value-add-financial-organization

RESEARH & ANALYSIS
Are You Building a Value-Add Financial Organization?
Creating growth or just crunching numbers — the difference is "embedded finance."

In today's market, a CFO can't just manage numbers — he or she must also help build a value-add financial organization that provides the company with real and sustainable growth. For the last several years, CFOs have been learning how, as they discover new ways to bring the insight of the finance organization to every part of the enterprise, identifying ways to save money, make money, improve processes, and increase shareholder value.

It's more important today than ever before. Risks are greater and competition is more fierce. Shareholders, still reeling from corporate scandal, demand more transparency and more top-line growth. Operational changes such as workforce reductions and new systems implementations can stress organizations and introduce unforeseen challenges. And CEOs want profitable growth and better business support. They also want to be sure the company is in compliance with new requirements like Sarbanes-Oxley.

Embedding finance
Research conducted over a three-year period by the CFO Executive Board, a non-profit organization funded by the top 600 financial companies worldwide, shows that CFOs have learned how best to serve their companies by embedding finance in the line. As a liaison, these finance experts work within the business to conduct a rigorous, constructive assessment of operating strategies and results. They determine who their most profitable customers are and what services they want. They identify processes that can be streamlined and new opportunities for growth. When successful, they bring line managers on board to adopt their recommendations.

Creating value at Dell
A notable example is Dell Computers, named "Most Admired Company" by Fortune Magazine. Senior Vice President and CFO Jim Schneider's mission — to cut $2 billion in costs out of Dell's already hyper-efficient supply chain to deliver even more value to customers; and to drive top-line growth and shareholder value through diversification into new products, services, and overseas markets — was the result of aggressive value-add strategies. (Read the article.)

Ask the right questions
As CFOs plan their own value-add strategies, it's important to answer some critical questions. The CFO Executive Board's research suggests the following:

A value-creation finance team will gain the most prominence in the corporation — and increase credibility with business partners — if they can demonstrate real results, and if those results are directly tied to business outcomes and business partners' incentives.

The Value-Add Financial Organization

CFO Executive Board research shows that effective value-add financial organizations share these features:

Value-Added Metrics
Finance KPIs and incentives encourage staff to support corporate strategy and business unit performance, rather than focusing solely on finance efficiency or process goals. Metrics encourage risk taking, allow for mistakes, and allow embedded finance to share the rewards (or penalties) for business results.

Aligned Priorities
Central criteria focus staff on activities that are important at the portfolio level, and provide "checks and balances" to ensure that non-strategic local urgencies do not displace corporate priorities. A danger is in following the usual finance metrics that are usually aligned to cost-and-efficiency measures more suited to "overhead," as opposed to improving business results.

Structural Flexibility
The finance organization should be fluid enough to align with the most strategic value-creation projects when needed, rather than held captive by static organizational structures. Organizational and departmental boundaries blur as teams reach out, in, or across to provide the expertise needed to meet customer needs and develop new markets.

Blending of Line and Finance Roles
Through career rotations or just good partnering, finance value creators understand (and have credibility with) the business, and key operational managers are financially disciplined and understand how Finance staff can help them achieve their goals. Knowing how to partner with other teams or organizations is considered a critical performance skill for both line and finance.

Economies of Knowledge
All value creation activities are not treated as scalable, nor are they treated as ad-hoc. Data-intensive, process-oriented value creation activities are centralized, while relationship- and judgment-based portions are performed by the most experienced and talented embedded staff.