimized processes and effective management of risks across the business network.
Managing Performance by Closing the Loop Between Strategy and Execution
Robert Kaplan and David Norton, in an article in the January 2008 issue of Harvard Business Review, state that 60% to 80% of companies fall short of the success predicted from their new strategies. Strategic planning and operational execution have historically worked in isolation, often driven through different people, information, and processes. Strategy without synchronized execution has led to wasteful corporate maneuvering, while fl awless execution in the absence of a good strategy has led many companies towards perilous decline. Insights and risks from operational processes are not taken into account, or action across the company is not properly aligned with a carefully crafted business strategy.
As the CFO Research Services study highlights, most companies are also evolving to a networked model, in which they rely on their partners for product co-innovation, outsourced manufacturing, third-party logistics, and alliance channels for sales. While closing the loop between strategy and execution is challenging enough within a company, it becomes crucial to success when companies expand traditional business processes in R&D, sales, operations, manufacturing, and finance to their partners, alliances, suppliers, and customers. In that ecosystem, strategy and execution must be planned, executed, monitored, and improved across a business network for maximum corporate performance.
Managing Governance, Compliance, and Risk
In business networks, companies have to manage higher risk for higher performance. Understanding risks holistically and mitigating them effectively requires visibility, trust among business network partners, and formal and documented methods. As this report highlights, finance professionals have traditionally paid more formal attention to fi nancial, regulatory, and operational risk. Workforce risks, such as segregation of duties; market risks, such as rising global commodity prices; and reputation risks, such as product recalls, have not received the same level of formal scrutiny. They could be managed implicitly within a company because they were obvious, but as more and more of the risks come from outside the core company, they must be formalized and managed proactively with business partners. The Mattel executives who suffered through a recall due to lead-based paint in toys built by their suppliers can testify to the importance of risk management in business networks. Companies need a unifi ed information foundation to manage compliance requirements, automatically monitor risks, promote company values, and build sustainable operations across the business network.
Moving Forward with a New Role for Finance
Finance has long played a crucial role in cost control and corporate reporting. CFOs have helped line of business executives manage their bottom line by negotiating procurement terms based on past vendor performance. And they have been the rock-solid foundation for monthly, quarterly, and yearly performance reporting. While important, these roles have been backwards-looking, concerned with lagging indicators of corporate performance and largely standardized into fi nancial shared services. To provide a competitive edge, successful CFOs are elevating their role to that of the Chief Performance Offi cer, driving performance forward by proactively managing strategy and planning functions across their business networks. Since corporate performance increasingly depends on loyal customers and revenue from alliances, fast-emerging regions, and new channels, the focus for CFOs is also shifting from pure cost control to sustained profi table growth. Managing enterprise performance is the new imperative for finance professionals in this global networked economy. It requires a unifi ed foundation for information, supporting collaborative decision making across teams with smooth fl ows for both structured and unstructured data and the ability to optimize processes across the business network.
Role of IT and SAP’s Unique Value
Finance needs to leverage IT, not only to simplify and standardize business processes that accelerate end of quarter close, but also to deploy the corporate strategic plan and monitor its execution proactively. To accomplish these tasks, transactional investments in enterprise resource planning and other enterprise applications need to be supplemented with investment in an information management platform to integrate enterprise performance and governance, compliance, and risk. SAP helps finance professionals align execution with strategy by delivering an IT solution that marries process execution holistically with strategy development, planning, and management of risk. It is our fundamental belief that SAP and Business Objects, an SAP company, are uniquely positioned to help close the performance gap and ultimately transform the way the world works by connecting people, information, and businesses.
Sunday, April 11, 2010
E-learning Course Design Don McIntosh and Ph.D - March 11, 2010 Originally Published: February 23, 2006 Printer Friendly * E-mail Article
Introduction
Imagine your company is embarking on a program to implement e-learning to complement its classroom training program, and you have been recruited to design some of the new courses. This article lays out a list of questions and hints that can serve as a checklist of things you need to consider when designing e-learning courses. Not all of these points apply to every situation. They must be appropriate to the objectives, the learners, and the content. Unfortunately, as the creator of the program, you are often not the best judge of these things. The most effective way to evaluate them is to have some typical learners go through the course with you. This is called formative evaluation.
Target Audience
It is essential to begin by identifying the target audience and determining both how much they already know about the topic and whether they have the necessary computer skills to access and complete the course.
Objectives
Critical for helping learners get the most out of an e-learning experience is a clear statement of learning objectives. You should consider attitude objectives as well as knowledge and skill objectives. You should state these objectives in measurable terms with expected outcomes and explain the criteria against which the outcomes will be measured. It is important to share these objectives with the learners so they know what is expected of them.
Pre-assessment
Before beginning the course, you may want to provide the learner with a pre-test or self-assessment that will enable him or her to bypass a module or course if they already know the material or have the required skills. Another option is to have the results of the pre-test direct the learner to specific sections according to where his or her skill deficiencies exist.
Design
Once the learning needs and objectives have been analyzed, the next step is course design. Instructional design is a lost science. Developed in the 1960s as a systems approach to the design of instruction, it employs practices that have worked very well in engineering. Instructional design has received some bad press for the time it takes, but that press failed to recognize the quality and effectiveness of the learning that results when it is done properly. The problem has often been that instructional design is used by people who haven't acquired the skills to do it correctly. Everyone is in a hurry today and wants the design done immediately. It is possible to do good instructional design quickly without abandoning the principles behind it. However, too often steps are skipped, for example, the analysis step because someone "knows what they need".
First, it is important to select a learning strategy that is appropriate to your objectives. Some examples of such strategies include story telling, sequential, competency-based, criterion-referenced, evaluated, co-operative, case studies, discovery or constructivist, role playing, simulation, games, experiential, laboratory, etc. Keep in mind that the most effective learning occurs when learners are actively engaged.
Does the content design reflect the needs and interests of the intended audience? Are the tone, level of content, and interactivity appropriate to the audience? Content needs to be clearly organized divided into appropriate chunks that are small enough for learners to assimilate. Be sure that you have provided for enough active exercises and practice to ensure the acquisition of the necessary skills and knowledge by the learners. The exercises should be directly related to the objectives and should reinforce key messages.
You may also want to provide ways for learners to organize the material (i.e., an advance organizer, see http://uts.cc.utexas.edu/~best/html/learning/advorg.htm for more information). In addition, resources that the learner can use for supplementary learning or clarification, as well as jobs aids and performance support (easily accessible pieces that workers can use for quick reference while working), may be included.
It is even possible to design the instruction to be adaptive, so that it can adjust itself to learners' needs based on their responses to the pre-test and their performance on previous modules. Prior performance can direct learners to only those modules that they need, allowing them to skip others.
Motivation
Learners need motivation to continue. Your course should appeal to their intrinsic motivation to learn, to do a better job, and to enjoy doing it. Does your program provide sufficient consistency and yet variety to maintain the interest of the learner? An e-learning course can engage the user through novelty, humor, game elements, testing, adventure, unique content, surprise elements, etc. Frequent learning checks and appropriate and timely feedback can also motivate the user. Above all, it pays to address the learner's primary concern: what's in it for me?
Aesthetics
The visual appeal of courses can help determine an e-learning initiative's success. For instance, is the overall design attractive and appealing to the eye and ear? Is the use of color appropriate and pleasant? Does the course have a consistent look and feel? Screens should be neither too busy nor too stark, and the overall appearance should be professional. In addition, icons or clear labels should be appropriately used so that users don't have to read excessively to determine program options.
Navigation
If the course is easy to navigate, the e-learning experience can be beneficial even for users with minimal computer skills. Make sure you provide instructions about the navigation through the course. The directions and navigation controls must be clear and intuitive. Answering the following questions may help you determine whether your e-learning course is easy to navigate.
* Have you provided a course menu (content map), one which links to all parts of the course so that the learner can choose where he or she will start or navigate to next (self-directed learning)? Are there several types of menus to help different learners?
* Can learners determine their own path through the course, if appropriate?
* Have you provided a glossary as an option to clarify meanings of words?
* Is an exit option always available?
* Does branching to other topics create a sense of being lost?
* Is there a way for the learner to tell how far along she is? For example, are there progress bars, or an indication such as page X of Y?
* Is the navigation consistent among courses, chapters, pages, tests, etc.?
Media
The term rich media is used to describe the use of graphics, animations, video, and sound. It can be very effective in helping the learning process, but it is extremely important that its use be appropriate to the topic, the audience, and the objectives, and not be merely for effect. The following questions may help guide you in its use.
* Is the on-screen text easy to read (font size and color)?
* Is the amount of on-screen text appropriate?
* Are graphics and illustrations appropriate to the topic, audience, and objectives?
* Do screens require scrolling?
* Are there too many or too few graphics?
* Is the use of animation or video distracting?
* Does the use of rich media sound and look professional?
Interactivity
To maximize learning and maintain interest and motivation, it is important that web-based learning be designed to be as interactive as possible. Interactivity is not simply clicking on buttons, watching animations or video, or listening to sound. It involves active participation by the learner—making choices, answering questions, going through simulations, etc. The learner should be engaged through the opportunity for input. Having said this, the interactivity needs to be appropriate to the course's users, content, and objectives, in terms of both type and amount. It should not be gratuitous, but rather be designed to promote learning of the course's objectives. There are various types and levels of interactivity, which are listed below.
* Choice of where to go next. This involves basic navigation capabilities, planned choice points, and optional access to anywhere in the course via a course menu or map.
* Supplementary resources or activities, for example, texts, journals, corporate documents, or web sites where a learner can go for additional information
* Branching as a result of answers to questions
* Exercises with more than one step (e.g., research, case studies, and laboratory exercises)
* Games and simulations
* Opportunity to communicate with a mentor or expert
* Threaded group discussions (either synchronous or asynchronous)
* Question and answer. Questions can be posed at various stages. There may also be interspersed quizzes.
* Feedback. Are there rich and unique feedback features?
Feedback
Feedback for questions and answers must be carefully designed. Where feedback is afforded, it should provide the learner with useful and helpful information. Various options, which you could use under different circumstances, include an overall test score, a specific response indicating whether each question is correct or incorrect, and a specific response giving the correct answer. You might also give the learner a chance to try the questions more than once. You could provide remedial feedback—not giving the correct answer, but pointing the learner to a place to find the correct answer or learn more. Another option is to have the learner's answer to a question reroute his or her path through the course (either in a programmed manner or by his or her choice). In a simulation, feedback is often the result of the learner making the correct decisions. In a gaming environment there are a variety of creative ideas for both positive and corrective feedback.
Learner Assessment
Even if there are no marks being given or scores being kept, performance feedback for the learner is essential. It lets the learner know if he or she has achieved the objectives. You will need to determine whether the mastery of total course content will be evaluated (using a final exam or other means). You will have to decide what the pass, fail, or grading criteria are. Whether scores will be recorded, or reports will be available for learners, instructors, or administrators are other issues that need to be dealt with.
Several types of assessment can be used to measure learning in a web-based course. These include completion (getting through the course), scores on tests, and results in simulations. Some web-based courses may involve communication and work done with others. In that situation, one can also evaluate group participation and effectiveness. Self-assessment can also be a valuable tool. Whatever type of assessment is used, the method of evaluation should be clearly described, and knowledge, skill, or attitude gains should be measured. Moreover, testing should relevant to real world performance objectives, and, in fact, real world problem solving (e.g., scenarios or course projects) can be used.
Section quizzes or other learning checks are often part of learner assessment. Test questions need to be written at an appropriate level. You may want to randomly pick questions from a bank. In addition, a good variety of the various different types of quiz questions should be used (see list below or go to http://www.questionmark.com/us/Learningcafe/ for more information).
* True-false
* Multiple choice
* Multiple answer
* Fill in the blank
* Matching (using drag-and-drop technology)
* Hot spot questions
* Numerical calculations
* Random generation of questions from a pool
* Ranking
* Likert scale selection (see http://www.usabilityfirst.com/glossary/term_968.txl)
* Problem solving
* Short answer
* Performance on a simulation
* Essay (requires someone to be available for marking)
Tools
There are many tools that can be used to author on-line learning courses. The choice of tool should be part of the design. Factors such as how elaborate the course design is; your experience with the various tools; how knowledgeable you are about both the technology and the course design; how much time you want to take to learn a new tool; and the learning content management system (LCMS) that will be used will influence the choice of tool. The following are a few examples of various tools.
* Basic programming of hypertext markup language (HTML) pages
* Macromedia Flash objects
* Web site authoring software, such as Macromedia Dreamweaver
* Tools, such as Articulate and Impatica, which convert documents from Microsoft PowerPoint and Word formats
* Fully programmable course authoring tools, such as ToolBook or Authorware
* Easier-to-learn authoring tools, such as OutStart Trainer or Trivantis Lectora
* Tools available within the LCMS
Technical Issues
Because e-learning courses operate in a technical environment—they must work on your learning management system (LMS) or LCMS, and people need easy access to them—there are a number of other technical issues that need to be considered. The following list highlights some areas you might want to take into account.
* Do the learners have the necessary computers and computer skills?
* Can learners access the course easily?
* Have you allowed for reduced bandwidth access to the course where necessary?
* Can people download the course for off-line access?
* Does the course start immediately when accessed? If not, is there a "please wait" message to the learners?
* Is the performance of the program adequate without long delays when making choices or using rich media?
* Does the course include clearly written and jargon-free instructions for accessing and downloading it (if appropriate)?
* Is helpful technical support available over the phone or on-line?
* Is the course compliant with standards, such as Aviation Industry CBT Committee (AICC), Sharable Content Object Reference Model (SCORM), etc., so that it will work properly with your LMS or LCMS?
Evaluation
Finally, have you provided a way to evaluate the course itself? Learners may appreciate an opportunity to provide feedback via questionnaires, surveys, interviews, etc. In addition, it is important to be able to make changes in the program based on learners' feedback. In this regard, it may pay to keep the following points in mind.
* Have you incorporated performance measures that can be used to benchmark the success of the program or the need for revision?
* Have you designed follow-up surveys, interviews, etc. with employees, colleagues, and managers to assess the on-the-job performance?
* Have you planned for course revisions based on feedback and performance measures?
* Have you incorporated goals for business measures, such as increased sales, reduced error rates, etc.?
For almost fifty years, the bible for the evaluation of training programs has been Donald Kirkpatrick's four levels (Kirkpatrick and Kirkpatrick 1998, see also http://www.questionmark.com/us/Learningcafe/kirkpatrick_4_levels.ppt). The four levels are as follows.
1. Learner reaction and satisfaction. This involves learner feedback as to the quality or effectiveness of the course, usually determined from post-course evaluation questionnaires, surveys, or interviews.
2. Learning. How much has been learned is determined, usually from test performance.
3. Behavior, application, implementation, or performance on the job. Is the learner doing a better job as a result of the training?
4. Results or business impact. Is the company or business unit achieving its objectives more effectively?
5. A fifth level—return on investment (ROI)—has been proposed by Jack Phillips (Phillips, 2003).
You can't really go beyond level two directly in a web-based course. The other levels require later follow-up. Nonetheless, they should be planned as part of the course design.
Imagine your company is embarking on a program to implement e-learning to complement its classroom training program, and you have been recruited to design some of the new courses. This article lays out a list of questions and hints that can serve as a checklist of things you need to consider when designing e-learning courses. Not all of these points apply to every situation. They must be appropriate to the objectives, the learners, and the content. Unfortunately, as the creator of the program, you are often not the best judge of these things. The most effective way to evaluate them is to have some typical learners go through the course with you. This is called formative evaluation.
Target Audience
It is essential to begin by identifying the target audience and determining both how much they already know about the topic and whether they have the necessary computer skills to access and complete the course.
Objectives
Critical for helping learners get the most out of an e-learning experience is a clear statement of learning objectives. You should consider attitude objectives as well as knowledge and skill objectives. You should state these objectives in measurable terms with expected outcomes and explain the criteria against which the outcomes will be measured. It is important to share these objectives with the learners so they know what is expected of them.
Pre-assessment
Before beginning the course, you may want to provide the learner with a pre-test or self-assessment that will enable him or her to bypass a module or course if they already know the material or have the required skills. Another option is to have the results of the pre-test direct the learner to specific sections according to where his or her skill deficiencies exist.
Design
Once the learning needs and objectives have been analyzed, the next step is course design. Instructional design is a lost science. Developed in the 1960s as a systems approach to the design of instruction, it employs practices that have worked very well in engineering. Instructional design has received some bad press for the time it takes, but that press failed to recognize the quality and effectiveness of the learning that results when it is done properly. The problem has often been that instructional design is used by people who haven't acquired the skills to do it correctly. Everyone is in a hurry today and wants the design done immediately. It is possible to do good instructional design quickly without abandoning the principles behind it. However, too often steps are skipped, for example, the analysis step because someone "knows what they need".
First, it is important to select a learning strategy that is appropriate to your objectives. Some examples of such strategies include story telling, sequential, competency-based, criterion-referenced, evaluated, co-operative, case studies, discovery or constructivist, role playing, simulation, games, experiential, laboratory, etc. Keep in mind that the most effective learning occurs when learners are actively engaged.
Does the content design reflect the needs and interests of the intended audience? Are the tone, level of content, and interactivity appropriate to the audience? Content needs to be clearly organized divided into appropriate chunks that are small enough for learners to assimilate. Be sure that you have provided for enough active exercises and practice to ensure the acquisition of the necessary skills and knowledge by the learners. The exercises should be directly related to the objectives and should reinforce key messages.
You may also want to provide ways for learners to organize the material (i.e., an advance organizer, see http://uts.cc.utexas.edu/~best/html/learning/advorg.htm for more information). In addition, resources that the learner can use for supplementary learning or clarification, as well as jobs aids and performance support (easily accessible pieces that workers can use for quick reference while working), may be included.
It is even possible to design the instruction to be adaptive, so that it can adjust itself to learners' needs based on their responses to the pre-test and their performance on previous modules. Prior performance can direct learners to only those modules that they need, allowing them to skip others.
Motivation
Learners need motivation to continue. Your course should appeal to their intrinsic motivation to learn, to do a better job, and to enjoy doing it. Does your program provide sufficient consistency and yet variety to maintain the interest of the learner? An e-learning course can engage the user through novelty, humor, game elements, testing, adventure, unique content, surprise elements, etc. Frequent learning checks and appropriate and timely feedback can also motivate the user. Above all, it pays to address the learner's primary concern: what's in it for me?
Aesthetics
The visual appeal of courses can help determine an e-learning initiative's success. For instance, is the overall design attractive and appealing to the eye and ear? Is the use of color appropriate and pleasant? Does the course have a consistent look and feel? Screens should be neither too busy nor too stark, and the overall appearance should be professional. In addition, icons or clear labels should be appropriately used so that users don't have to read excessively to determine program options.
Navigation
If the course is easy to navigate, the e-learning experience can be beneficial even for users with minimal computer skills. Make sure you provide instructions about the navigation through the course. The directions and navigation controls must be clear and intuitive. Answering the following questions may help you determine whether your e-learning course is easy to navigate.
* Have you provided a course menu (content map), one which links to all parts of the course so that the learner can choose where he or she will start or navigate to next (self-directed learning)? Are there several types of menus to help different learners?
* Can learners determine their own path through the course, if appropriate?
* Have you provided a glossary as an option to clarify meanings of words?
* Is an exit option always available?
* Does branching to other topics create a sense of being lost?
* Is there a way for the learner to tell how far along she is? For example, are there progress bars, or an indication such as page X of Y?
* Is the navigation consistent among courses, chapters, pages, tests, etc.?
Media
The term rich media is used to describe the use of graphics, animations, video, and sound. It can be very effective in helping the learning process, but it is extremely important that its use be appropriate to the topic, the audience, and the objectives, and not be merely for effect. The following questions may help guide you in its use.
* Is the on-screen text easy to read (font size and color)?
* Is the amount of on-screen text appropriate?
* Are graphics and illustrations appropriate to the topic, audience, and objectives?
* Do screens require scrolling?
* Are there too many or too few graphics?
* Is the use of animation or video distracting?
* Does the use of rich media sound and look professional?
Interactivity
To maximize learning and maintain interest and motivation, it is important that web-based learning be designed to be as interactive as possible. Interactivity is not simply clicking on buttons, watching animations or video, or listening to sound. It involves active participation by the learner—making choices, answering questions, going through simulations, etc. The learner should be engaged through the opportunity for input. Having said this, the interactivity needs to be appropriate to the course's users, content, and objectives, in terms of both type and amount. It should not be gratuitous, but rather be designed to promote learning of the course's objectives. There are various types and levels of interactivity, which are listed below.
* Choice of where to go next. This involves basic navigation capabilities, planned choice points, and optional access to anywhere in the course via a course menu or map.
* Supplementary resources or activities, for example, texts, journals, corporate documents, or web sites where a learner can go for additional information
* Branching as a result of answers to questions
* Exercises with more than one step (e.g., research, case studies, and laboratory exercises)
* Games and simulations
* Opportunity to communicate with a mentor or expert
* Threaded group discussions (either synchronous or asynchronous)
* Question and answer. Questions can be posed at various stages. There may also be interspersed quizzes.
* Feedback. Are there rich and unique feedback features?
Feedback
Feedback for questions and answers must be carefully designed. Where feedback is afforded, it should provide the learner with useful and helpful information. Various options, which you could use under different circumstances, include an overall test score, a specific response indicating whether each question is correct or incorrect, and a specific response giving the correct answer. You might also give the learner a chance to try the questions more than once. You could provide remedial feedback—not giving the correct answer, but pointing the learner to a place to find the correct answer or learn more. Another option is to have the learner's answer to a question reroute his or her path through the course (either in a programmed manner or by his or her choice). In a simulation, feedback is often the result of the learner making the correct decisions. In a gaming environment there are a variety of creative ideas for both positive and corrective feedback.
Learner Assessment
Even if there are no marks being given or scores being kept, performance feedback for the learner is essential. It lets the learner know if he or she has achieved the objectives. You will need to determine whether the mastery of total course content will be evaluated (using a final exam or other means). You will have to decide what the pass, fail, or grading criteria are. Whether scores will be recorded, or reports will be available for learners, instructors, or administrators are other issues that need to be dealt with.
Several types of assessment can be used to measure learning in a web-based course. These include completion (getting through the course), scores on tests, and results in simulations. Some web-based courses may involve communication and work done with others. In that situation, one can also evaluate group participation and effectiveness. Self-assessment can also be a valuable tool. Whatever type of assessment is used, the method of evaluation should be clearly described, and knowledge, skill, or attitude gains should be measured. Moreover, testing should relevant to real world performance objectives, and, in fact, real world problem solving (e.g., scenarios or course projects) can be used.
Section quizzes or other learning checks are often part of learner assessment. Test questions need to be written at an appropriate level. You may want to randomly pick questions from a bank. In addition, a good variety of the various different types of quiz questions should be used (see list below or go to http://www.questionmark.com/us/Learningcafe/ for more information).
* True-false
* Multiple choice
* Multiple answer
* Fill in the blank
* Matching (using drag-and-drop technology)
* Hot spot questions
* Numerical calculations
* Random generation of questions from a pool
* Ranking
* Likert scale selection (see http://www.usabilityfirst.com/glossary/term_968.txl)
* Problem solving
* Short answer
* Performance on a simulation
* Essay (requires someone to be available for marking)
Tools
There are many tools that can be used to author on-line learning courses. The choice of tool should be part of the design. Factors such as how elaborate the course design is; your experience with the various tools; how knowledgeable you are about both the technology and the course design; how much time you want to take to learn a new tool; and the learning content management system (LCMS) that will be used will influence the choice of tool. The following are a few examples of various tools.
* Basic programming of hypertext markup language (HTML) pages
* Macromedia Flash objects
* Web site authoring software, such as Macromedia Dreamweaver
* Tools, such as Articulate and Impatica, which convert documents from Microsoft PowerPoint and Word formats
* Fully programmable course authoring tools, such as ToolBook or Authorware
* Easier-to-learn authoring tools, such as OutStart Trainer or Trivantis Lectora
* Tools available within the LCMS
Technical Issues
Because e-learning courses operate in a technical environment—they must work on your learning management system (LMS) or LCMS, and people need easy access to them—there are a number of other technical issues that need to be considered. The following list highlights some areas you might want to take into account.
* Do the learners have the necessary computers and computer skills?
* Can learners access the course easily?
* Have you allowed for reduced bandwidth access to the course where necessary?
* Can people download the course for off-line access?
* Does the course start immediately when accessed? If not, is there a "please wait" message to the learners?
* Is the performance of the program adequate without long delays when making choices or using rich media?
* Does the course include clearly written and jargon-free instructions for accessing and downloading it (if appropriate)?
* Is helpful technical support available over the phone or on-line?
* Is the course compliant with standards, such as Aviation Industry CBT Committee (AICC), Sharable Content Object Reference Model (SCORM), etc., so that it will work properly with your LMS or LCMS?
Evaluation
Finally, have you provided a way to evaluate the course itself? Learners may appreciate an opportunity to provide feedback via questionnaires, surveys, interviews, etc. In addition, it is important to be able to make changes in the program based on learners' feedback. In this regard, it may pay to keep the following points in mind.
* Have you incorporated performance measures that can be used to benchmark the success of the program or the need for revision?
* Have you designed follow-up surveys, interviews, etc. with employees, colleagues, and managers to assess the on-the-job performance?
* Have you planned for course revisions based on feedback and performance measures?
* Have you incorporated goals for business measures, such as increased sales, reduced error rates, etc.?
For almost fifty years, the bible for the evaluation of training programs has been Donald Kirkpatrick's four levels (Kirkpatrick and Kirkpatrick 1998, see also http://www.questionmark.com/us/Learningcafe/kirkpatrick_4_levels.ppt). The four levels are as follows.
1. Learner reaction and satisfaction. This involves learner feedback as to the quality or effectiveness of the course, usually determined from post-course evaluation questionnaires, surveys, or interviews.
2. Learning. How much has been learned is determined, usually from test performance.
3. Behavior, application, implementation, or performance on the job. Is the learner doing a better job as a result of the training?
4. Results or business impact. Is the company or business unit achieving its objectives more effectively?
5. A fifth level—return on investment (ROI)—has been proposed by Jack Phillips (Phillips, 2003).
You can't really go beyond level two directly in a web-based course. The other levels require later follow-up. Nonetheless, they should be planned as part of the course design.
The Renewed Finance Function: Extending Performance Management Beyond Finance
Contents
* About this Report
* Executive Summary
* Chapter 1: The Strategic CFO
* Chapter 2: The New Role: A Holistic Leader and Partner"Not Merely a Technician
* Chapter 3: Standardizing and Streamlining
* Chapter 4: Conclusion
* Sponsor's Perspective
About this Report
In August 2007, CFO Research Services (a unit of CFO Publishing Corp.) launched a research program to explore the ways in which the role of the finance team has changed in recent years due to increased oversight from regulators, more active investors, and company- specific changes in business operations. We wanted to better understand the internal and exter- nal forces that are causing these transformations and the steps that companies and their finance teams are taking to respond to these forces. This research program" which includes an electronic survey and a series of inter- views among senior finance executives"finds that the finance team is indeed under new pressure from more demanding external stakeholders. This pressure, espe- cially from regulators, has prompted finance teams to document and often repair core finance and operating activities.
Pressure from more demanding external stakeholders has prompted finance teams to document and often repair core finance and operating activities.
But companies aren't in business just to comply with regulations. They are in the business of making valuable products, rendering high-quality services, serving customers, and generating value for shareholders. Amid a marked increase in investors' expectations from com- panies and their finance teams, executives in this study show new enthusiasm for closer collaboration with business unit management in an effort to improve business performance and lessen risk. By doing so, they will contribute to the core business activities that satisfy customers and shareholders"as well as stake- holders such as regulators, business unit managers, and employees at large.
This report presents the findings of our online survey of 255 senior finance executives and in-depth interviews with executives at the following companies:
* ABB
* Bank of Montreal
* CB Richard Ellis Group, Inc.
* Cengage Learning (formerly Thomson Learning)
* Cleveland-Cliffs, Inc.
* CMA CGM (America) Inc.
* Cox Communications, Inc.
* Levi Strauss & Co.
* MGM Mirage
* Silgan Plastics Corp.
* Turbocam
* Verigy Ltd.
* Wyndham Worldwide Corporation
* Executives at several other companies in North America, Europe, and Asia that asked not to be cited by name in this report
CFO Research Services and SAP developed the hypotheses for this research jointly. SAP funded the research and publication of our findings, and we would like to acknowledge Erin Halfnight, Barbara Dischner, and Jim D'Addario for their contributions and support. At CFO Research Services, Elaine Appleton Grant conducted the interview program and wrote the report. Sam Knox directed the research and managed the project.
Executive Summary
These are demanding times for senior finance executives. Investors want higher returns. Regulators require more complete documentation of companies' compliance with stricter requirements. And in the face of stiffer market competition, business managers want more capital to invest in the business and more assistance in making investment and operating decisions for their increasingly complex businesses.
Companies and their stakeholders have always had high expectations for their finance teams. But this research program reveals that, most recently, these pressures" from regulators, from investors, and from competitors" are pushing companies to look for more from their finance teams in two main, but often conflicting, areas. Regulatory pressures, especially the Sarbanes-Oxley Act, push finance teams toward more rigor in their transac- tional duties of controllership and financial reporting. At the same time, competitive pressures, demands from line-of-business management, and higher expectations from investors pull finance executives toward a more active role in setting, validating, overseeing, and ensuring execution of business strategy.
The need for finance executives to play a greater role in business performance management creates the demand for new and different skills among finance management and staff. To use these skills, finance executives need technology and systems that often go beyond standard transaction processing and core accounting. And finance executives need a cultural mandate from business and functional management to work collaboratively on improving performance.
Sources interviewed for this study are voluble on the importance of the finance function playing a higher-value role. One CFO says, "I think the business environment is absolutely demanding it. When you think about the financial returns from the stock market in the last ten years, they've been extremely attractive. Now, CEOs are actually seeking out more financial guidance and part- nering because it's harder to drive superior shareholder return." He continues, "As we look at the next ten years, it's not going to be as easy to drive that type of produc- tivity and value creation. So, I think most businesses are longing for that strategic partner and the insights, so that they can make better decisions, drive transforma- tional productivity, and ensure they're choosing the right strategies."
Whether or not finance embraces an emerging mandate to contribute more fully to performance management, the finance function remains responsible for companies' core transaction processing, financial reporting, audit management, and other traditional controllership activities. The demand to keep transactional processes running with close control, improve their efficiency, and lower their cost pushes finance into a continual evolu- tion of its processes and systems. This evolution in processes"sometimes gradual, sometimes rapid" allows the finance team to standardize, streamline, and simplify routine transaction processing. Companies are then able to execute routine activities more quickly and with fewer errors, to free up finance executives' time to act as a partner to the CEO and operational leaders, and to provide better and faster information for competitive decision making throughout the corporation.
"When you think about the financial returns from the stock market in the last ten years, they've been extremely attractive. Now, CEOs are actually seeking out more financial guidance and partnering because it's harder to drive superior shareholder return,"
says one CFO interviewed for this report
Key Findings
* The role of the finance function is changed by three things: Regulations on the one hand, with competition and investor expectations on the other. As a result, the finance function is pulled in two directions.
* Most finance executives seem to agree that as the role of the finance professional becomes more strategic, the skills of the new finance employee must become broader"much like those of a CEO, without diluting the technical skills of finance's traditional controllership role. Finance leaders in this study call for business schools and company-run training programs to provide their finance and operating executives with a broader base in both finance and business support skills.
* As the opportunity for top-line growth slows, growth in profitability becomes a more important source of value, and information to support decisions made by operations and functional managers becomes critical.
* Companies that have elevated CFOs to strategic leadership positions have done so in part to satisfy the needs of stakeholders, such as investors. CFOs can speak their language.
* In order for finance to play a greater role in driving business performance, say executives, it needs to collaborate more closely with business unit and line management. A majority of respondents say such collaboration is underway"although it's not without challenges"at all levels of the organization, including partnerships with the CEO and Boards of Directors.
* While respondents in this study say the finance function often has broad credibility with business unit managers, finance's assessment of operations managers' understanding of finance is far less favorable. Finance executives report that business unit managers do not understand the world of finance as well as they should. More"and more formalized"financial education for business unit managers would help finance executives have better internal dialogue about performance.
* In response to regulatory and internal requirements, companies have focused on documenting, standardizing, streamlining, and automating their accounts receivable (A/R), accounts payable (A/P), and other core financial processes. More than half of the companies in this study have completed or are currently executing projects to standardize their charts of accounts, to streamline their financial close processes, or to simplify/standardize core finance processes. However, while large-scale investments in enterprise IT systems are commonplace, current or recent technology projects are less likely to be dedicated to automating regulatory compliance or to measuring and managing risk.
* Finance executives are also seeking to distribute performance management systems to a broader coalition of decision makers. In many cases, they are pushing performance management and measurement systems out into their organizations"thus, distributing financial and operating information in an effort to allow business and functional managers to make more timely decisions in extraordinarily competitive markets.
The role of the finance function is changed by three things: Regulations on the one hand, with competition and investor expectations on the other. As a result, the finance function is pulled in two directions.
Chapter 1: The Strategic CFO
Over the last decade, finance executives have evolved from serving primarily as chief accountants to becoming more closely engaged with business unit managers. Rather than focusing on keeping a historical record of company activity and performance, CFOs and their teams are providing advice, counsel, and decision sup- port to business managers on a broader array of finan- cial and operating activities. While the role of the finance team varies with the unique requirements of each com- pany, executives in this research program affirm that business activities and the role of the finance function have been altered in recent years by shifts in their com- petitive environment, increased complexity of business operations, and investors' scrutiny of company performance. Accordingly, they aspire to contribute more materially to developing business strategy. (See Figure 1.)
At the same time, regulatory oversight has weighed heavily on companies in recent years. In this survey of more than 200 senior finance executives, fully 38 percent of respondents said "regulatory compliance require- ments (e.g., SEC regulations, privacy, security, environ- mental, trade, labor, and other regulations)" had a "dra- matic impact" on their companies' business activities in the last two years. Although we are now five years beyond the passage of Sarbanes-Oxley, and most com- panies have concluded their initial investments and internal controls assessments, the stringent audit requirements of Sarbanes-Oxley still draw finance teams away from activities that support decision making and presumably generate value for customers and shareholders.
"There are two forces over the last few years that have been pulling in opposite directions," says Laurie Brlas, chief financial officer of Cleveland-Cliffs, Inc., a $1.9 billion mining company in Cleveland, Ohio. "I think Sarbanes- Oxley has pushed finance executives to be less strategic and more control focused"kind of ‘the cop,'" she says. On the other hand, she adds, "most folks recognize that the skill set and the approach that a finance executive brings to the table are very valuable in strategic decision making, so companies are always pulling in that direction."
The tension between these two roles"strategy and con- trollership"is significant. At the minimum, it can stretch resources thin. At the extreme, it can go so far as to con- tribute to decisions to cast off the burdens of Sarbanes- Oxley altogether. "Until six weeks ago, I would have said what kept me up at night was interacting with our exter- nal auditors to get compliant with Sarbanes-Oxley," said a finance executive at a food-service conglomerate earli- er this year. He calls the Sarbanes-Oxley work a "night- mare": "We were not allowed any incremental resources. We had to basically come under compliance with the existing resources that we had." But this summer, the food-service conglomerate delisted from the NYSE, in part to escape the onerous Sarbanes-Oxley requirements. Still, it will take some time for their finance department to overcome the effects of those resource constraints, the finance executive says, because Sarbanes-Oxley forced the finance team to lessen its role guiding operations management in strategic decisions and moved it into a "more nuts-and-bolts control function," a move that he says has been "a point of contention."
Other finance executives working for U.S. public compa- nies also say the Sarbanes-Oxley compliance require- ments have reduced their abilities"but not the desire nor the need"to contribute to developing, executing, and measuring business strategy. Meeting Sarbanes- Oxley compliance without adding to staff has challenged his team, says Rick Arpin, vice president of financial accounting for gaming company MGM Mirage in Las Vegas. "A project comes up and we say, ‘Who's going to do this project? Who's going to look at this changing environment? Who's going to look at this deal we might do?' And all the finance and accounting people are busy doing flowcharts and the other work that needs to be done for 404," he says. Mr. Arpin adds that in the last year the initial work for Sarbanes-Oxley compliance has abated somewhat, and, as a result, the finance and accounting group has been able to reassign some Sar- banes-Oxley compliance duties into other areas of the company, and has been able to take on more strategic projects as a result.
However, the impact of Sarbanes-Oxley and other regulato- ry regimens may not be entirely negative, say some execu- tives interviewed for this study. Sarbanes-Oxley "has had a lasting impact on the way we run our finance back office" all the way from a more robust audit program to more dis- closure in our forms 10K and 10Q," says Gil Borok, executive vice president of finance at CB Richard Ellis Group, Inc. (CBRE), a large commercial real estate services company with operations in 50 countries. He continues, "There's always the argument that the costs don't justify the bene- fits, but there are some good things that have come of it. It has made us function differently. The demands have gone up significantly. I think it's overall good, overall positive."
While Compliance Requirements Mount, Markets Mature and Become More Competitive
The rigors of Sarbanes-Oxley aside, more than one-third of survey respondents and many of the executives we inter- viewed for this study say that a shifting competitive environ- ment has had a dramatic impact on their companies in recent years. Globalization (of capital, labor, information, and sup- ply chains), new competitors, industry maturation, and M&A each have increased the pace and intensity of competition in many industries. And in response, companies are turning to their finance teams as strategic advisors to help develop busi- ness strategies, manage risk more effectively, and extract organic growth from current lines of business.
"The trends have to do partly with globalization, which in turn has spurred on the need for discovery of where the next incremental growth and shareholder value will come from," says Ashish Gupta, vice president of pricing and business ini- tiatives for Cengage Learning's Academic Group. "Industries mature and consolidate, so the top-line growth from just rev- enue and business as we've known it in the past cannot con- tinue at the pace it used to in most industries." Mr. Gupta argues that in many industries, finance executives work to bring business unit management to the table. "Growth does- n't have to always come from top-line sources. Sometimes, it's the traditional sales channel or could be alternative sales. It could be different ways of structuring your business to get to the desired target."
The maturing gaming industry provides a case study. Because the industry is crowded with casinos, gaming companies are beginning to look elsewhere for growth, cash flow, and profits. For instance, rather than using any available real estate to build casinos, companies such as MGM Mirage are experimenting with other value-creation models. "So there's an option analysis, I guess you might call it, of ‘What should we actually do with these assets and is there a better way than just owning and operating a casino resort?'" Mr. Arpin explains. "Should we own and operate a mixed-use development? Should we partner with someone to do a project? Should we master-plan the property like a real estate company?" As the questions become more complex, MGM Mirage looks to its finance team to help determine which options will create the most value in the future, Mr. Arpin says. Other finance executives, such as Bill Fitzsimmons, vice president of accounting, financial planning, and analysis at Cox Communications, Inc., find themselves in similar positions. For the last several years, the Atlanta-based cable company acquired market share as fast as it could.
Now, though, markets are becoming saturated; the pool of prospective customers from which to draw is shrink- ing; and voice, cable, and data service providers are muscling in on each others' markets. As a result, the whole telecommunications industry is scrambling for the same customers. Mr. Fitzsimmons says, "It's going to cost more to acquire [new customers]. We've got to real- ly understand our costs of acquisition, whereas in the past that was not as important as just managing volume growth." As the competitive landscape becomes more complex, operating decisions"for instance, how much to spend on marketing to these scarce customers, for what return, and so on"become more difficult to make and require a greater depth of financial input, such as analysis of marketing campaign costs versus "the ultimate payback" that's associated with that kind of campaign, including the monthly revenue generated by new customers. "The nature of our industry is getting more competitive and so there's a greater reliance on the role of finance as an advisor," Mr. Fitzsimmons says.
Additional competition from globalization, new market entrants, or industry maturation puts pressure on prices and margins. And as the opportunity for top-line growth slows, growth in profitability often becomes a more important source of value. With this in mind, many finance executives are seeking to provide more up-to- date information to operating managers in an effort to support better decision making. Such decisions vary broadly, of course"from near-term tactical spending on marketing programs, to headcount, to investment and asset allocation decisions.
At the American subsidiary of CMA CGM S.A., a multi- billion dollar privately held container-shipping company headquartered in Marseilles, France, senior vice presi- dent and chief financial officer Jim Arnold is driving activ- ities to shrink costs. "We have a lot of rate pressure in the shipping industry, and competition caused rate decreases last year," he says. To help pull costs out, the new CFO"he's been there for a year"is sponsoring a data warehouse project that, along with new perform- ance dashboards, will allow operating executives throughout the company to make decisions about shipping and inland transportation routes, pricing, and sourcing much faster than they've been able to previously"activities that should improve both margins and competitive position.
As the opportunityfor top-line growth slows, growth in profitability often becomes a more important source of value. With this in mind, many finance executives are seeking to provide more up-to-date information to operating managers in an effort to support better decision making.
Industry maturity and margin erosion"along with access to capital"can breed M&A activity, as compa- nies constrained in stalling markets look to acquisitions for growth or fall prey to others' acquisition strategies. Opportunities for mergers and acquisitions and the need to make deal decisions quickly also transform the role of the finance executive; many of the executives we spoke with were deeply and regularly involved in analyzing deal opportunities. Some were new to organizations that had recently been spun out of larger companies; others were brought on to help initiate acquisition processes or inte- grate recent purchases. While the circumstances of each executive we interviewed are different, the finance func- tion plays a pivotal role in M&A targeting, evaluation, and structuring in nearly every instance.
Derek Schmidt, chief financial officer of the Plastic divi- sion at Silgan Holdings, Inc., a $2.7 billion manufacturer of metal and plastic food containers, explains how the maturation of his company's industry drives both acqui- sitions and an expanded role for the finance function. "The plastics [market] is very fragmented, and there's a substantial amount of consolidation happening.
Organic growth in our industry is typically lower single- digits, so acquisitions represent a viable option to grow more rapidly. As we start to look at acquisitions, not only do we look for [cost] synergies, but we look at whether we can expand our geographical capabilities and get into different consumer segments than we currently have today."
A large part of the company's business strategy, says Mr. Schmidt, hinges on the acquisitions, not just from an operating point of view but also from a financial value perspective. Mr. Schmidt argues for including the business development function within the broader finance function"in part due to finance's independence and broad analytical capabilities: "We need someone with a strong mindset around value creation who can objectively look at acquisition candidates and choose those that not only have strategic fit but also those where there's considerable financial value-creation potential."
Investors Call for More Information and Closer Relations with Finance
While globalization, regulation, and competition have driven changes in the role of finance in recent years, investors in companies both public and private now have higher expectations for companies and their finance teams. Queried on investors' expectations, a solid major- ity of respondents in our survey say their investors demand more information, more access to the CFO, and better performance from the companies in which they hold shares. (See Figure 2, next page.)
The heightened scrutiny has increased the demand for outward-looking CFOs who can speak to the investor community in ways that CEOs, COOs, and other operat- ing executives cannot. When Cleveland-Cliffs' former CEO"who was also the company's CFO"left, its board decided the company needed a sitting CFO, in part to have an executive who could communicate with an active investor community, says current chief financial officer Ms. Brlas.
Investor scrutiny has increased the demand for outward-looking CFOs who can speak to the investor community in ways that CEOs, COOs, and other operating executives cannot.
Elsewhere in the survey, a solid majority of respondents say that increased scrutiny from investors has had a moderate-to-dramatic effect on their companies' business activities. "I think that our investor relations function has needed a lot more support than it might have needed three or four years ago," says Mr. Borok, of the Los Angeles-based CBRE. "We have a very active investor relations program, which requires us to stream- line information, summarize it, and make it user-friend- ly. We have most of the data, but we have to make it such that it's easily interpreted by investors and sharehold- ers. And I think that investors ask a lot more questions today than they did years ago and that does put an additional strain on the organization."
Moreover, a growing flood of acquisitions, buyouts, mergers, and spin-offs creates more demand for infor- mation from an investor community that must make buy, sell, and hold decisions on companies they may know little about. About a year ago, Cendant Corporation spun off $3.8 billion Wyndham Worldwide Corporation as a new public company; Virginia Wilson, the Parsippany, New Jersey, company's executive vice president and chief financial officer, says, "Many of the people in the invest- ing community who ended up owning our shares after the spin-off hadn't necessarily bought the old Cendant shares because they wanted to be involved in the hospitality space… So there was a big decision for them to make about whether they wanted to continue to own the shares."
Whether investors are as informed as they would like to be, it is finance's job to step in and give investors the information they seek. Verigy Ltd., a $778 million semiconductor test manufacturer based in Singapore, was spun off from Agilent Technologies in 2006 (which was itself an offshoot from Hewlett-Packard) and has had a similar experience in man- aging shareholder relations after a spin-off, albeit with investors more informed about industry performance, says Michael Jung, vice president of corporate financial planning and analysis. "We used to be part of a conglomerate. Now we're a pure play semiconductor test company, and as a result, we've got investors who are familiar with the industry and are more focused." He says, "These new investors have probably raised the bar a notch, and the rest of the share- holders get more keen insight into Verigy and are likely to drive the bar higher, too."
Investor Demand for Better Performance
Not only do investors want more information, they demand better performance. For instance, as $7.1 billion MGM Mirage reacts to its competitive landscape by moving into new busi- nesses, investors want accelerated rates of activity and of return, says Rick Arpin: "When operating as just a gaming company, it might be okay to open up a property, generate some cash flow, pay down the debt and then say, ‘In five years I'll open the next property.' Real estate investors don't want to hear that. They want to know what land you are buy- ing next and what building is going up next."
Increased expectations for performance can translate into fundamental organization changes, resulting in dramatical- ly new and more encompassing roles for the finance team. In mid-2007, Silgan Plastics, a division of Silgan Holdings in Chesterfield, Missouri, created a new CFO position and hired Derek Schmidt, who now oversees finance, IT, and corporate development. "Our purpose is all about driving shareholder value," Mr. Schmidt says, "hence the need to combine corpo- rate development and finance. Regarding IT, we have strong technical people, but they had no clear vision, no strategy as to how IT would actually create a competitive advantage for the entire business." Moreover, he adds, "a lot of the diver- sity in my role has to do with the fact that we're in a lower margin, competitive industry, so you can't necessarily afford to have a CIO, CFO, and chief strategy officer."
While investors have always clamored for higher perform- ance and better returns"when wouldn't they want more from their investments?"investor expectations have driv- en CFOs and their teams toward enhancing business advi- sory capabilities, even in the face of daunting compliance requirements. By doing this well, say sources, the finance function can fulfill an expanded mandate as the steward of both controls and company performance. Says Cathy Cranston, senior vice president of financial strategy at the $16 billion Bank of Montreal, "The last few years have been just crazy with governance, with Sarbanes-Oxley, Basel II, and all the rest." And as a result, her company's finance team has had to focus on compliance matters more than it would like. She continues, "Our investors are very demanding in terms of the returns they want, and our industry is extremely com- petitive. Absolutely, the force from investors is pulling us for- ward to improve our performance. We in finance have a role to play, and it's a lost opportunity when the full value we can bring to the table isn't harnessed and leveraged. It's a huge missed opportunity [to focus on governance at the risk of ignoring performance improvement]."
"When operating as just a gaming company, it might be okay to open up a property, generate some cash flow, pay down the debt and then say, ‘In five years I'll open the next property.' Real estate investors don't want to hear that. They want to know what land you are buying next and what building is going up next," says Rick Arpin, VP of financial accounting for MGM Mirage.
Chapter 2: The New Role: A Holistic Leader and Partner" Not Merely a Technician
Senior finance executives say they serve as partners to the CEO and to operational leaders as companies strive to improve performance. In some cases, this has been long-standing practice. At CBRE, Gil Borok says his com- pany's business management seeks out the finance func- tion for "thoughtful analysis and the impact of decisions on their business." He continues, "I've always tried to be client service-oriented, and the lines of business are a client of ours. That's just what we do. The business comes first. They are the ones generating the revenue. I think that the finance organization here has improved. It has become recognized that we can add value to the businesses, and they come to us more frequently." In other organizations"including a majority of the com- panies represented in this survey"the finance team has recently assumed an expanded role as a counselor to functional and business unit leaders. (See Figure 3.) At educational materials publisher Cengage Learning in Belmont, California, Ashish Gupta says finance works on strategic projects more closely with the company's CEO and Board than it had it the past. This trend, says Mr. Gupta, "spans across industries, but I've seen it more in my current position, perhaps because of our recent sale to private equity." He says, "Finance is a key player in various metrics-driven projects to analyze where the gaps are in the business, to find opportunities for improv- ing not only revenue but margin, and therefore cash flow, as cash flow becomes extremely important across businesses."
In a majority of the companies represented in this survey, the finance team has recently assumed an expanded role as a counselor to functional and business unit leaders.
Cengage Learning is exploring ways to improve yield optimization"for instance, by looking creatively at how to make money in the used textbook market. (The $1.8 billion company, formerly Thomson Learning, was spun off from Thomson Corporation in mid-2007 and was pur- chased by private equity group Apex Partners.) Mr. Gupta is also exploring ways to improve the bottom line and generate more free cash flow by providing incentives to its distributors to reduce textbook returns. "These kinds of incremental opportunities"and in some cases, quantum opportunities"are the kinds of out-of-the-box scenarios that the Board seems to be more and more interested in," Mr. Gupta says.
Why are Boards and CEOs turning to finance executives for guidance on these sorts of decisions, rather than relying exclusively on operational executives, such as the COO? Our research suggests some fundamental reasons. First, the finance team is often responsible for performance measurement activities and therefore has the metrics-driven knowledge to contribute to decision making at this level. (See Figure 4.)
Simultaneously, investors are demanding more commu- nication with"and a deeper, more strategic level of information from"senior finance executives. According to a U.K.-based senior finance executive for a global chemical company, both investors and analysts expect the CFO to present strategic information, and they also expect the first point of contact to be with the CFO, not the CEO. "If you're going to go out and represent your company"either to rating agencies, banks, or investors"if you're looking for funds, I think they need or expect the CFO to have a broader view and a business view that they can represent to these potential stake- holders," he says. "Has that changed significantly over the years? Perhaps. I just think that with all things, as the Internet has opened up levels of communication, it drives information hunger. People expect more. Certainly, the City [of London] expects more from the CFO."
As investors raise their expectations for performance metrics-driven data, CEOs have begun to turn to finance teams to serve as independent voices within companies that challenge the assumptions of operational leaders, particularly when they assess new opportunities. (In this way, the finance team is acting as a surrogate for the investment community, asking the hard questions that they expect from investors and analysts in the future.) "I tell everyone on my team, ‘I look to you to be the CFO of your team and that doesn't mean just putting together the numbers. You need to provide the insight, you need to challenge people's assumptions. You need to really act as though you're running the organization,'" says Michael Jung, vice president of corporate financial plan- ning and analysis at Verigy, the semiconductor test man- ufacturer that was spun out of Agilent Technologies in 2006. "By necessity, I need those people to play that devil's advocate role, to challenge the team and make ure that what comes out of the team is strong."
Partnership at Many Levels
Finance executives are increasingly partnering with busi- ness unit and functional leaders in addition to support- ing the Board and CEO. More than 80 percent of respon- dents to our survey agreed either strongly or somewhat that business unit and functional leaders are seeking a greater contribution from and closer collaboration with the finance team. (See Figure 5.)
Indeed, survey respondents say that business unit lead- ers give finance executives high marks for their abilities to contribute to solving a broad range of problems. To do so requires candor, good information, and trust devel- oped over the long term. (See Figure 6.) Says Cathy Cranston of the Bank of Montreal, "I think the onus is on the finance group to earn the right to be at the table. You do that by being good"by bringing useful, actionable information to the table, by being a devil's advocate, by bringing information forward that sometimes people simply don't want to hear." She says finance executives should work to "become trusted advisors, and in some cases, finance people have earned that position. They've proven their value." Conversely, she says, "if finance peo- ple stay in the background"just doing what they're told, producing the numbers but not challenging them" never bringing anything more to the table, they have not earned the right to be at the table, and they won't be." At a well-known international information aggregator, a vice president of finance points out the change in busi- ness managers' thinking about how to work with the finance team. "Finance was typically a scorekeeper; it produced these reports that would make sure that the rules are followed. I think what the business is saying now is, ‘Look, finance, it's great that you're showing me these reports, but they're not enough. We want you to understand a few things and convey your understanding to us to provide us with insight in business decision mak- ing so that we're more knowledgeable.'" He calls on finance executives to truly master the underlying busi- ness: "Understanding the business itself so that you can predict financial results better and more accurately and analyze the mass of information that is out there will help the business have key insights into where it can improve itself."
Collaborating with business leaders to assess potential value-creation opportunities may be CFO Virginia Wilson's most important role at Wyndham Worldwide. "We're help- ing people make decisions about whether there is a greater growth opportunity if you pursue one set of options versus alternatives. Is there risk associated with that? It is impor- tant for us to both help guide [business unit leaders] and then to communicate [these opportunities and risks] to our investing community," Ms. Wilson says.
Less Confidence in Business Management "A Call for Training Emerges
Unfortunately for the health of such partnerships, the finance team doesn't give such high marks to their business unit peers when it comes to understanding finance. In fact, only 2 percent of respondents reported that "business unit managers have an excellent understanding of the finance function." Recently, says a finance executive at the food- service conglomerate, "operators have really focused pri- marily on just performing their duty and keeping their employees happy and almost divested themselves from any financial responsibility because they had a finance guy attached to the hip." That's a problem, he continues, because "some of our operators in the field don't have the ability to see niches and opportunities in the market because they don't have the full financial pallet available to them." Yet there is a chasm between finance's doubts and the actual responsibilities of most business unit managers. Our research shows that business managers are routine- ly held accountable for performance tied to financial and operating metrics. (See Figure 7.) Executives interviewed for this study confirm this focus on accountability among business managers for performance results. Cathy Cranston at the Bank of Montreal says, "My CEO recent- ly asked my group to create a much better line-of-sight into how we were going to meet our targets for next year, so we had to work across the organization to create met- rics and targets at a lower level to really be able to see how we were going to get there, and to be able to track them more rigorously. We already do that; this was sort of an extra effort that was meant to create transparen- cy and accountability." As a result of this effort, says Ms. Cranston, "we've got much better metrics, and that's because we want to create that transparency to set up the right discussions. It's not enough to just say at the end of the year ‘Oops, we missed.' There are monthly performance meetings with every group."
Despite the need, less than one-third of companies have formalized programs in place to better educate business managers on financial concepts and how to apply them to the business. (See Figure 8.) Such programs for nonfinan- cial managers are often optional, but, according to our research, companies are starting to put training programs into place to bring financial and analytical expertise to their functional and managerial leaders.
Silgan Plastics, for instance, currently has no formal pro- gram in place to train business managers in finance"a sit- uation new CFO Derek Schmidt plans to remedy. "That is one of my objectives," he says. "At the end of the day, it's the frontline managers within our plants and sales force that are making the decisions, and we need to do our best to equip them with the right knowledge to make great financial choices for the company." At the food-service con- glomerate, the finance team is just beginning to train oper- ations managers in finance. Says a finance executive at the food-service organization, "We want a better, well-round- ed operator who not only can interface with a client, who can not only manage the careers of our associates, but who also can analyze and report his own financials."
It's important to note that, at least according to our inter- views, finance executives do look critically at their own departments, not just at those of their operations counter- parts. In fact, for finance teams that are transforming from transaction-oriented groups into strategic ones, upgrading their talent may be the first order of business. Silgan's Mr. Schmidt previously worked for Masterbrand Cabinets, which had grown from a $300 million-plus company to a $2 billion- plus business in less than ten years via organic growth and acquisitions. "They had grown so fast that the investment in finance talent and IT systems was far behind what a $2 bil- lion organization needed," Mr. Schmidt says. "I was brought into that role to overhaul talent, implement performance management systems, upgrade key financial processes, and bring more financial partnering to the key business leaders." Out of a 33-person finance team, he replaced 13 positions "with very strategically minded and savvy business people," he says. "After repositioning talent, the second most impor- tant action was instilling that performance management system and an operational focus around things that truly drove financial success for the business."
Less than one-third of companies have formalized programs in place to better educate business managers on financial concepts and how to apply them to the business. According to our research, companies are starting to put training programs into place to bring financial and analytical expertise to their functional and managerial leaders.
Chapter 3: Standardizing and Streamlining
Like Y2K before it, the passage of Sarbanes-Oxley in 2002 spurred significant investments in information technology. Five years down the road, most finance executives feel companies have the software and systems that they need, but that companies aren't using this technology to its full advantage. (Note that there is a significant minority, in cer- tain industries, still suffering with manual processes.) Thus, the finance team has been spending its time and resources standardizing processes, linking systems together for better information flow, introducing more performance measurement resources companywide, and improving upon existing organizational structures. At container shipping company CMA CGM, for instance, Jim Arnold is working on a large, 14-month data- warehousing initiative. He's using existing technology. "The parent company has most of the systems," Mr. Arnold says. "It's just they haven't always deployed those systems into the subsidiaries in the past. When I came onboard and started probing, [I discovered that] we have all these very robust systems and I said, ‘Well, we've got to be able to utilize those systems in the subsidiaries.' This doesn't mean the current systems are a data warehouse; it just means the systems that house the data are available and they utilize well-known technology that can be developed to provide the company with real-time decision-making tools."
Similarly, when Derek Schmidt arrived in his new role at Silgan Plastics, he and his team decided to initiate a major project to introduce performance dashboards into all areas of the company so that, eventually, all key employees will have access to information for instantaneous decision making. It's a phased project that will take two years to complete"but it won't require major new technology investments. "We [had] already bought the functionality as part of our broader software package. So, there is no incremental expenditure in terms of software purchase," Mr. Schmidt says. "We're going to have roughly three or four individuals primarily dedicated to this internally. [And] we've already contracted with an outside consulting firm."
Process Improvements
Clearly, finance teams are becoming more assertive when it comes to maximizing the technology and the systems at their fingertips. Over the last two years, respondents say, they've undertaken or completed significant process changes, mostly intended to ensure that all parts of the organization are using accurate and timely information, and also intended to improve efficiency and accountabil- ity (for instance, centralizing certain accounting activi- ties). As one example, well over 60 percent are working on or have completed substantial process review and doc- umentation projects for compliance purposes (an obvi- ous effect of Sarbanes-Oxley); more than 60 percent are working on standardizing their charts of accounts or have completed doing so. (See Figure 9., next page) Most of our interview subjects indicated that by standardizing processes, they and their business unit counterparts can both spend less time and effort on recording transactions and have better information with which to then drive strategy. For instance, Cox Commu- nications, part of $13.3 billion (2006 annual revenue) media company Cox Enterprises, Inc., is a highly decen- tralized company, says Bill Fitzsimmons. While he acknowledges that decentralization has its strengths on the customer side, for the past six years he has been working on centralizing and standardizing all of the financial procedures, regardless of where they reside in the company. "We standardized how the accounts were structured; we streamlined departments; we got people using a standard chart of accounts consistently. That set up our conversion into a new system," he says. "Now we're on a common platform and we have common measurements," Mr. Fitzsimmons says. By standardizing, he says, "you can draw efficiencies by doing things better and faster and the result is a cleaner and more accurate product. If I were out in the field, I would be grateful for that, because that will allow me to spend more of my time on true analysis as opposed to just cranking through the brute-force number calculations."
"If you're the CFO, efficiency in process has to be the drumbeat that you march to," says another senior finance executive at a division of a major pharmaceutical company, who recently finished standardizing the organization's accounts receivable management. The result: The organization can reduce head count by four or five people this year.
Simply because these initiatives are happening, however, doesn't mean it's easy for strategy-minded executives to make them happen, particularly in transaction-oriented cultures. The pharmaceutical executive says, "It's because we have pushed and pushed, but it takes a lot of effort from the inside of the organization to get that change to happen."
That acknowledgment nods at a truth within even the highest-performing organizations: There is still much progress to be made in streamlining processes and sys- tems"and making sure the right information is avail- able for various activities. Our research indicates that finance executives feel they are well prepared in some areas to execute on their companies' business strategies over the next three to five years, but highly unsatisfied in others. (See Figure 10.) Namely, more than 90 percent say they are fairly or very well equipped when it comes to having well-documented and controlled processes for routine finance activities such as A/R, A/P, and so on. That number dips to just over 60 percent when it comes to IT systems for use in performance management and business planning"reflecting, perhaps, the fact that finance teams are truly still in the midst of transforming from the traditional "backwards-looking" finance cul- ture"one schooled in post-mortems"to the 21st cen- tury's forward-looking finance environment.
There is still much progress to be made in streamlining processes and systems"and making sure the right information is available for various activities.
Consider, for example, how some of these issues play out at MGM Mirage. As the gaming company enters new business arenas in response to the industry's mature, highly competitive environment, it's incumbent upon finance to gather different information in support of these new arenas (requiring, in fact, some technology investments). But constrained resources mean that finance still lives with some manual processes, reports Rick Arpin. "We've been able to find systems that can do what we want in specific areas," he says. "It's just that ultimately we'd like to link solutions end-to-end. [Presently] our systems require a manual intervention, taking information from one system and putting it into another. I think that's a challenge and it probably won't go away in the near term, but we keep looking for efficiencies in the process."
Cengage's Ashish Gupta acknowledges that systems complexity does sometimes force the finance team to make less-than-perfect decisions. "The optimal business decision needs be balanced with operational and sys- tems complexity. Sometimes, given the 80/20, it's easi- er to trade-off elements of the former with ease of imple- menting, managing and updating [systems]," he says. Also at play, of course, is that because the enterprise keeps growing and changing, you cannot find a one-size- fits-all solution and be done. Mergers, acquisitions, and spin-offs force companies to change their processes often, and often drastically. According to Wyndham's Vir- ginia Wilson, "In connection with our transaction last year [when Wyndham was spun out of Cendant], we essentially had one very large company split into four very large companies and we pretty much had to pull apart all of the technology stuff"telecommunications systems, mainframes, the data center, everything. E-mail, security"all of that had to be re-implemented. So that has been an enormous undertaking over the last 18 months."
Given those two drivers"the difficulty of working with outdated systems and the need for technology i nvestment as a result of M&A activity"it should not be surprising that finance is still making some investments in IT. Of greatest interest is ERP systems: A third of our survey respondents call investing in ERP systems their first priority, when it comes to financial applications, over the next two years. (See Figure 11, next page.)
Performance Measurement and Management
Judging from survey and interview research, finance teams that have not yet begun significant performance measurement and management initiatives may do so in the next few years, as the Board, CEOs, and investors search for continuously higher performance in a compet- itive, global environment. Our research indicates that business managers and finance are "not on the same page," so to speak, when it comes to accessing critical information. In 50 percent of companies, finance and business managers equally share performance- reporting dashboards"and for most companies, that's not good enough, according to our interview subjects. Business and finance share other applications even less of the time"for instance, they share planning, budgeting, and forecasting applications equally in only 36 percent of organizations. (See Figure 12, next page.)
Cox Communications is among those companies rolling dashboards out to all of its professional employees (in Cox's case, to 18 locations). It uses the dashboards, which employ a simple-to-understand graphic, not only to inform operations managers but also to motivate them. "We have what we call a ‘frog in a blender' analy- sis," says Mr. Fitzsimmons. "If you're in the top third in a given statistic, you're rated green"you look pretty much like a frog. If you're in the middle third, you're rated white and if you're in the bottom third, you're red" you're going to look more like a blended frog," he says. "So that's an easy way to see visually where things are and then, obviously, you can drill through into the num- bers to really understand [the underlying characteristics driving performance]."
Smaller companies, too, are beginning to adopt perform- ance measurement tools such as dashboards. Doug Pat- teson joined Turbocam, a $45 million, privately held man- ufacturer in Barrington, New Hampshire, two years ago as the company's first CFO. He was brought on specifi- cally to work as a strategic partner to the CEO, who was readying for a growth spurt (the company has doubled in size since then). Mr. Patteson is an enthusiastic sup- porter of dashboarding, but can do so only in a limited fashion, because of resource constraints that don't allow him to purchase necessary systems. "When you talk about transforming what has historically been an infra- structure support function into a strategic one, that may require fairly extensive capital outlays. That's a hard sell and we're not there yet," he says. "So we do [dashboard- ing] manually," he says. "But the concept is huge, so let's do whatever we can to adopt the concept now and then let's adopt ever-better tools to deliver on [its promise]." Sources interviewed for this study maintain that finance- driven performance management requires very high- quality information from companies' various IT systems, analyzed and presented with clearly defined business decision making in mind. But they caution that perform- ance management isn't a pure technology problem" one that can be solved with the ultimate spreadsheet or leading-edge application. The CFO of Levi Strauss & Co., the $4.2 billion global manufacturer and retailer, says, "Finance and business managers have to learn to give and take. The spreadsheet won't give you the answer. It will give you a number on a piece of paper but then deter- mining what is the right solution is a matter of leader- ship." He says finance executives should provide good information and help managers find the right answers themselves. "Once people get the tools they need and keep them simple"and if finance keeps asking the right questions"people will arrive at the answer themselves. Most people prefer to have a clear understanding of why the answer is strategically correct, instead of having finance push the answer to them. I think that's also about leadership style. Just ask the right questions and then people will come to the right answer themselves."
As companies seek to squeeze out better performance from existing resources, they not only must assess opportuni- ties, they must also evaluate potential risk. Our research indicates that 72 percent of organizations have a dedicat- ed risk management function; almost half of all risk man- agers report to the CFO. (See Figure 13, previous page.) However, there exists the possibility that these dedicat- ed risk managers do not have all of the information they need to perform their jobs optimally, because technolo- gy investments in risk assessment are insufficient. Only 8 percent of companies have completed substantial risk management technology projects during the last two years; another 22 percent have significant projects under way. (See Figure 9, page 18.)
Sources interviewed for this study suggest that evaluating operating risk"the negative outcomes from business process failures, poor strategic and tactical decisions, and so on"is as much a collaborative mental exercise as it is a sci- entific analysis of probability and expected values. The finance executive at the information aggregator says this about oper- ating risk management: "The problem with our business is it's so diverse that we have a knowledge sharing portal, but that's really it." Risk management at this international infor- mation company, he says, "requires a lot of talking with peo- ple, a lot of analysis of information that is out there and avail- able, and then it requires a cognitive process of thinking things through, sort of like thinking of a chess board. ‘What happens if this occurs?' It's a very logical, critical-thinking position." The abstract problems of risk management are best solved, he says, through human analysis based on experience and sup- ported by information technology.
This executive cites diagnostic and therapeutic information as an example. "Let's say you have a doctor with a handheld device," he says. "The doctor observes that the client has a condition, and through our handheld device, he pulls up infor- mation about the patient and his other prescriptions. We pro- vide a recommendation on what dosage of a particular drug to take. Now, if that dosage is wrong, we're in trouble. So the risks of some of our information and [its use] are critical. They [operating risks] must be well managed."
Other sources cite a risk management model that consid- ers purely financial risks"those that stem from currency fluctuation, interest rate, product liability, and workforce injury, for example"separately from operating risk. At ABB, a global electrical engineering firm based in Switzer- land, senior vice president and chief financial officer for North America Herbert Parker says the company has two classes of risk management: major projects and more tra- ditional insurable risk. Says Mr. Parker, "Prior to us signing any large contract of say, $15 million or so, our risk review committee thoroughly reviews the details of contracts while they are still in the proposal stage. During this review, we assess the risk of such items as new technology, coun- try risk (labor, political, safety, etc.), prior experience with the customer, consequential liquidated damages, and any other type of typical risks inherent in large projects." The finance organization is instrumental, he says, in these reviews. In addition, he says, the company has a separate group for conventional risk management "that's more on the insurance side, looking at product liability claims and any type of major catastrophes that could happen in a nor- mal business transaction, including large projects." But sources are adamant that their risk review function not inhibit business growth or productivity. Says one European executive, "We realize as a company that without taking risk, we're not going to get growth. So the businesses in and of themselves are definitely the engine for growth; we in finance just act as a counterbalance to them. They also must manage their own risk and that's one thing that we demand of them, but there are cases when they're taking risks that are not in our best interest that we need to highlight."
Sources interviewed for this study suggest that evaluating operating risk"the negative outcomes from business process failures, poor strategic and tactical decisions, and so on"is as much a collaborative mental exercise as it is a scientific analysis of probability and expected values.
Chapter 4: Conclusion
Surely the desire for finance executives to become more strategic has existed within companies, and within the finance team, for several years. Over the last two years, the demand for finance to provide strategic guidance in pursuit of corporate performance has accelerated. Pushed by a number of factors"most significantly an increasingly difficult competitive environment, combined with a vigilant and sophisticated investor community" the majority of finance teams have indeed moved further along this continuum, despite a continued need to pay attention to transactions and regulatory compliance. Why, exactly? Over the last decade, large companies have achieved significant growth and earnings. There- fore, CEOs are seeking creative ways to generate new profits"and they're looking to finance for help. In addi- tion, the growth of private equity into the acquisition marketplace has placed a new emphasis on the role of cash flow. This new emphasis places demands upon finance executives for metrics-driven analysis of the ways in which organizations use"and tie up"their cash and how to free it up. In sum, these influences are forcing companies to look for growth in other places than the top line. The finance professional, says Cengage's Mr. Gupta, is the best person to seek those "nontraditional levers that [can] spur the engine of growth."
The good news: Finance teams have made significant progress in standardizing and streamlining their systems and processes over the last two years. However, they still have additional responsibility when it comes to imple- menting performance reporting and measurement appli- cations throughout the organization and in training operations on the functions of the finance team. Furthermore, companies evolving finance into a more strategic role must attract and retain better educated finance executives, because the skills needed in a strate- gic finance organization"as counselor to functional and business unit leaders, collaborator with the CEO and the Board, and voice for the investor community"are dra- matically different than those required in a transaction- al finance group. "Being a strategic partner requires a whole different skill set," says a senior finance executive at a division of a global pharmaceutical company. "You have to be more of a holistic thinker. You can't be just a person who sits in your office and grinds away at the numbers all day." Says Silgan's Mr. Schmidt, "They have to understand how technology, purchasing, finance, marketing, sales, and operations all play a critical yet interdependent role in business strategy and execution."
Our interview subjects all indicate that such talent is hard to find, and demographics would indicate that the search for talent will only become more grueling. "That's going to be our challenge in the next decade and beyond," Mr. Schmidt says. "It's very challenging to find an individual who has the capability to either grow into that strategic partner role or who has the breadth of business experience plus the technical finance founda- tion to play both ends of the spectrum in a truly strate- gic finance role."
Sponsor's Perspective
SAP partnered with CFO Research Services on this study as part of our ongoing effort to better serve our cus- tomers as well as understand how companies are pro- gressing on their financial transformation journey. We had two major goals in sponsoring this research. First, we wanted to gain insight into the challenges and suc- cesses that finance departments are experiencing as they strive to make their operations more efficient and play a more strategic role in the business. Second, we wanted to deepen the knowledge we have gained through both our own research and our 35 years of expe- rience providing financial management solutions to the world's leading companies.
This study confirms what we have learned through that experience as well as through the benchmarking research conducted by SAP's Value Engineering group: Investments in IT solutions that automate and stan- dardize critical finance processes not only help decrease costs and cycle times but pay additional dividends in the form of strengthened compliance and improved financial returns. Moreover, these benefits are being realized up and down the financial value chain, beyond core accounting and reporting, to encompass broader finan- cial management processes such as payables process- ing and cash management. From closing the books to straight-through payment processing, technology solu- tions are helping companies harmonize financial data across systems and organizational units, achieve greater process consistency, minimize manual processing and compliance risk, and enable their finance professionals to apply their expertise to higher value-added work. For example, companies are benefiting from greater automation and strategic insight around the period end financial reporting cycle. Closing the books can be very challenging and time-consuming, especially when data from multiple systems has to be consolidated and tasks must be coordinated across operating units located in different locations and time zones. Businesses can great- ly reduce the time and effort required to close the books by investing in technology that helps to standardize, automate, and coordinate the companywide closing process. The right products can enable more consistent processes and better task coordination, collaboration, and workflow needed to efficiently close the books. And when these products allow users to work with familiar office tools such as Excel"and give them graphical web interfaces to centrally manage the closing process and facilitate cross-unit coordination"companies benefit from fast adoption and greater visibility. For example, one customer found that SAP software that supports business planning and consolidation was so easy to use that in the same month that their financial reporting went live, users successfully produced that month's financial reports using the new software. At the same time, it facilitated compliance with US GAAP regulations and condensed their three-month consolidation process to one week.
Strategic software investments can improve processes in other areas as well"and realize significant cost sav- ings and higher returns. For example, companies can reduce costs by taking advantage of Internet-based pay- ment networks that streamline invoicing and payment processes and provide real-time visibility into global cash balances needed to manage liquidity effectively. One SAP customer"a $6 billion firm in the oil and gas indus- try"completely automated its accounts payable and cash management functions, enabling the company to process thousands of payments every month with just two full-time employees. The company also automated its cash management activities, enabling the finance department to perform reconciliations across its numer- ous banking relationships in just a few hours a day. Because of the automated processes, the company has also reduced its bank fees, lowered its operating costs, and generated higher returns on its cash positions.
Businesses can also leverage the transformative power of performance management software to model and optimize all drivers affecting profitability, and the strength of governance, risk, and compliance (GRC) to reduce risks and process costs. Using SAP software, some companies have been able to substantially reduce the cycle time needed to gain insight into profitability, as well as dramatically lower their cost of ownership while increasing net profits. From a GRC perspective, compa- nies can significantly lower their external audit fees and increase their internal audit efficiency, which can save them hundreds of thousands of dollars per year. Most also realize significant additional savings adding up to $1 million or more annually, thanks to improved compliance and operational processes.
SAP is the world's leading provider of business software. For more than 35 years, we have provided companies with robust financial management solutions for automating core accounting and reporting functions, optimizing their financial supply chains, and achieving better business performance. More than 30,000 compa- nies worldwide (including many of those mentioned in this report) across over 25 industries depend on SAP financial management solutions. SAP is proud to spon- sor this research to help finance professionals gain insight into how their peers in leading companies are transforming their roles and helping their organizations achieve better performance.
For more informationabout how SAP financial management solutions help businesses streamline finance processes, ensure compliance, and equip their finance professionals to provide more strategic value to the company, please visit http://www.sap.com/solutions/index.epx. You'll discover why the best-run businesses run SAP.
* About this Report
* Executive Summary
* Chapter 1: The Strategic CFO
* Chapter 2: The New Role: A Holistic Leader and Partner"Not Merely a Technician
* Chapter 3: Standardizing and Streamlining
* Chapter 4: Conclusion
* Sponsor's Perspective
About this Report
In August 2007, CFO Research Services (a unit of CFO Publishing Corp.) launched a research program to explore the ways in which the role of the finance team has changed in recent years due to increased oversight from regulators, more active investors, and company- specific changes in business operations. We wanted to better understand the internal and exter- nal forces that are causing these transformations and the steps that companies and their finance teams are taking to respond to these forces. This research program" which includes an electronic survey and a series of inter- views among senior finance executives"finds that the finance team is indeed under new pressure from more demanding external stakeholders. This pressure, espe- cially from regulators, has prompted finance teams to document and often repair core finance and operating activities.
Pressure from more demanding external stakeholders has prompted finance teams to document and often repair core finance and operating activities.
But companies aren't in business just to comply with regulations. They are in the business of making valuable products, rendering high-quality services, serving customers, and generating value for shareholders. Amid a marked increase in investors' expectations from com- panies and their finance teams, executives in this study show new enthusiasm for closer collaboration with business unit management in an effort to improve business performance and lessen risk. By doing so, they will contribute to the core business activities that satisfy customers and shareholders"as well as stake- holders such as regulators, business unit managers, and employees at large.
This report presents the findings of our online survey of 255 senior finance executives and in-depth interviews with executives at the following companies:
* ABB
* Bank of Montreal
* CB Richard Ellis Group, Inc.
* Cengage Learning (formerly Thomson Learning)
* Cleveland-Cliffs, Inc.
* CMA CGM (America) Inc.
* Cox Communications, Inc.
* Levi Strauss & Co.
* MGM Mirage
* Silgan Plastics Corp.
* Turbocam
* Verigy Ltd.
* Wyndham Worldwide Corporation
* Executives at several other companies in North America, Europe, and Asia that asked not to be cited by name in this report
CFO Research Services and SAP developed the hypotheses for this research jointly. SAP funded the research and publication of our findings, and we would like to acknowledge Erin Halfnight, Barbara Dischner, and Jim D'Addario for their contributions and support. At CFO Research Services, Elaine Appleton Grant conducted the interview program and wrote the report. Sam Knox directed the research and managed the project.
Executive Summary
These are demanding times for senior finance executives. Investors want higher returns. Regulators require more complete documentation of companies' compliance with stricter requirements. And in the face of stiffer market competition, business managers want more capital to invest in the business and more assistance in making investment and operating decisions for their increasingly complex businesses.
Companies and their stakeholders have always had high expectations for their finance teams. But this research program reveals that, most recently, these pressures" from regulators, from investors, and from competitors" are pushing companies to look for more from their finance teams in two main, but often conflicting, areas. Regulatory pressures, especially the Sarbanes-Oxley Act, push finance teams toward more rigor in their transac- tional duties of controllership and financial reporting. At the same time, competitive pressures, demands from line-of-business management, and higher expectations from investors pull finance executives toward a more active role in setting, validating, overseeing, and ensuring execution of business strategy.
The need for finance executives to play a greater role in business performance management creates the demand for new and different skills among finance management and staff. To use these skills, finance executives need technology and systems that often go beyond standard transaction processing and core accounting. And finance executives need a cultural mandate from business and functional management to work collaboratively on improving performance.
Sources interviewed for this study are voluble on the importance of the finance function playing a higher-value role. One CFO says, "I think the business environment is absolutely demanding it. When you think about the financial returns from the stock market in the last ten years, they've been extremely attractive. Now, CEOs are actually seeking out more financial guidance and part- nering because it's harder to drive superior shareholder return." He continues, "As we look at the next ten years, it's not going to be as easy to drive that type of produc- tivity and value creation. So, I think most businesses are longing for that strategic partner and the insights, so that they can make better decisions, drive transforma- tional productivity, and ensure they're choosing the right strategies."
Whether or not finance embraces an emerging mandate to contribute more fully to performance management, the finance function remains responsible for companies' core transaction processing, financial reporting, audit management, and other traditional controllership activities. The demand to keep transactional processes running with close control, improve their efficiency, and lower their cost pushes finance into a continual evolu- tion of its processes and systems. This evolution in processes"sometimes gradual, sometimes rapid" allows the finance team to standardize, streamline, and simplify routine transaction processing. Companies are then able to execute routine activities more quickly and with fewer errors, to free up finance executives' time to act as a partner to the CEO and operational leaders, and to provide better and faster information for competitive decision making throughout the corporation.
"When you think about the financial returns from the stock market in the last ten years, they've been extremely attractive. Now, CEOs are actually seeking out more financial guidance and partnering because it's harder to drive superior shareholder return,"
says one CFO interviewed for this report
Key Findings
* The role of the finance function is changed by three things: Regulations on the one hand, with competition and investor expectations on the other. As a result, the finance function is pulled in two directions.
* Most finance executives seem to agree that as the role of the finance professional becomes more strategic, the skills of the new finance employee must become broader"much like those of a CEO, without diluting the technical skills of finance's traditional controllership role. Finance leaders in this study call for business schools and company-run training programs to provide their finance and operating executives with a broader base in both finance and business support skills.
* As the opportunity for top-line growth slows, growth in profitability becomes a more important source of value, and information to support decisions made by operations and functional managers becomes critical.
* Companies that have elevated CFOs to strategic leadership positions have done so in part to satisfy the needs of stakeholders, such as investors. CFOs can speak their language.
* In order for finance to play a greater role in driving business performance, say executives, it needs to collaborate more closely with business unit and line management. A majority of respondents say such collaboration is underway"although it's not without challenges"at all levels of the organization, including partnerships with the CEO and Boards of Directors.
* While respondents in this study say the finance function often has broad credibility with business unit managers, finance's assessment of operations managers' understanding of finance is far less favorable. Finance executives report that business unit managers do not understand the world of finance as well as they should. More"and more formalized"financial education for business unit managers would help finance executives have better internal dialogue about performance.
* In response to regulatory and internal requirements, companies have focused on documenting, standardizing, streamlining, and automating their accounts receivable (A/R), accounts payable (A/P), and other core financial processes. More than half of the companies in this study have completed or are currently executing projects to standardize their charts of accounts, to streamline their financial close processes, or to simplify/standardize core finance processes. However, while large-scale investments in enterprise IT systems are commonplace, current or recent technology projects are less likely to be dedicated to automating regulatory compliance or to measuring and managing risk.
* Finance executives are also seeking to distribute performance management systems to a broader coalition of decision makers. In many cases, they are pushing performance management and measurement systems out into their organizations"thus, distributing financial and operating information in an effort to allow business and functional managers to make more timely decisions in extraordinarily competitive markets.
The role of the finance function is changed by three things: Regulations on the one hand, with competition and investor expectations on the other. As a result, the finance function is pulled in two directions.
Chapter 1: The Strategic CFO
Over the last decade, finance executives have evolved from serving primarily as chief accountants to becoming more closely engaged with business unit managers. Rather than focusing on keeping a historical record of company activity and performance, CFOs and their teams are providing advice, counsel, and decision sup- port to business managers on a broader array of finan- cial and operating activities. While the role of the finance team varies with the unique requirements of each com- pany, executives in this research program affirm that business activities and the role of the finance function have been altered in recent years by shifts in their com- petitive environment, increased complexity of business operations, and investors' scrutiny of company performance. Accordingly, they aspire to contribute more materially to developing business strategy. (See Figure 1.)
At the same time, regulatory oversight has weighed heavily on companies in recent years. In this survey of more than 200 senior finance executives, fully 38 percent of respondents said "regulatory compliance require- ments (e.g., SEC regulations, privacy, security, environ- mental, trade, labor, and other regulations)" had a "dra- matic impact" on their companies' business activities in the last two years. Although we are now five years beyond the passage of Sarbanes-Oxley, and most com- panies have concluded their initial investments and internal controls assessments, the stringent audit requirements of Sarbanes-Oxley still draw finance teams away from activities that support decision making and presumably generate value for customers and shareholders.
"There are two forces over the last few years that have been pulling in opposite directions," says Laurie Brlas, chief financial officer of Cleveland-Cliffs, Inc., a $1.9 billion mining company in Cleveland, Ohio. "I think Sarbanes- Oxley has pushed finance executives to be less strategic and more control focused"kind of ‘the cop,'" she says. On the other hand, she adds, "most folks recognize that the skill set and the approach that a finance executive brings to the table are very valuable in strategic decision making, so companies are always pulling in that direction."
The tension between these two roles"strategy and con- trollership"is significant. At the minimum, it can stretch resources thin. At the extreme, it can go so far as to con- tribute to decisions to cast off the burdens of Sarbanes- Oxley altogether. "Until six weeks ago, I would have said what kept me up at night was interacting with our exter- nal auditors to get compliant with Sarbanes-Oxley," said a finance executive at a food-service conglomerate earli- er this year. He calls the Sarbanes-Oxley work a "night- mare": "We were not allowed any incremental resources. We had to basically come under compliance with the existing resources that we had." But this summer, the food-service conglomerate delisted from the NYSE, in part to escape the onerous Sarbanes-Oxley requirements. Still, it will take some time for their finance department to overcome the effects of those resource constraints, the finance executive says, because Sarbanes-Oxley forced the finance team to lessen its role guiding operations management in strategic decisions and moved it into a "more nuts-and-bolts control function," a move that he says has been "a point of contention."
Other finance executives working for U.S. public compa- nies also say the Sarbanes-Oxley compliance require- ments have reduced their abilities"but not the desire nor the need"to contribute to developing, executing, and measuring business strategy. Meeting Sarbanes- Oxley compliance without adding to staff has challenged his team, says Rick Arpin, vice president of financial accounting for gaming company MGM Mirage in Las Vegas. "A project comes up and we say, ‘Who's going to do this project? Who's going to look at this changing environment? Who's going to look at this deal we might do?' And all the finance and accounting people are busy doing flowcharts and the other work that needs to be done for 404," he says. Mr. Arpin adds that in the last year the initial work for Sarbanes-Oxley compliance has abated somewhat, and, as a result, the finance and accounting group has been able to reassign some Sar- banes-Oxley compliance duties into other areas of the company, and has been able to take on more strategic projects as a result.
However, the impact of Sarbanes-Oxley and other regulato- ry regimens may not be entirely negative, say some execu- tives interviewed for this study. Sarbanes-Oxley "has had a lasting impact on the way we run our finance back office" all the way from a more robust audit program to more dis- closure in our forms 10K and 10Q," says Gil Borok, executive vice president of finance at CB Richard Ellis Group, Inc. (CBRE), a large commercial real estate services company with operations in 50 countries. He continues, "There's always the argument that the costs don't justify the bene- fits, but there are some good things that have come of it. It has made us function differently. The demands have gone up significantly. I think it's overall good, overall positive."
While Compliance Requirements Mount, Markets Mature and Become More Competitive
The rigors of Sarbanes-Oxley aside, more than one-third of survey respondents and many of the executives we inter- viewed for this study say that a shifting competitive environ- ment has had a dramatic impact on their companies in recent years. Globalization (of capital, labor, information, and sup- ply chains), new competitors, industry maturation, and M&A each have increased the pace and intensity of competition in many industries. And in response, companies are turning to their finance teams as strategic advisors to help develop busi- ness strategies, manage risk more effectively, and extract organic growth from current lines of business.
"The trends have to do partly with globalization, which in turn has spurred on the need for discovery of where the next incremental growth and shareholder value will come from," says Ashish Gupta, vice president of pricing and business ini- tiatives for Cengage Learning's Academic Group. "Industries mature and consolidate, so the top-line growth from just rev- enue and business as we've known it in the past cannot con- tinue at the pace it used to in most industries." Mr. Gupta argues that in many industries, finance executives work to bring business unit management to the table. "Growth does- n't have to always come from top-line sources. Sometimes, it's the traditional sales channel or could be alternative sales. It could be different ways of structuring your business to get to the desired target."
The maturing gaming industry provides a case study. Because the industry is crowded with casinos, gaming companies are beginning to look elsewhere for growth, cash flow, and profits. For instance, rather than using any available real estate to build casinos, companies such as MGM Mirage are experimenting with other value-creation models. "So there's an option analysis, I guess you might call it, of ‘What should we actually do with these assets and is there a better way than just owning and operating a casino resort?'" Mr. Arpin explains. "Should we own and operate a mixed-use development? Should we partner with someone to do a project? Should we master-plan the property like a real estate company?" As the questions become more complex, MGM Mirage looks to its finance team to help determine which options will create the most value in the future, Mr. Arpin says. Other finance executives, such as Bill Fitzsimmons, vice president of accounting, financial planning, and analysis at Cox Communications, Inc., find themselves in similar positions. For the last several years, the Atlanta-based cable company acquired market share as fast as it could.
Now, though, markets are becoming saturated; the pool of prospective customers from which to draw is shrink- ing; and voice, cable, and data service providers are muscling in on each others' markets. As a result, the whole telecommunications industry is scrambling for the same customers. Mr. Fitzsimmons says, "It's going to cost more to acquire [new customers]. We've got to real- ly understand our costs of acquisition, whereas in the past that was not as important as just managing volume growth." As the competitive landscape becomes more complex, operating decisions"for instance, how much to spend on marketing to these scarce customers, for what return, and so on"become more difficult to make and require a greater depth of financial input, such as analysis of marketing campaign costs versus "the ultimate payback" that's associated with that kind of campaign, including the monthly revenue generated by new customers. "The nature of our industry is getting more competitive and so there's a greater reliance on the role of finance as an advisor," Mr. Fitzsimmons says.
Additional competition from globalization, new market entrants, or industry maturation puts pressure on prices and margins. And as the opportunity for top-line growth slows, growth in profitability often becomes a more important source of value. With this in mind, many finance executives are seeking to provide more up-to- date information to operating managers in an effort to support better decision making. Such decisions vary broadly, of course"from near-term tactical spending on marketing programs, to headcount, to investment and asset allocation decisions.
At the American subsidiary of CMA CGM S.A., a multi- billion dollar privately held container-shipping company headquartered in Marseilles, France, senior vice presi- dent and chief financial officer Jim Arnold is driving activ- ities to shrink costs. "We have a lot of rate pressure in the shipping industry, and competition caused rate decreases last year," he says. To help pull costs out, the new CFO"he's been there for a year"is sponsoring a data warehouse project that, along with new perform- ance dashboards, will allow operating executives throughout the company to make decisions about shipping and inland transportation routes, pricing, and sourcing much faster than they've been able to previously"activities that should improve both margins and competitive position.
As the opportunityfor top-line growth slows, growth in profitability often becomes a more important source of value. With this in mind, many finance executives are seeking to provide more up-to-date information to operating managers in an effort to support better decision making.
Industry maturity and margin erosion"along with access to capital"can breed M&A activity, as compa- nies constrained in stalling markets look to acquisitions for growth or fall prey to others' acquisition strategies. Opportunities for mergers and acquisitions and the need to make deal decisions quickly also transform the role of the finance executive; many of the executives we spoke with were deeply and regularly involved in analyzing deal opportunities. Some were new to organizations that had recently been spun out of larger companies; others were brought on to help initiate acquisition processes or inte- grate recent purchases. While the circumstances of each executive we interviewed are different, the finance func- tion plays a pivotal role in M&A targeting, evaluation, and structuring in nearly every instance.
Derek Schmidt, chief financial officer of the Plastic divi- sion at Silgan Holdings, Inc., a $2.7 billion manufacturer of metal and plastic food containers, explains how the maturation of his company's industry drives both acqui- sitions and an expanded role for the finance function. "The plastics [market] is very fragmented, and there's a substantial amount of consolidation happening.
Organic growth in our industry is typically lower single- digits, so acquisitions represent a viable option to grow more rapidly. As we start to look at acquisitions, not only do we look for [cost] synergies, but we look at whether we can expand our geographical capabilities and get into different consumer segments than we currently have today."
A large part of the company's business strategy, says Mr. Schmidt, hinges on the acquisitions, not just from an operating point of view but also from a financial value perspective. Mr. Schmidt argues for including the business development function within the broader finance function"in part due to finance's independence and broad analytical capabilities: "We need someone with a strong mindset around value creation who can objectively look at acquisition candidates and choose those that not only have strategic fit but also those where there's considerable financial value-creation potential."
Investors Call for More Information and Closer Relations with Finance
While globalization, regulation, and competition have driven changes in the role of finance in recent years, investors in companies both public and private now have higher expectations for companies and their finance teams. Queried on investors' expectations, a solid major- ity of respondents in our survey say their investors demand more information, more access to the CFO, and better performance from the companies in which they hold shares. (See Figure 2, next page.)
The heightened scrutiny has increased the demand for outward-looking CFOs who can speak to the investor community in ways that CEOs, COOs, and other operat- ing executives cannot. When Cleveland-Cliffs' former CEO"who was also the company's CFO"left, its board decided the company needed a sitting CFO, in part to have an executive who could communicate with an active investor community, says current chief financial officer Ms. Brlas.
Investor scrutiny has increased the demand for outward-looking CFOs who can speak to the investor community in ways that CEOs, COOs, and other operating executives cannot.
Elsewhere in the survey, a solid majority of respondents say that increased scrutiny from investors has had a moderate-to-dramatic effect on their companies' business activities. "I think that our investor relations function has needed a lot more support than it might have needed three or four years ago," says Mr. Borok, of the Los Angeles-based CBRE. "We have a very active investor relations program, which requires us to stream- line information, summarize it, and make it user-friend- ly. We have most of the data, but we have to make it such that it's easily interpreted by investors and sharehold- ers. And I think that investors ask a lot more questions today than they did years ago and that does put an additional strain on the organization."
Moreover, a growing flood of acquisitions, buyouts, mergers, and spin-offs creates more demand for infor- mation from an investor community that must make buy, sell, and hold decisions on companies they may know little about. About a year ago, Cendant Corporation spun off $3.8 billion Wyndham Worldwide Corporation as a new public company; Virginia Wilson, the Parsippany, New Jersey, company's executive vice president and chief financial officer, says, "Many of the people in the invest- ing community who ended up owning our shares after the spin-off hadn't necessarily bought the old Cendant shares because they wanted to be involved in the hospitality space… So there was a big decision for them to make about whether they wanted to continue to own the shares."
Whether investors are as informed as they would like to be, it is finance's job to step in and give investors the information they seek. Verigy Ltd., a $778 million semiconductor test manufacturer based in Singapore, was spun off from Agilent Technologies in 2006 (which was itself an offshoot from Hewlett-Packard) and has had a similar experience in man- aging shareholder relations after a spin-off, albeit with investors more informed about industry performance, says Michael Jung, vice president of corporate financial planning and analysis. "We used to be part of a conglomerate. Now we're a pure play semiconductor test company, and as a result, we've got investors who are familiar with the industry and are more focused." He says, "These new investors have probably raised the bar a notch, and the rest of the share- holders get more keen insight into Verigy and are likely to drive the bar higher, too."
Investor Demand for Better Performance
Not only do investors want more information, they demand better performance. For instance, as $7.1 billion MGM Mirage reacts to its competitive landscape by moving into new busi- nesses, investors want accelerated rates of activity and of return, says Rick Arpin: "When operating as just a gaming company, it might be okay to open up a property, generate some cash flow, pay down the debt and then say, ‘In five years I'll open the next property.' Real estate investors don't want to hear that. They want to know what land you are buy- ing next and what building is going up next."
Increased expectations for performance can translate into fundamental organization changes, resulting in dramatical- ly new and more encompassing roles for the finance team. In mid-2007, Silgan Plastics, a division of Silgan Holdings in Chesterfield, Missouri, created a new CFO position and hired Derek Schmidt, who now oversees finance, IT, and corporate development. "Our purpose is all about driving shareholder value," Mr. Schmidt says, "hence the need to combine corpo- rate development and finance. Regarding IT, we have strong technical people, but they had no clear vision, no strategy as to how IT would actually create a competitive advantage for the entire business." Moreover, he adds, "a lot of the diver- sity in my role has to do with the fact that we're in a lower margin, competitive industry, so you can't necessarily afford to have a CIO, CFO, and chief strategy officer."
While investors have always clamored for higher perform- ance and better returns"when wouldn't they want more from their investments?"investor expectations have driv- en CFOs and their teams toward enhancing business advi- sory capabilities, even in the face of daunting compliance requirements. By doing this well, say sources, the finance function can fulfill an expanded mandate as the steward of both controls and company performance. Says Cathy Cranston, senior vice president of financial strategy at the $16 billion Bank of Montreal, "The last few years have been just crazy with governance, with Sarbanes-Oxley, Basel II, and all the rest." And as a result, her company's finance team has had to focus on compliance matters more than it would like. She continues, "Our investors are very demanding in terms of the returns they want, and our industry is extremely com- petitive. Absolutely, the force from investors is pulling us for- ward to improve our performance. We in finance have a role to play, and it's a lost opportunity when the full value we can bring to the table isn't harnessed and leveraged. It's a huge missed opportunity [to focus on governance at the risk of ignoring performance improvement]."
"When operating as just a gaming company, it might be okay to open up a property, generate some cash flow, pay down the debt and then say, ‘In five years I'll open the next property.' Real estate investors don't want to hear that. They want to know what land you are buying next and what building is going up next," says Rick Arpin, VP of financial accounting for MGM Mirage.
Chapter 2: The New Role: A Holistic Leader and Partner" Not Merely a Technician
Senior finance executives say they serve as partners to the CEO and to operational leaders as companies strive to improve performance. In some cases, this has been long-standing practice. At CBRE, Gil Borok says his com- pany's business management seeks out the finance func- tion for "thoughtful analysis and the impact of decisions on their business." He continues, "I've always tried to be client service-oriented, and the lines of business are a client of ours. That's just what we do. The business comes first. They are the ones generating the revenue. I think that the finance organization here has improved. It has become recognized that we can add value to the businesses, and they come to us more frequently." In other organizations"including a majority of the com- panies represented in this survey"the finance team has recently assumed an expanded role as a counselor to functional and business unit leaders. (See Figure 3.) At educational materials publisher Cengage Learning in Belmont, California, Ashish Gupta says finance works on strategic projects more closely with the company's CEO and Board than it had it the past. This trend, says Mr. Gupta, "spans across industries, but I've seen it more in my current position, perhaps because of our recent sale to private equity." He says, "Finance is a key player in various metrics-driven projects to analyze where the gaps are in the business, to find opportunities for improv- ing not only revenue but margin, and therefore cash flow, as cash flow becomes extremely important across businesses."
In a majority of the companies represented in this survey, the finance team has recently assumed an expanded role as a counselor to functional and business unit leaders.
Cengage Learning is exploring ways to improve yield optimization"for instance, by looking creatively at how to make money in the used textbook market. (The $1.8 billion company, formerly Thomson Learning, was spun off from Thomson Corporation in mid-2007 and was pur- chased by private equity group Apex Partners.) Mr. Gupta is also exploring ways to improve the bottom line and generate more free cash flow by providing incentives to its distributors to reduce textbook returns. "These kinds of incremental opportunities"and in some cases, quantum opportunities"are the kinds of out-of-the-box scenarios that the Board seems to be more and more interested in," Mr. Gupta says.
Why are Boards and CEOs turning to finance executives for guidance on these sorts of decisions, rather than relying exclusively on operational executives, such as the COO? Our research suggests some fundamental reasons. First, the finance team is often responsible for performance measurement activities and therefore has the metrics-driven knowledge to contribute to decision making at this level. (See Figure 4.)
Simultaneously, investors are demanding more commu- nication with"and a deeper, more strategic level of information from"senior finance executives. According to a U.K.-based senior finance executive for a global chemical company, both investors and analysts expect the CFO to present strategic information, and they also expect the first point of contact to be with the CFO, not the CEO. "If you're going to go out and represent your company"either to rating agencies, banks, or investors"if you're looking for funds, I think they need or expect the CFO to have a broader view and a business view that they can represent to these potential stake- holders," he says. "Has that changed significantly over the years? Perhaps. I just think that with all things, as the Internet has opened up levels of communication, it drives information hunger. People expect more. Certainly, the City [of London] expects more from the CFO."
As investors raise their expectations for performance metrics-driven data, CEOs have begun to turn to finance teams to serve as independent voices within companies that challenge the assumptions of operational leaders, particularly when they assess new opportunities. (In this way, the finance team is acting as a surrogate for the investment community, asking the hard questions that they expect from investors and analysts in the future.) "I tell everyone on my team, ‘I look to you to be the CFO of your team and that doesn't mean just putting together the numbers. You need to provide the insight, you need to challenge people's assumptions. You need to really act as though you're running the organization,'" says Michael Jung, vice president of corporate financial plan- ning and analysis at Verigy, the semiconductor test man- ufacturer that was spun out of Agilent Technologies in 2006. "By necessity, I need those people to play that devil's advocate role, to challenge the team and make ure that what comes out of the team is strong."
Partnership at Many Levels
Finance executives are increasingly partnering with busi- ness unit and functional leaders in addition to support- ing the Board and CEO. More than 80 percent of respon- dents to our survey agreed either strongly or somewhat that business unit and functional leaders are seeking a greater contribution from and closer collaboration with the finance team. (See Figure 5.)
Indeed, survey respondents say that business unit lead- ers give finance executives high marks for their abilities to contribute to solving a broad range of problems. To do so requires candor, good information, and trust devel- oped over the long term. (See Figure 6.) Says Cathy Cranston of the Bank of Montreal, "I think the onus is on the finance group to earn the right to be at the table. You do that by being good"by bringing useful, actionable information to the table, by being a devil's advocate, by bringing information forward that sometimes people simply don't want to hear." She says finance executives should work to "become trusted advisors, and in some cases, finance people have earned that position. They've proven their value." Conversely, she says, "if finance peo- ple stay in the background"just doing what they're told, producing the numbers but not challenging them" never bringing anything more to the table, they have not earned the right to be at the table, and they won't be." At a well-known international information aggregator, a vice president of finance points out the change in busi- ness managers' thinking about how to work with the finance team. "Finance was typically a scorekeeper; it produced these reports that would make sure that the rules are followed. I think what the business is saying now is, ‘Look, finance, it's great that you're showing me these reports, but they're not enough. We want you to understand a few things and convey your understanding to us to provide us with insight in business decision mak- ing so that we're more knowledgeable.'" He calls on finance executives to truly master the underlying busi- ness: "Understanding the business itself so that you can predict financial results better and more accurately and analyze the mass of information that is out there will help the business have key insights into where it can improve itself."
Collaborating with business leaders to assess potential value-creation opportunities may be CFO Virginia Wilson's most important role at Wyndham Worldwide. "We're help- ing people make decisions about whether there is a greater growth opportunity if you pursue one set of options versus alternatives. Is there risk associated with that? It is impor- tant for us to both help guide [business unit leaders] and then to communicate [these opportunities and risks] to our investing community," Ms. Wilson says.
Less Confidence in Business Management "A Call for Training Emerges
Unfortunately for the health of such partnerships, the finance team doesn't give such high marks to their business unit peers when it comes to understanding finance. In fact, only 2 percent of respondents reported that "business unit managers have an excellent understanding of the finance function." Recently, says a finance executive at the food- service conglomerate, "operators have really focused pri- marily on just performing their duty and keeping their employees happy and almost divested themselves from any financial responsibility because they had a finance guy attached to the hip." That's a problem, he continues, because "some of our operators in the field don't have the ability to see niches and opportunities in the market because they don't have the full financial pallet available to them." Yet there is a chasm between finance's doubts and the actual responsibilities of most business unit managers. Our research shows that business managers are routine- ly held accountable for performance tied to financial and operating metrics. (See Figure 7.) Executives interviewed for this study confirm this focus on accountability among business managers for performance results. Cathy Cranston at the Bank of Montreal says, "My CEO recent- ly asked my group to create a much better line-of-sight into how we were going to meet our targets for next year, so we had to work across the organization to create met- rics and targets at a lower level to really be able to see how we were going to get there, and to be able to track them more rigorously. We already do that; this was sort of an extra effort that was meant to create transparen- cy and accountability." As a result of this effort, says Ms. Cranston, "we've got much better metrics, and that's because we want to create that transparency to set up the right discussions. It's not enough to just say at the end of the year ‘Oops, we missed.' There are monthly performance meetings with every group."
Despite the need, less than one-third of companies have formalized programs in place to better educate business managers on financial concepts and how to apply them to the business. (See Figure 8.) Such programs for nonfinan- cial managers are often optional, but, according to our research, companies are starting to put training programs into place to bring financial and analytical expertise to their functional and managerial leaders.
Silgan Plastics, for instance, currently has no formal pro- gram in place to train business managers in finance"a sit- uation new CFO Derek Schmidt plans to remedy. "That is one of my objectives," he says. "At the end of the day, it's the frontline managers within our plants and sales force that are making the decisions, and we need to do our best to equip them with the right knowledge to make great financial choices for the company." At the food-service con- glomerate, the finance team is just beginning to train oper- ations managers in finance. Says a finance executive at the food-service organization, "We want a better, well-round- ed operator who not only can interface with a client, who can not only manage the careers of our associates, but who also can analyze and report his own financials."
It's important to note that, at least according to our inter- views, finance executives do look critically at their own departments, not just at those of their operations counter- parts. In fact, for finance teams that are transforming from transaction-oriented groups into strategic ones, upgrading their talent may be the first order of business. Silgan's Mr. Schmidt previously worked for Masterbrand Cabinets, which had grown from a $300 million-plus company to a $2 billion- plus business in less than ten years via organic growth and acquisitions. "They had grown so fast that the investment in finance talent and IT systems was far behind what a $2 bil- lion organization needed," Mr. Schmidt says. "I was brought into that role to overhaul talent, implement performance management systems, upgrade key financial processes, and bring more financial partnering to the key business leaders." Out of a 33-person finance team, he replaced 13 positions "with very strategically minded and savvy business people," he says. "After repositioning talent, the second most impor- tant action was instilling that performance management system and an operational focus around things that truly drove financial success for the business."
Less than one-third of companies have formalized programs in place to better educate business managers on financial concepts and how to apply them to the business. According to our research, companies are starting to put training programs into place to bring financial and analytical expertise to their functional and managerial leaders.
Chapter 3: Standardizing and Streamlining
Like Y2K before it, the passage of Sarbanes-Oxley in 2002 spurred significant investments in information technology. Five years down the road, most finance executives feel companies have the software and systems that they need, but that companies aren't using this technology to its full advantage. (Note that there is a significant minority, in cer- tain industries, still suffering with manual processes.) Thus, the finance team has been spending its time and resources standardizing processes, linking systems together for better information flow, introducing more performance measurement resources companywide, and improving upon existing organizational structures. At container shipping company CMA CGM, for instance, Jim Arnold is working on a large, 14-month data- warehousing initiative. He's using existing technology. "The parent company has most of the systems," Mr. Arnold says. "It's just they haven't always deployed those systems into the subsidiaries in the past. When I came onboard and started probing, [I discovered that] we have all these very robust systems and I said, ‘Well, we've got to be able to utilize those systems in the subsidiaries.' This doesn't mean the current systems are a data warehouse; it just means the systems that house the data are available and they utilize well-known technology that can be developed to provide the company with real-time decision-making tools."
Similarly, when Derek Schmidt arrived in his new role at Silgan Plastics, he and his team decided to initiate a major project to introduce performance dashboards into all areas of the company so that, eventually, all key employees will have access to information for instantaneous decision making. It's a phased project that will take two years to complete"but it won't require major new technology investments. "We [had] already bought the functionality as part of our broader software package. So, there is no incremental expenditure in terms of software purchase," Mr. Schmidt says. "We're going to have roughly three or four individuals primarily dedicated to this internally. [And] we've already contracted with an outside consulting firm."
Process Improvements
Clearly, finance teams are becoming more assertive when it comes to maximizing the technology and the systems at their fingertips. Over the last two years, respondents say, they've undertaken or completed significant process changes, mostly intended to ensure that all parts of the organization are using accurate and timely information, and also intended to improve efficiency and accountabil- ity (for instance, centralizing certain accounting activi- ties). As one example, well over 60 percent are working on or have completed substantial process review and doc- umentation projects for compliance purposes (an obvi- ous effect of Sarbanes-Oxley); more than 60 percent are working on standardizing their charts of accounts or have completed doing so. (See Figure 9., next page) Most of our interview subjects indicated that by standardizing processes, they and their business unit counterparts can both spend less time and effort on recording transactions and have better information with which to then drive strategy. For instance, Cox Commu- nications, part of $13.3 billion (2006 annual revenue) media company Cox Enterprises, Inc., is a highly decen- tralized company, says Bill Fitzsimmons. While he acknowledges that decentralization has its strengths on the customer side, for the past six years he has been working on centralizing and standardizing all of the financial procedures, regardless of where they reside in the company. "We standardized how the accounts were structured; we streamlined departments; we got people using a standard chart of accounts consistently. That set up our conversion into a new system," he says. "Now we're on a common platform and we have common measurements," Mr. Fitzsimmons says. By standardizing, he says, "you can draw efficiencies by doing things better and faster and the result is a cleaner and more accurate product. If I were out in the field, I would be grateful for that, because that will allow me to spend more of my time on true analysis as opposed to just cranking through the brute-force number calculations."
"If you're the CFO, efficiency in process has to be the drumbeat that you march to," says another senior finance executive at a division of a major pharmaceutical company, who recently finished standardizing the organization's accounts receivable management. The result: The organization can reduce head count by four or five people this year.
Simply because these initiatives are happening, however, doesn't mean it's easy for strategy-minded executives to make them happen, particularly in transaction-oriented cultures. The pharmaceutical executive says, "It's because we have pushed and pushed, but it takes a lot of effort from the inside of the organization to get that change to happen."
That acknowledgment nods at a truth within even the highest-performing organizations: There is still much progress to be made in streamlining processes and sys- tems"and making sure the right information is avail- able for various activities. Our research indicates that finance executives feel they are well prepared in some areas to execute on their companies' business strategies over the next three to five years, but highly unsatisfied in others. (See Figure 10.) Namely, more than 90 percent say they are fairly or very well equipped when it comes to having well-documented and controlled processes for routine finance activities such as A/R, A/P, and so on. That number dips to just over 60 percent when it comes to IT systems for use in performance management and business planning"reflecting, perhaps, the fact that finance teams are truly still in the midst of transforming from the traditional "backwards-looking" finance cul- ture"one schooled in post-mortems"to the 21st cen- tury's forward-looking finance environment.
There is still much progress to be made in streamlining processes and systems"and making sure the right information is available for various activities.
Consider, for example, how some of these issues play out at MGM Mirage. As the gaming company enters new business arenas in response to the industry's mature, highly competitive environment, it's incumbent upon finance to gather different information in support of these new arenas (requiring, in fact, some technology investments). But constrained resources mean that finance still lives with some manual processes, reports Rick Arpin. "We've been able to find systems that can do what we want in specific areas," he says. "It's just that ultimately we'd like to link solutions end-to-end. [Presently] our systems require a manual intervention, taking information from one system and putting it into another. I think that's a challenge and it probably won't go away in the near term, but we keep looking for efficiencies in the process."
Cengage's Ashish Gupta acknowledges that systems complexity does sometimes force the finance team to make less-than-perfect decisions. "The optimal business decision needs be balanced with operational and sys- tems complexity. Sometimes, given the 80/20, it's easi- er to trade-off elements of the former with ease of imple- menting, managing and updating [systems]," he says. Also at play, of course, is that because the enterprise keeps growing and changing, you cannot find a one-size- fits-all solution and be done. Mergers, acquisitions, and spin-offs force companies to change their processes often, and often drastically. According to Wyndham's Vir- ginia Wilson, "In connection with our transaction last year [when Wyndham was spun out of Cendant], we essentially had one very large company split into four very large companies and we pretty much had to pull apart all of the technology stuff"telecommunications systems, mainframes, the data center, everything. E-mail, security"all of that had to be re-implemented. So that has been an enormous undertaking over the last 18 months."
Given those two drivers"the difficulty of working with outdated systems and the need for technology i nvestment as a result of M&A activity"it should not be surprising that finance is still making some investments in IT. Of greatest interest is ERP systems: A third of our survey respondents call investing in ERP systems their first priority, when it comes to financial applications, over the next two years. (See Figure 11, next page.)
Performance Measurement and Management
Judging from survey and interview research, finance teams that have not yet begun significant performance measurement and management initiatives may do so in the next few years, as the Board, CEOs, and investors search for continuously higher performance in a compet- itive, global environment. Our research indicates that business managers and finance are "not on the same page," so to speak, when it comes to accessing critical information. In 50 percent of companies, finance and business managers equally share performance- reporting dashboards"and for most companies, that's not good enough, according to our interview subjects. Business and finance share other applications even less of the time"for instance, they share planning, budgeting, and forecasting applications equally in only 36 percent of organizations. (See Figure 12, next page.)
Cox Communications is among those companies rolling dashboards out to all of its professional employees (in Cox's case, to 18 locations). It uses the dashboards, which employ a simple-to-understand graphic, not only to inform operations managers but also to motivate them. "We have what we call a ‘frog in a blender' analy- sis," says Mr. Fitzsimmons. "If you're in the top third in a given statistic, you're rated green"you look pretty much like a frog. If you're in the middle third, you're rated white and if you're in the bottom third, you're red" you're going to look more like a blended frog," he says. "So that's an easy way to see visually where things are and then, obviously, you can drill through into the num- bers to really understand [the underlying characteristics driving performance]."
Smaller companies, too, are beginning to adopt perform- ance measurement tools such as dashboards. Doug Pat- teson joined Turbocam, a $45 million, privately held man- ufacturer in Barrington, New Hampshire, two years ago as the company's first CFO. He was brought on specifi- cally to work as a strategic partner to the CEO, who was readying for a growth spurt (the company has doubled in size since then). Mr. Patteson is an enthusiastic sup- porter of dashboarding, but can do so only in a limited fashion, because of resource constraints that don't allow him to purchase necessary systems. "When you talk about transforming what has historically been an infra- structure support function into a strategic one, that may require fairly extensive capital outlays. That's a hard sell and we're not there yet," he says. "So we do [dashboard- ing] manually," he says. "But the concept is huge, so let's do whatever we can to adopt the concept now and then let's adopt ever-better tools to deliver on [its promise]." Sources interviewed for this study maintain that finance- driven performance management requires very high- quality information from companies' various IT systems, analyzed and presented with clearly defined business decision making in mind. But they caution that perform- ance management isn't a pure technology problem" one that can be solved with the ultimate spreadsheet or leading-edge application. The CFO of Levi Strauss & Co., the $4.2 billion global manufacturer and retailer, says, "Finance and business managers have to learn to give and take. The spreadsheet won't give you the answer. It will give you a number on a piece of paper but then deter- mining what is the right solution is a matter of leader- ship." He says finance executives should provide good information and help managers find the right answers themselves. "Once people get the tools they need and keep them simple"and if finance keeps asking the right questions"people will arrive at the answer themselves. Most people prefer to have a clear understanding of why the answer is strategically correct, instead of having finance push the answer to them. I think that's also about leadership style. Just ask the right questions and then people will come to the right answer themselves."
As companies seek to squeeze out better performance from existing resources, they not only must assess opportuni- ties, they must also evaluate potential risk. Our research indicates that 72 percent of organizations have a dedicat- ed risk management function; almost half of all risk man- agers report to the CFO. (See Figure 13, previous page.) However, there exists the possibility that these dedicat- ed risk managers do not have all of the information they need to perform their jobs optimally, because technolo- gy investments in risk assessment are insufficient. Only 8 percent of companies have completed substantial risk management technology projects during the last two years; another 22 percent have significant projects under way. (See Figure 9, page 18.)
Sources interviewed for this study suggest that evaluating operating risk"the negative outcomes from business process failures, poor strategic and tactical decisions, and so on"is as much a collaborative mental exercise as it is a sci- entific analysis of probability and expected values. The finance executive at the information aggregator says this about oper- ating risk management: "The problem with our business is it's so diverse that we have a knowledge sharing portal, but that's really it." Risk management at this international infor- mation company, he says, "requires a lot of talking with peo- ple, a lot of analysis of information that is out there and avail- able, and then it requires a cognitive process of thinking things through, sort of like thinking of a chess board. ‘What happens if this occurs?' It's a very logical, critical-thinking position." The abstract problems of risk management are best solved, he says, through human analysis based on experience and sup- ported by information technology.
This executive cites diagnostic and therapeutic information as an example. "Let's say you have a doctor with a handheld device," he says. "The doctor observes that the client has a condition, and through our handheld device, he pulls up infor- mation about the patient and his other prescriptions. We pro- vide a recommendation on what dosage of a particular drug to take. Now, if that dosage is wrong, we're in trouble. So the risks of some of our information and [its use] are critical. They [operating risks] must be well managed."
Other sources cite a risk management model that consid- ers purely financial risks"those that stem from currency fluctuation, interest rate, product liability, and workforce injury, for example"separately from operating risk. At ABB, a global electrical engineering firm based in Switzer- land, senior vice president and chief financial officer for North America Herbert Parker says the company has two classes of risk management: major projects and more tra- ditional insurable risk. Says Mr. Parker, "Prior to us signing any large contract of say, $15 million or so, our risk review committee thoroughly reviews the details of contracts while they are still in the proposal stage. During this review, we assess the risk of such items as new technology, coun- try risk (labor, political, safety, etc.), prior experience with the customer, consequential liquidated damages, and any other type of typical risks inherent in large projects." The finance organization is instrumental, he says, in these reviews. In addition, he says, the company has a separate group for conventional risk management "that's more on the insurance side, looking at product liability claims and any type of major catastrophes that could happen in a nor- mal business transaction, including large projects." But sources are adamant that their risk review function not inhibit business growth or productivity. Says one European executive, "We realize as a company that without taking risk, we're not going to get growth. So the businesses in and of themselves are definitely the engine for growth; we in finance just act as a counterbalance to them. They also must manage their own risk and that's one thing that we demand of them, but there are cases when they're taking risks that are not in our best interest that we need to highlight."
Sources interviewed for this study suggest that evaluating operating risk"the negative outcomes from business process failures, poor strategic and tactical decisions, and so on"is as much a collaborative mental exercise as it is a scientific analysis of probability and expected values.
Chapter 4: Conclusion
Surely the desire for finance executives to become more strategic has existed within companies, and within the finance team, for several years. Over the last two years, the demand for finance to provide strategic guidance in pursuit of corporate performance has accelerated. Pushed by a number of factors"most significantly an increasingly difficult competitive environment, combined with a vigilant and sophisticated investor community" the majority of finance teams have indeed moved further along this continuum, despite a continued need to pay attention to transactions and regulatory compliance. Why, exactly? Over the last decade, large companies have achieved significant growth and earnings. There- fore, CEOs are seeking creative ways to generate new profits"and they're looking to finance for help. In addi- tion, the growth of private equity into the acquisition marketplace has placed a new emphasis on the role of cash flow. This new emphasis places demands upon finance executives for metrics-driven analysis of the ways in which organizations use"and tie up"their cash and how to free it up. In sum, these influences are forcing companies to look for growth in other places than the top line. The finance professional, says Cengage's Mr. Gupta, is the best person to seek those "nontraditional levers that [can] spur the engine of growth."
The good news: Finance teams have made significant progress in standardizing and streamlining their systems and processes over the last two years. However, they still have additional responsibility when it comes to imple- menting performance reporting and measurement appli- cations throughout the organization and in training operations on the functions of the finance team. Furthermore, companies evolving finance into a more strategic role must attract and retain better educated finance executives, because the skills needed in a strate- gic finance organization"as counselor to functional and business unit leaders, collaborator with the CEO and the Board, and voice for the investor community"are dra- matically different than those required in a transaction- al finance group. "Being a strategic partner requires a whole different skill set," says a senior finance executive at a division of a global pharmaceutical company. "You have to be more of a holistic thinker. You can't be just a person who sits in your office and grinds away at the numbers all day." Says Silgan's Mr. Schmidt, "They have to understand how technology, purchasing, finance, marketing, sales, and operations all play a critical yet interdependent role in business strategy and execution."
Our interview subjects all indicate that such talent is hard to find, and demographics would indicate that the search for talent will only become more grueling. "That's going to be our challenge in the next decade and beyond," Mr. Schmidt says. "It's very challenging to find an individual who has the capability to either grow into that strategic partner role or who has the breadth of business experience plus the technical finance founda- tion to play both ends of the spectrum in a truly strate- gic finance role."
Sponsor's Perspective
SAP partnered with CFO Research Services on this study as part of our ongoing effort to better serve our cus- tomers as well as understand how companies are pro- gressing on their financial transformation journey. We had two major goals in sponsoring this research. First, we wanted to gain insight into the challenges and suc- cesses that finance departments are experiencing as they strive to make their operations more efficient and play a more strategic role in the business. Second, we wanted to deepen the knowledge we have gained through both our own research and our 35 years of expe- rience providing financial management solutions to the world's leading companies.
This study confirms what we have learned through that experience as well as through the benchmarking research conducted by SAP's Value Engineering group: Investments in IT solutions that automate and stan- dardize critical finance processes not only help decrease costs and cycle times but pay additional dividends in the form of strengthened compliance and improved financial returns. Moreover, these benefits are being realized up and down the financial value chain, beyond core accounting and reporting, to encompass broader finan- cial management processes such as payables process- ing and cash management. From closing the books to straight-through payment processing, technology solu- tions are helping companies harmonize financial data across systems and organizational units, achieve greater process consistency, minimize manual processing and compliance risk, and enable their finance professionals to apply their expertise to higher value-added work. For example, companies are benefiting from greater automation and strategic insight around the period end financial reporting cycle. Closing the books can be very challenging and time-consuming, especially when data from multiple systems has to be consolidated and tasks must be coordinated across operating units located in different locations and time zones. Businesses can great- ly reduce the time and effort required to close the books by investing in technology that helps to standardize, automate, and coordinate the companywide closing process. The right products can enable more consistent processes and better task coordination, collaboration, and workflow needed to efficiently close the books. And when these products allow users to work with familiar office tools such as Excel"and give them graphical web interfaces to centrally manage the closing process and facilitate cross-unit coordination"companies benefit from fast adoption and greater visibility. For example, one customer found that SAP software that supports business planning and consolidation was so easy to use that in the same month that their financial reporting went live, users successfully produced that month's financial reports using the new software. At the same time, it facilitated compliance with US GAAP regulations and condensed their three-month consolidation process to one week.
Strategic software investments can improve processes in other areas as well"and realize significant cost sav- ings and higher returns. For example, companies can reduce costs by taking advantage of Internet-based pay- ment networks that streamline invoicing and payment processes and provide real-time visibility into global cash balances needed to manage liquidity effectively. One SAP customer"a $6 billion firm in the oil and gas indus- try"completely automated its accounts payable and cash management functions, enabling the company to process thousands of payments every month with just two full-time employees. The company also automated its cash management activities, enabling the finance department to perform reconciliations across its numer- ous banking relationships in just a few hours a day. Because of the automated processes, the company has also reduced its bank fees, lowered its operating costs, and generated higher returns on its cash positions.
Businesses can also leverage the transformative power of performance management software to model and optimize all drivers affecting profitability, and the strength of governance, risk, and compliance (GRC) to reduce risks and process costs. Using SAP software, some companies have been able to substantially reduce the cycle time needed to gain insight into profitability, as well as dramatically lower their cost of ownership while increasing net profits. From a GRC perspective, compa- nies can significantly lower their external audit fees and increase their internal audit efficiency, which can save them hundreds of thousands of dollars per year. Most also realize significant additional savings adding up to $1 million or more annually, thanks to improved compliance and operational processes.
SAP is the world's leading provider of business software. For more than 35 years, we have provided companies with robust financial management solutions for automating core accounting and reporting functions, optimizing their financial supply chains, and achieving better business performance. More than 30,000 compa- nies worldwide (including many of those mentioned in this report) across over 25 industries depend on SAP financial management solutions. SAP is proud to spon- sor this research to help finance professionals gain insight into how their peers in leading companies are transforming their roles and helping their organizations achieve better performance.
For more informationabout how SAP financial management solutions help businesses streamline finance processes, ensure compliance, and equip their finance professionals to provide more strategic value to the company, please visit http://www.sap.com/solutions/index.epx. You'll discover why the best-run businesses run SAP.
Subscribe to:
Posts (Atom)