CFOs: DRIVING FINANCE TRANSFORMATION FOR THE 21ST CENTURY

A report prepared by CFO Research Services in collaboration with Cap Gemini Ernst & Young

CFOs: DRIVING FINANCE TRANSFORMATION FOR THE 21ST CENTURY
A report prepared by CFO Research Services in collaboration with Cap Gemini Ernst & Young

CFOs: Driving Finance Transformation for the 21st Century

ABOUT THIS REPORT
In May 2002, CFO Research Services (a unit of CFO Publishing Corp.) and Cap Gemini Ernst & Young conducted a research program to examine what progress large U.S. companies have made in transforming the finance function. CFOs: Driving Finance Transformation for the 21st Century summarizes the findings of a mail survey of 265 senior finance executives and interviews conducted with 12 more. Cap Gemini Ernst & Young, a global management consulting and IT services firm, funded the study and the publication of the findings. The organizations that participated in the interview program and agreed to be cited are:
■ Allergan ■ American Express ■ Chevron Phillips ■ Cinergy ■ Converium ■ EMC ■ Fairchild Semiconductor ■ GE Capital Equipment Financing ■ Hillenbrand Industries ■ ING U.S. Financial Services ■ Intel ■ Public Service Enterprise Group

The research hypotheses for this report were developed jointly by CFO Research Services and Cap Gemini Ernst & Young. At Cap Gemini Ernst & Young, we would like to thank Karen Cohen, Rich de Moll, John Karr, and Alexis Miller for their analysis and editorial contributions. CFO Research Services conducted the survey and interview program. Don Durfee edited the report and Lauren Gibbons Paul conducted field research. CFO Research Services and Cap Gemini Ernst & Young are grateful to the many CFOs and other senior finance executives who provided us with their time and insights. CFOs: Driving Finance Transformation for the 21st Century is published by CFO Publishing Corp., 253 Summer Street, Boston, Massachusetts 02210. Web site: www.cfo.com Please direct inquiries to Lisa Nelson at (617) 345-9700, ext. 249, or lisanelson@cfo.com

August, 2002 Copyright © 2002 CFO Publishing Corp., which is solely responsible for its content. All rights reserved. No part of this report may be reproduced or stored in a retrieval system or transmitted in any form or by any means without written permission.

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TABLE OF CONTENTS
Executive Summary Chapter 1: The CFO’s Changing Agenda Close up: CFOs Respond to Corporate Scandal Chapter 2: Finance’s Current and Future State Case Study: Intel Chapter 3: Undertaking a Transformation Case Study: American Express Case Study: Hillenbrand Industries 2 4 7 8 15 16 20 23

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CFOs: Driving Finance Transformation for the 21st Century

EXECUTIVE SUMMARY Finance has not kept pace
The euphoria of the high-growth 1990s drove an unprecedented level of corporate activity. Globalization and rapid economic expansion forced companies into aggressive programs of investment, deal making, and deployment of new business models and technology. Despite the continued economic slowdown, the business environment remains frenetic as companies struggle to shift business strategies, lower costs, and improve quality and service. Unfortunately for many CFOs, the transformation of finance has not kept pace. A survey of senior finance executives at 265 large US corporations, supplemented by 12 in-person interviews, indicates that few CFOs are satisfied with finance’s strategic role or the progress of its transformation to a valued business partner. According to CFOs, the roadblocks to change are near-term pressures such as the need to navigate a weak economy, increased scrutiny of accounting practices and reporting, greater demands for actionable information, and demand for an almost immediate positive return on investment. In essence, many financial executives feel challenged to do much more with much less. Certainly, the rising number of accounting scandals is rapidly shifting CFOs’ attention as companies rush to respond to the short-term crises related to improved forecasting accuracy and external financial reporting transparency. Survey results indicate that CFOs are committed to longer-term finance transformation by reducing the cost of transaction processing while increasing the effectiveness of decision support and strategic activity. However, the gap between stated finance transformation intentions of the last five to ten years and the minimal overall progress evident in the survey results brings finance’s ability to address both short- and long-term demands into question. History suggests that without a significant change in approach, there is a strong likelihood that finance will implement short-term, band-aid solutions that fail to launch or sustain longer-term transformation efforts.

Notable findings:
■ Accounting scandals and recession drive focus on reporting accuracy. 81% of

finance executives polled say that accuracy of revenue and earnings forecast is a high or the highest priority in 2002. While most (93%) believe they are complying with current external reporting requirements, 58% cited financial reporting transparency as a priority. CFOs believe they are following the external reporting process as defined today and that they are not perpetrating an Enron- or WorldCom-type accounting fraud. They do, however, recognize the need to provide more transparency detail and accuracy.
■ CFOs are committed to long-term company growth, but doubt finance’s ability to meet the challenge. 60% of those polled cite their role in the development of corporate strategy as a priority. Senior finance executives report they are personally involved in strategic activities; however, only 25% say the rest of the organization views finance as a value-added function to be consulted on all important decisions. Similarly, only 39% are very satisfied that finance consistently influences the decisions that drive shareholder value.

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■ Inadequate IT systems are a roadblock to finance transformation. While

a great majority of respondents (81%) said that accurate earnings and revenue forecasting is a high priority, 63% are saddled with inadequate, nonor partially-integrated budgeting, forecasting, and decision support systems. When asked what obstacles are holding back transformation, 56% cited technology and 59% identified lack of senior management support—a signal that many companies have yet to connect IT capabilities with finance production.
■ Finance remains bogged down by transaction processing. Increased financial

reporting demands aside, too much of finance’s time (39% on average) is still spent on transaction processing. Over the next three years, a large majority of CFOs are committed to using shared services and/or partial outsourcing to accomplish a reduction to 27% of time allocated to transaction processing.
■ Leading companies focus on overcoming barriers to finance transformation. According to respondents, the top challenges to finance transformation are people- and technology-related. These include developing the necessary personnel skills (64% report this as very significant), building senior management support (59%), acquiring the necessary technology (56%), and building business unit perception that finance should be a partner (53%).

Potential CFO actions
■ Demand top-to-bottom financial transparency supported by CEO and board endorsement of finance transformation. While the CFO needs to take the lead in defining and driving the processes and architecture for ensuring financial transparency, sustained CEO and board commitment is essential for successful implementation. CEOs and boards must champion finance transformation as the method to meet both the short-term regulatory and shareholder demands, as well as prepare the company for new demands as they evolve. Strong, top-down sponsorship and leadership is necessary to resolve “turf issues.” Further, CEO support is needed to ensure that the multi-year investment is sustained even as other corporate priorities emerge. Survey results indicate that successful finance transformation depends on the combined resolve of senior management. ■ Accelerate improvements in both cost efficiency and shareholder value. Finance can meet the demands placed on it by its various constituencies only by successfully executing the full transformation agenda of cost efficiency and shareholder value improvements. Specifically, finance needs to dramatically improve the efficiency of financial transaction processing and re-allocate a substantial portion of these savings to decision support activity. At the same time, finance must improve the processes and tools within decision support in order to optimize the output. Leading finance organizations spend less than 24% of their time (versus 46% for lagging companies) on transaction processing by employing leading practices such as consolidated and integrated financial systems and shared services. These same companies spend more than 43% of their time (compared with 15% for lagging companies) on decision-support activities that are enabled by sophisticated and integrated tools. Leading decision support practices include modeling the impact of financial and non-financial measures on shareholder value, deploying these value metrics in key decision-making activity, implementing web-based planning and reporting tools, and enhancing the skills of finance personnel. Survey results indicate that finance organizations that reduce transaction processing focus and re-allocate time to enhanced decision support activity are more likely to be viewed as value-added contributors to strategic and operational decision making. ■ Drive a balanced transformation approach that integrates people, process, and technology improvements. Leading CFOs design transformation programs that move all aspects of the finance function forward in a coherent and integrated fashion. Too often, the implementation of new technology is viewed as the finance transformation solution. Implementing technology alone, without changing processes and organization structure, will not generate a sufficient business case to gain the ongoing support of corporate leadership. While managing a multi-dimensional finance transformation program is difficult, the ultimate payoff is much higher.

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CHAPTER 1: THE CFO’S CHANGING AGENDA
These are turbulent times for finance. Over the past year, CFOs and other senior finance executives have confronted a host of challenges. The recession and slow recovery have put them in the role of identifying growth opportunities and ways to reduce costs. The increased threat of terrorism has led to demands for better risk management. And then there are the corporate accounting scandals — the collapse of Enron and the troubles at companies such as Global Crossing and WorldCom have cast a harsh light on the finance profession, putting intense pressure on CFOs to demonstrate the accuracy of their own company’s results. Finance executives are responding to these pressures. As we will discuss below, the main priorities for finance now include improving the accuracy of forecasts, providing better decision support for the business, participating in the development of corporate strategy, and increasing the transparency of reported results. The result will be a more active role for the CFO and the finance function. “Boards and CEOs are turning to the CFOs and saying, ‘Guide us,’” says Joseph Martin, CFO of Fairchild Semiconductor, a $1.4 billion technology firm. “‘Show us where the costs are; show us what buttons to push; show us how to manage the cash; tell us how long we can continue on this path or whether we should take another path.’” At the same time, CFOs are attempting to make their finance departments more efficient and responsive to the needs of the business. This effort—often referred to as finance transformation—has been underway at many companies for over a decade. Today, finance transformation is even more urgent. Achieving most of the top priorities listed by respondents requires fundamental improvements that only a transformation is likely to bring about. For example, providing managers with a better view of growth drivers will require better data and, in turn, more integrated IT systems. Likewise, greater strategic support by finance calls for new skills among finance employees as well as the processes to allow them to spend less time on paperwork. As Chapter Two will illustrate, most companies have made less progress with transformation than commonly assumed. In fact, a significant gap has emerged between the small group of companies that have reshaped finance and those that have not. But this gap can be closed. In Chapter Three we will explain how leading companies have overcome obstacles to develop efficient, valuable finance organizations.

Study demographics
To understand how the finance executive’s agenda is changing, we conducted a survey of senior finance executives at large U.S. companies. The 265 respondents work at companies with over $500 million in annual revenues (82% are from companies with over $1 billion in revenues). Most of the respondents are CFOs, with the rest being VPs of finance and controllers. The two best-represented industries are financial services (26%) and manufacturing (19%). Other well-represented industries include retail/consumer products, energy/chemicals, and high tech/telecommunications. To provide a context for the survey data, we also conducted 12 in-person interviews with the CFOs of companies such as American Express, Cinergy, Allergan, and EMC.
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A new focus for finance
Our survey found that the most important near-term priority for finance executives is to help their companies adapt to weak economic conditions. This takes several forms: providing better insight into what future results will be, helping support operational decisions to improve performance, formulating corporate-level strategy to cope with the environment, and understanding the profitability dynamics of the company. As figure 1.1 shows, the top three priorities are the accuracy of earnings and revenue forecasts (81% cited this as “high” or “highest priority”), operational decision support (60%), and the formulation of corporate strategy (60%). Figure 1.1 What priority does your finance group currently apply to the following issues?
% responding "high priority" or "highest priority" Accuracy of earnings and revenue forecasts Operational decision support Formulation of corporate strategy External financial reporting transparency Profitability measurement Risk management Overcoming barriers to transforming finance Modeling the drivers of shareholder value M&A / Alliance management Flexible cost structures Management of fixed asset investments 0% 20% 60% 60% 58% 56% 51% 49% 42% 36% 34% 27% 40% 60% 80% 100% 81%

Source: CFO Research Services

In part, this reflects the evolution of the finance executive’s job toward more strategic activities. It is also a product of economic conditions. According to many CFOs, finance functions have historically done an inadequate job of providing line-of-business managers with a true sense of the company’s growth prospects or a quantifiable assessment of the risks and opportunities of different strategic options. While such analysis is helpful in a time of growth, it is essential during a downturn. “In a time of contraction, people look to the finance organization for leadership,” says Bill Teuber, EVP and CFO of electronics manufacturer EMC. “[The business asks us] to explain where we are going, how we are going to get there, and what we need to do.”

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Financial reporting transparency is another urgent issue for finance, with 58% citing this as top priority. Transparency is especially pressing for energy companies — 74% of finance executives in the energy / chemicals sector cite this as a top issue (figure 1.2). Figure 1.2 What priority does your finance group currently apply to the following issues?
High tech/Telecom Chemicals/Energy % responding "high priority" or "highest priority" Manufacturing >70% 50-69% <50% Retail/Consumer prod.

Accuracy of earnings and revenue forecasts 84% 76% 84% 77% 81% Formulation of corporate strategy 65% 63% 60% 52% 57% Operational decision support 65% 55% 48% 45% 63% External financial reporting transparency 47% 63% 68% 74% 54% Profitability measurement 55% 58% 68% 39% 68% Risk management 37% 42% 52% 65% 60% Overcoming barriers to finance transformation 49% 47% 52% 39% 50% Modeling the drivers of shareholder value 39% 50% 36% 52% 38% M&A / Alliance management 41% 34% 48% 39% 29% Flexible cost structures 37% 18% 52% 29% 38% Management of fixed asset investments 31% 21% 28% 26% 19%
Source: CFO Research Services

But few finance executives report plans to change the way they handle external reporting. Only 7% of respondents stated that they believe there is a significant gap between how they handle external reporting and what outsiders are requesting, and only 9% say that they plan significant changes to external reporting. Our interviews provided some insight into this apparent contradiction. While many do expect to provide greater financial detail to outsiders (see sidebar, “CFOs respond to corporate scandal”), few plan changes to the process of communicating financial results to the outside world, including the work of investor relations and the CFO’s communications with Wall Street analysts. In fact, only 17% of respondents indicate that they feel significant pressure to change the investor relations function.

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Finance transformation remains high on finance executives’ agendas. Indeed, nearly half of all respondents report that overcoming the barriers to finance transformation is a top priority. The number of companies planning a transformation is likely to be even higher, since the top three priorities— forecasting, decision support, and strategy development—are largely dependent on progress in transforming finance’s capabilities. For instance, at the U.S. operations of the Dutch financial services giant ING, one of the CFO’s goals is to turn each business unit’s finance group into a true decision-support team. For that to happen, the company first needs to shift the finance function’s focus away from transaction processing toward more value-added activities. One key step in accomplishing that shift is the implementation of a company-wide finance database, according to Chris Schreier, CFO of ING U.S. Financial Services. The next chapter will examine the current state of the finance function and where finance executives hope to be in three years. As we will explain, while CFOs have a consistent view of how the finance function should look, few believe they have achieved their vision. CFOs respond to corporate scandal
Just how much is the CFO’s job changing as a result of this year’s corporate finance scandals? While there is some debate, interviews conducted during the Spring of 2002 suggest that the change has been extensive, reaching into areas such as external reporting, the transactional tools available to the finance executive, and the CFO’s relationship with the audit committee. One area of agreement is that CFOs face far greater scrutiny from investors than before. As a result, some transactions and accounting practices that were previously well-accepted—even such standard techniques as share buybacks and issuing debt to bolster the capital structure—are now regarded with suspicion. “Many of the tools available for managing the business are now unavailable,” says Eric Brandt, CFO of Allergan, a $1.7 billion pharmaceutical company. There are also demands for reporting financial performance in greater detail. At GE, the finance function is working to provide more detailed information to investors, including information about the financing and net income of its business units. “Our view is that this will be an ongoing change in the way we do business,” says Chris Jacobs, CFO of GE Capital Equipment Financing. “Investors are going to be seeking more information about the different businesses within GE, and we’ll have to support that.” The CFO’s relationship with the audit committee is an area of less certainty. Only 24% of the CFOs responding to the survey reported that they expect a significant change in how they work with this group. This low percentage may reflect unrealistic expectations. As the pressure on corporate boards intensifies, many CFOs are likely to find themselves pressed into a closer relationship with audit committees (note: the survey was conducted in May of 2002, before the revelation of problems at WorldCom and the ensuing push by Congress to enact new corporate governance rules). In fact, several of the CFOs we interviewed are already working more closely with board members. One is R. Foster Duncan, EVP and CFO of Cinergy, a major energy firm based in Cincinnati. According to Duncan, because of Enron and other recent events, he now spends far more time working with audit committee members to ensure they have all the information they need about the company’s operations and policies. Among the steps the company has taken are conducting a best practices session with the audit committee and launching a secure extranet for board members, giving them real-time access to key corporate information.

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CHAPTER 2: FINANCE’S CURRENT AND FUTURE STATE The myth of finance transformation
After more than a decade of discussion, the fact remains: few companies have fully transformed their finance organizations. Most CFOs are dissatisfied with the contribution finance makes to shareholder value—only 39% are very satisfied that finance consistently influences the decisions that drive shareholder value. Likewise, only a quarter of finance executives believe that the rest of the organization views finance as a value-added function to be consulted on all important decisions. This stands in contrast to the CFO’s own increasingly central role in corporate decision making. Consider the following numbers from the survey:
■ 69% of senior finance executives say they are deeply involved in commu-

nicating and advocating strategy internally
■ 67% are highly involved in translating strategy into operational actions ■ 64% are highly involved in providing analysis to link strategy to shareholder value

Some companies have made progress in transforming the finance function, though. The CFOs of these companies report that their finance functions are more efficient and effective, and are more engaged in value-added activities. This chapter examines the companies that have made progress and compares them to those that have yet to transform. We also discuss the progress companies have made in various aspects of transformation.

A consistent vision of finance
We asked survey participants to describe how their finance functions will look in the future. Although the focus of finance transformation has shifted over the past decade, the overarching objectives have remained constant. Ideally, say executives, finance functions should be able to perform back-office duties more efficiently while devoting increased time to activities that contribute more directly to shareholder value. These include providing customized analysis to the business unit heads and helping formulate strategy. Gary Crittenden, CFO of American Express, summed up the goals of many of the executives we spoke with: “An ideal finance function spends very little time on reconciliation and a minimal amount of time reporting on what has happened. Instead, a great organization spends the majority of its time trying to anticipate what’s going to happen in the future, making sure the company’s resources are allocated to the most important opportunities that it has, and to ensuring that the company operates with tight controls and great processes.” Additionally, respondents believe their finance functions will have some of the following characteristics in three years:

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■ On average, time spent on transaction processing will fall from 39% of the

function’s time to 27%—the time will be reallocated to more forward-looking activities such as strategy development and decision support
■ The finance function’s ability to predict the company’s future performance

will improve: budgets and forecasts will be dynamic (rolling) and based on operational drivers at 52% of companies (compared with 14% today)
■ Transaction processes will be fully standardized, centralized, or outsourced

at 50% of companies (compared with 11% today)
■ Finance IT systems will be primarily ERP-based and at least partly integrated at 77% of companies (compared with 23% today)

Four levels of transformation
Only a relatively small number of companies possess these characteristics today. Using respondents’ answers to our survey questions, we have assigned a score to each respondent’s company to reflect its level of sophistication in five areas: how finance allocates its time; budgeting and forecasting processes; the technology supporting budgeting and forecasting; transaction processes; and the technology supporting transactions. The result is four levels of transformation:
■ Leaders. These are companies on the leading edge of finance transformation. Nearly all transaction processing is performed through shared services or is outsourced, information systems are completely integrated (and in many cases, Web-based), and decision-support teams provide customized analysis for most important business issues. ■ Early adopters. The finance functions of these companies have made significant progress in most areas of transformation. Transaction processes are mostly consolidated in shared services, information systems are largely integrated and ERP-based, and finance employees provide decision support on demand. ■ Followers. These companies have made selected improvements to finance,

but generally have not implemented any program to shift finance’s role. There is some rationalization of processes, minimal integration of information systems, and employees focus on transactions while providing limited decision support.
■ Cautious observers. These are companies that have made few, if any, changes to the way finance operates. Finance processes are duplicated within business units, information systems are disconnected, and employees focus on transactions.

As figure 2.1 shows, only a handful of companies currently fall into the “leaders” category, about a third can be considered “early adopters”, and the rest are “followers” or “cautious observers”.

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Figure 2.1 The evolution of finance: Four levels of transformation
6% 31% 46% 17% Cautious observers •46% of finance function time spent on transaction processing •Generally have line-item based budgets, static forecasts •Budgeting / forecasting mostly spreadsheet-based •Transaction processing generally done in multiple B.U.s • Transaction systems mostly legacy and non-integrated Followers •42% of finance function time spent on transaction processing •Budgets partly based on operational drivers; static forecasts •Partly integrated tools for budgeting / forecasting, non-standard decisionsupport tools •Transaction processes somewhat standardized across B.U.s •Transaction systems partly integrated with ERP components Early adopters •35% of finance function time spent on transaction processing • Budgets partly based on operational drivers; dynamic forecasts •Partly integrated budgeting/ forecasting, sophisticated decision-support tools •Mostly shared services for transaction processes •Transaction systems largely integrated; some are primarily ERP-based •Partly integrated budgeting/ forecasting, sophisticated decision-support tools Leaders •24% of finance function time spent on transaction processing •Dynamic budgets and forecasts based on operational drivers •Most have partly integrated budgeting / forecasting; some have fully-integrated, web-based systems •Mostly shared services for transaction processes; some fully outsource •Transaction systems primarily ERP-based; some fully integrated within company and with suppliers

Source: CFO Research Services

Who are the leaders?
The companies in the top two categories (leaders and early adopters) come from a range of industries. The two best-represented industries are high tech / telecommunications (46% are classified as leaders or early adopters) and chemicals/energy (45%). Behind these are financial services (38%), manufacturing (33%), and retail/consumer products (29%). (Bear in mind that in some cases these broad rankings mask underlying differences. For example, although chemicals/energy companies score higher in transaction processing, budgeting and technology, on average, they spend less time on decision support than other companies.) Firms in the top two groups are more likely to be large (with annual revenues over $10 billion), but include both high- and slow-growth companies— this reflects the fact that slow-growing companies have as much, if not more, incentive as their fast-growth peers to improve finance. On average, leaders and early adopters spend somewhat less on finance as a percentage of corporate revenues.

Transformation boosts efficiency and effectiveness
To what degree does transformation yield an improvement in finance function performance? From the perspective of the senior finance executive, at least, the improvement is significant. The leaders and early adopters report higher levels of efficiency and effectiveness than the followers and cautious observers. For example, 60% of respondents in the leader/early adopter group say that the efficiency level of their finance group is “very good” or “outstanding”. That number is only 40% for the bottom two groups. Likewise, 47% of the leaders/early adopters give a high effectiveness rating to finance, compared with 41% of the followers/cautious observers.
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These improvements come from a few different sources. American Express reports that it has saved a great deal of money by consolidating nearly all of its transaction processing into shared services centers (the company is currently consolidating its reporting processes). “We have had the benefit of headcount reduction, but also the benefit of lower factor costs, because a large part of the shared services operation is in India, and the cost there is a fraction of what it is elsewhere,” says Gary Crittenden. The company also believes that it has been able to increase the effectiveness of back-office processing, partly because it is easier to implement new systems when operations are in one place.

A greater strategic contribution from finance
At leading companies, finance is also making a greater contribution to strategy and to many day-to-day operational decisions. The finance functions of the leaders/early adopters are more likely to influence the drivers of shareholder value: 46% of these respondents say they are very satisfied that finance consistently influences shareholder value, compared with 35% of companies in the bottom two groups. We found that across a range of activities, transformed finance groups are consistently more involved in strategic activities than their peers. This is especially true in the areas of profitability analysis, partnering decisions, pricing decisions, and supply and demand forecasting (figure 2.2 ).
Figure 2.2 What contribution do representatives from the finance organization make in any of the following initiatives?
% responding "leadership role" or "important role" M&A analysis Strategic investment analysis Development of companywide performance metrics Product, customer, channel, or B.U. profit analysis Development of operating unit performance metrics Partnering decisions and measurement Pricing decisions Forecasting of supply and demand Management of company-wide IT investments New product development 0%
Source: CFO Research Services

89% 80% 84% 75% 77% 69% 71% 55% 71% 60% 67% 48% 52% 28% 44% 25% 43% 38% 22% 10% 20% 40% 60% 80% 100%

Followers/Observers

Leaders/Early adopters

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At GE Capital Commercial Financing, finance is closely involved in a number of strategic activities, including acquisition analysis, profitability analysis, and cost structure evaluation (including recommending and leading change in cost reduction). According to Chris Jacobs, the function is currently expanding its role in the area of technology investment decisions. “We’ve always done return on investment calculations,” says Jacobs, “but we are now more focused on holding businesses and functions accountable once the investment is made, so that we realize the forecasted productivity benefits that were relied on in approving the investment initially.”

Five aspects of finance transformation
Companies have not made equal progress across the various dimensions of finance transformation. Some areas have seen progress; for instance, companies appear to be spending less time on transaction processing today than they did several years ago. Supporting technology for transaction processing and forecasting has seen less improvement, however.
■ Allocation of finance’s time. Over the next three years, respondents expect

to spend less time on transaction processing and more on corporate strategy development and consultative decision support (figure 2.3). Finance functions currently spend, on average, 39% of their time on transaction processing. This will drop to 27%, with the difference being reallocated to strategy and decision support. Figure 2.3 Approximately what percentage of your finance function's time is devoted to the following activities?
% finance employee time 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 Corporate strategy development
Source: CFO Research Services

39% Today In 3 years 27% 21% 14% 20% 20% 32% 27%

Consultative decision support

Fiduciary responsibilities

Transaction processing

At many individual companies, the amount of time spent on transactions is far higher than the average. One CFO estimates that his department currently spends two-thirds of its time on transaction processing. In two years, he hopes to shift his employees’ focus so that 80% of their time is spent on more strategic activities.
■ Transaction processing. One particularly troublesome area for companies

today is transaction processing. For most finance operations, this work is the most resource-intensive part of their responsibilities. It is not just a matter of time and money, though—manual transaction processes that are non-integrated

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are more error-prone and prevent senior management from having an up-todate, enterprise-wide view of the firm’s financial situation. Today, about half of companies have mostly decentralized transaction processing (figure 2.4). 23% perform processing in multiple business units, and 27% have some degree of standardization. A handful of leaders have used outsourcing or shared services to fully standardize or centralize transaction processes. In three years, respondents expect a dramatic shift toward centralization: 50% expect to have fully standardized/centralized transaction processing, and an additional 33% expect to have mostly centralized processes. Figure 2.4 Which statement best describes your financial transaction processes?
% respondents 60% 50% 40% 30% 20% 10% 0% Performed in multiple business units
Source: CFO Research Services

Today In 3 years 23% 8% 27% 9%

50% 39% 33%

11%

Somewhat standardized across business units

Mostly standardized Fully standardized, centalized, or or centralized in outsourced shared services

■ IT for transactions. CFOs recognize that in most cases the IT infrastructure

supporting transactions will also need to be upgraded. Today, most companies labor with non-integrated IT systems or systems that are only partly integrated (figure 2.5). This makes standardization difficult, if not impossible, and requires expensive rekeying of data for senior management to have an aggregated view. In three years, companies hope to move toward systems that are mostly ERP-based and at least partly integrated—77% expect to have partly- or fully- integrated ERP-based systems. Figure 2.5 Which statement best describes your IT capabilities related to financial transaction processing?
% respondents 60% 50% 40% 30% 20% 10% 0% Non-integrated and Partially primarily legacy integrated with ERP components
Source: CFO Research Services

Today In 3 years 29%

48%

48%

29% 18% 5% Primarily ERPbased and partly integrated 21%

2% Primarily ERPbased and fully integrated

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One company that has made significant progress in automating its transaction processing is Intel. The company has created a Web-based system for handling many transactions, including supplier invoicing (see case study, next page).
■ Budgeting and forecasting. Companies have made more progress in the

area of budgets and forecasts. According to our survey, 39% of companies now have dynamic forecasts and budgets at least partly based on operational drivers, although only 14% have both a dynamic forecast and a dynamic budget based on operational drivers. In three years, 52% of companies expect to have dynamic forecasts based on operational drivers (figure 2.6). This will provide corporate decision makers with a significantly improved tool for planning. Figure 2.6 Which statement best describes your budgeting and forecasting processes?
% respondents 60% 50% 40% 30% 20% 10% 0 Budget line-item based; forecast based on static year
Source: CFO Research Services

52% 39% 27% 36%

Today In 3 years 19% 4% 8%

14%

Budget partly based on operational drivers; static forecast

Budget partly based on operational drivers; dynamic forecast

Dynamic budget and forecast based on operational drivers

■ IT for budgeting and forecasting. As with transactions, progress in budgeting and forecasting depends partly on information technology. In this area, finance functions are further behind. Today, only 4% of companies have fully integrated, web-based budgeting and forecasting tools (figure 2.7).

Figure 2.7 Which statement best describes your IT capabilities related to budgeting, forecasting, and decision support?
% respondents 60% 50% 40% 30% 20% 10% 0% Non-integrated tool for budgeting and forecasting; no decisionsupport tools
Source: CFO Research Services

Today In 3 years 26%

48% 37% 33% 13% 36%

3% Partially integrated tools for budgeting and forecasting; non-standard decision-support tools Partially integrated tools for budgeting and forecasting; sophisticated decision-support tools

4% Fully integrated webbased budgeting and forecasting tools; sophisticated decision-support tools and web-based access to information

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At the other end of the spectrum, 26% have non-integrated budgeting and forecasting, and no decision-support tools. In the future, finance executives hope to make great improvements: 36% expect to have partly integrated tools for budgeting and forecasting and sophisticated decision-support tools; 48% say they will have fully integrated, Web-based forecasting and budgeting, as well as sophisticated decision-support tools. What will it take for companies to move from where they are today to their vision of finance? In the next chapter we will examine the obstacles to transformation, and discuss how companies are overcoming them to improve the finance organization’s performance. Intel: The online finance function
As many companies backed away from their e-business initiatives after 2001, Intel continued its projects, quietly making progress toward its goal of becoming a 100% “e-corporation.” An important component of this effort has been to move the finance function online. As Leslie Culbertson, vice president of finance and enterprise services for Intel, explained, the finance function is now working to achieve totally paperless accounts payable processing within two years. The benefits of hands-free A/P The motto is “‘key-no-more in 2004’,” says Culbertson. With over 4,000 suppliers currently registered to do Web-based invoicing, the finance group of the $26 billion company is well on its way to receiving only electronic invoices from suppliers. More than half of its monthly transactions are currently paper-free. Culbertson predicts the benefits of “hands-free AP” will include more accurate data, reduced throughput time, reduced cost-per-transaction, and less human involvement in the process. The rewards will spill over to the company at large. “When we can communicate in real time on a demand-supply basis, we can reduce our inventory,” says Culbertson. The Web-invoicing project is one piece of that. In April 2001, Intel conducted a pilot of its Web-invoicing program, and completed full implementation in May 2002 (although new suppliers are coming online with the system all the time). The system currently processes 16,000 invoice transactions per month. In addition to its work on Web invoicing, Intel has co-led the open-standards group RossettaNet, which has developed XML-based standard data formats. “We didn’t want this to be a one-off [operation]. Whatever we develop has to work for other companies, not just Intel,” says Culbertson. The application has been a success, although challenges remain. For infrastructure reasons, not all suppliers—particularly those in Asia—can submit online invoices yet. “It’s just a question of where they are in the cycle of being computerized or of restrictions due to local government regulations. Some countries are far behind others,” she says. Indeed, the Intel development team spent a lot of time studying its suppliers’ invoicing procedures, in terms of both business processes and systems. Hooking up a supplier’s platform to use the XML interface to Intel’s systems is not a trivial matter. The e-transformation continues Intel’s finance function will reap the benefits of more technology-enabled advancements when the company completes its implementation of SAP’s R/3 General Ledger (GL) module early next year. The company has already implemented the customer-facing R/3 modules. This year Intel will implement a planning system. That application will be fully integrated into the SAP R/3 platform, along with the GL module. Soon, Intel will have one standard system and one set of processes deployed worldwide. “We will eliminate a lot of manual activity,” says Culbertson. “We will have standardized forecasting processes based on the single system throughout all of Intel. We’ll have more real-time data, which will let us reduce the amount of inventory we carry. Our financial reporting will be better and we’ll be much more in tune with our customers.”

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CHAPTER 3: UNDERTAKING A TRANSFORMATION The challenges of transformation
As we explained in the last chapter, most companies have not completed the transformation of their finance organizations, and only a few have reached a truly advanced level. Transformation is not a simple undertaking—it can be expensive and time-consuming, and may encounter significant cultural and organizational barriers. Our survey asked finance executives to rate the main challenges to transformation (figure 3.1). We found that most of these challenges are organizational and cultural in nature:
■ Developing personnel skills to support transformation (64% cited this as “very significant” or “extremely significant”) ■ Building senior management support (59%) ■ Acquiring the necessary enabling technology (56%) ■ Increasing business unit perception that finance should be a partner (53%)

Figure 3.1 How significant will the following challenges be to transforming the finance organization?
% responding "very significant" or "extremely significant" Developing the right personnel skills to support transformation Building senior management support Acquiring the right enabling technology Building business unit perception that finance should be a partner Aligning compensation with transformation goals Building finance employee buy-in Building a convincing business case Managing perceived risk of giving up control over transactions
Source: CFO Research Services

64% 59% 56% 53% 53% 51% 51% 29% 0% 20% 40% 60% 80%

Interviewees confirmed that these are among the major obstacles they face. The need for finance employees with analytical skills was mentioned especially often. “Ultimately, I think that the 10% or so of the companies in America that have really transformed their finance departments have done

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it by changing people,” says Kent Potter, CFO of Chevron Phillips, a $6 billion chemicals joint venture between Chevron Texaco and Phillips Petroleum. The concern of many CFOs—and what others overlook—is that even the best processes and systems will require finance employees with the background and skills to analyze the data, approach business units as customers, and provide timely analysis to drive decisions. Without the appropriate skills, even a “successful” technology or process implementation could be perceived as a failure because finance cannot demonstrate the benefits of that investment to the rest of the business. CFOs also spoke about the need for active CEO support, for technology that can deliver detailed financial information to decision makers, and for the ability to demonstrate to business unit leaders that consulting finance on important decisions will do more than merely slow down the process. This last point is especially important—the perception that finance isn’t the place to go when the business needs help making a decision may be the root cause (and the result) of many failed transformations. Additionally, many finance executives confront the natural reluctance of companies to invest in finance during an economic downturn. “We’re in an environment where we’re trying to manage costs tightly,” says Schreier of ING. “It’s not easy to make long-term investments when you are making some tough, short-term cost decisions.” Our survey revealed that the challenges vary somewhat by industry (figure 3.2). For example, companies in the chemicals/energy sector are more likely to see a need to change the rest of the organization’s opinion about finance. Figure 3.2 How significant will the following challenges be to transforming the finance organization?
High tech/Telecom Chemicals/Energy % responding "very significant" or "extremely significant" Manufacturing >60% 50-59% <50% Retail/Consumer prod.

Developing the right personnel skills to 66% 60% 65% 68% support transformation 61% Building senior management support 61% 53% 68% 65% 54% Acquiring the right enabling technology 49% 50% 60% 42% 56% Building business unit perception that finance should be a partner 47% 58% 40% 65% 51% Aligning compensation with transformation goals 49% 55% 44% 45% 60% Building finance employee buy-in 59% 53% 48% 52% 47% Building a convincing business case 49% 55% 56% 48% 49% Managing perceived risk of giving up control 31% over transactions
Source: CFO Research Services

16% 40% 23% 29%

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Financial services companies are more likely to regard aligning compensation with transformation goals as a challenge. The issue of personnel skills, however, extends across all industries. Despite evidence of slow transformation and uneven success, there are finance organizations that have overcome the barriers. Below, we discuss the approaches these companies have taken.

Three areas of observed transformation
CFOs who are transforming finance are generally concentrating their efforts in three broad areas: transforming transaction management, turning finance into a source of business intelligence to support decisions, and improving the performance management framework to link operational actions with strategic direction. 1. Transforming transaction management The most basic area of work is to alter the way a company handles transactions. There are several areas of opportunity: improving the quality and timeliness of financial information, reducing the cost of processing, and allowing a shift of resources toward analysis. Several of the CFOs we spoke with emphasized that this last opportunity is the most important. “Our transformation is not only about saving money,” says Crittenden of American Express, “it’s all about making sure we can spend more time and resources on anticipating the future and providing the opportunity for the company to be steered correctly.” Being able to devote time to the company’s future means performing transaction processes with as few people as possible, and with a greater degree of consistency. It also suggests that the business case for transformation should include cost reallocation as well as cost reduction. As we described in Chapter Two, finance executives expect to spend less time on transactions over the next three years. They also expect a dramatic move toward the centralization of these processes. Shared services will be a crucial part of making this happen. The reason is simple: by consolidating the location, processes, and technology associated with a company’s transaction processing, finance functions can achieve economies of scale, ensure a consistent process, and potentially move the entire operation offshore to take advantage of lower costs. Our survey found that 60% of respondents are considering shared services to make the cost structure more flexible; other steps include digitization (54%) and partial outsourcing (47%). While the most common activities for shared services are accounts payable/receivable, cash management, fixed asset management, and payroll (figure 3.3), some companies, such as American Express, have gone further by consolidating virtually all financial transaction processing, including functional and management reporting (see case study, page 21). While outsourcing is less common, its use is increasing. As figure 3.4 shows, the most common activities for outsourcing are generally those in non-strategic areas such as payroll, benefits, tax processes, and internal audit.

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Figure 3.3 For which of the following finance processes do you have shared services?
% respondents Accounts payable / receivable Cash management Fixed asset management Payroll General Accounting Expense reports Benefits Insurance buying Tax process Internal audit Reporting Collections Credit management Planning and budgeting Cost accounting
Source: CFO Research Services

75% 63% 61% 59% 59% 57% 57% 57% 55% 55% 54% 49% 48% 40% 38% 0% 10% 20% 30% 40% 50% 60% Today Plan to 70% 80%

Figure 3.4 Which of the following finance processes do you outsource?
% respondents Payroll Benefits Tax process Internal audit Collections Insurance buying Accounts payable / receivable Expense reports Fixed asset management Credit management General accounting Cash management Reporting Cost accounting Planning and budgeting
Source: CFO Research Services

36% 24% 18% 14% 12% 12% 11% 9% 7% 6% 5% 5% 4% 3% 2% 0% 10% 20% 30% 40% 50%

Today Plan to

60%

70%

80%

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American Express: The shift to shared services for finance
Although the idea of creating shared services for finance activities is not new, few companies have attempted a transition on the scale that American Express has. The company’s move to shared services for finance began in 1993, with the decision to centralize certain transaction processes. Since then, the company has expanded its shared services operations to all finance transactions across the corporation, tax compliance, and—more recently—reporting. According to CFO Gary Crittenden, the overriding objective for shared services is not mere cost cutting (although the company claims to have saved a great deal), but to free the core finance team to concentrate on decision-support activities. “The mantra was, let’s eliminate time that we spend on repetitive reporting and free up time so we can spend more time focusing on the business and on what the future performance of the company is going to be,” says Crittenden. Today, American Express has three shared services centers: one in Phoenix, Delhi, and Brighton, England. These operations, which have thousands of employees, supply financial information to the business unit CFOs. The advantage in sharing According to Crittenden, this change has yielded several benefits: ■ Most obviously, shared services create cost savings. These savings have come partly through reduced headcount, but also through the lower costs of operating in sites such as India. Some of the savings have been reinvested elsewhere in the finance function. ■ Second, the centralization of transaction processing and reporting has made it easier to make improvements. “It’s advantageous to move reporting out, because you can do things in a common way across the enterprise and you can afford to invest in systems which you could not afford to if you were working in a small group,” says Crittenden. ■ A third benefit has been the creation of a more visible career path for back-office employees. By adding reporting to the shared services operations, employees who begin in transaction processing can move up to reporting, and potentially to an analytical role within one of the business units. ■ Finally, having shared services operations in three parts of the world serves as a hedge against the disruption of the back office. “When September 11 happened, it would have been difficult for us to close our books had we not had reporting distributed around the world,” says Crittenden. The cultural challenge Changing the finance structure has required American Express to overcome some obstacles. The biggest challenge, particularly in the early stages, was the concern by business leaders that they would be giving up control of processing—a natural reaction, given the importance of the information coming out of the back office. According to Crittenden, overcoming this difficulty required a dedicated team to carefully map the transition and manage the switch. The success of that first shift to shared services built support for later efforts. “If the first reporting move had not worked in some way, it would have been the last reporting move for many years,” he says. More recently, the company has worked to build confidence in the shared services operations through the exchange of employees. For example, the reporting for the company’s Argentina operations is now done in India. Before moving reporting out of Argentina, the company brought some employees from India to work in the Argentina operation. Those employees returned to India, and then the company sent Argentine employees over to India for the first few closes. “We try to invest the time to make sure there’s good cross-fertilization between India and Argentina now, even after the transition has taken place,” says Crittenden.

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2. Decision support Creating a finance team that can provide analytical support to business decision makers is also a central goal of transformation. The support can range from providing the financial analysis necessary for strategy development, to providing models and tools to support more accurate, driver-based forecasting. This calls for a close working relationship between finance and the business. “We are a partner with the business units,” says Thomas O’Flynn, CFO of PSEG, a New Jersey-based energy company. “Our role is to help them think through the financial implications of their decisions.” Providing decision support calls for different skills than a CFO and the finance team were traditionally required to have. “The CFO can’t be a strategic neophyte,” says Scott Sorensen, CFO of Hillenbrand Industries, an Indiana-based health care and funeral services company. “That person has to be able to fully co-opt the vision of the CEO, view it from more of a riskadjusted perspective, and then have the ability to pivot and look at the organization and make sure there aren’t threats coming out of the operations or any area of the business that may trip up that strategy.” To provide better support to the business, many finance functions are creating decentralized decision-support teams that work within the business units and are coordinated and supported by the central finance function. Most transaction processing is consolidated in shared services centers, and an integrated IT system allows finance analysts at the local level to work with the same data that is available at the corporate level. Chevron Phillips recently implemented such a structure. Each business unit has a finance group that serves as a member of that unit’s management team and reports to the business vice president. To ensure consistency, one member of each finance group sits on a central management committee with the corporate CFO. The finance groups perform a range of services for their business units, including budgeting for capital allocations and analytical reviews for capital investment decisions. According to Kent Potter, the objective is to completely integrate these decision-support groups into the businesses. “It has taken away the labels of accounting and finance department so that they have become part of the business units,” says Potter. This connection to the business units can be reinforced with employee compensation. At American Express, 70% of decision-support employees’ goal is based on how successful they have been in supporting their business units’ objectives. 3. Strategic performance management One of the quickest ways to be accepted into the company’s circle of strategic decision makers is to know what factors drive shareholder value. This knowledge — demonstrated with a well-defined, linked set of indicators that model and predict changes in market performance—can arm a CFO with a unique, fact-based perspective on strategic decision making. The ability to do this typically goes hand-in-hand with a finance transformation: senior management needs real-time access to consolidated financial information from across the organization, and the finance organization needs the skills

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and the tools to create and maintain an effective performance management system. One company that recently implemented a new performance management program is Hillenbrand Industries. Prompted by a desire for better internal visibility and the need to provide better guidance to investors, the CFO led an effort to identify the metrics that provide the best view of the company’s current situation and likely future performance (see case study, next page). On a related topic, the use of value-based metrics (e.g., EVA, RAROC, etc.) tends to be more pervasive in organizations with a transformed finance function. However, this does not suggest that financial indicators are the only factors that CFOs are concerned about when it comes to influencing market performance. In fact, nearly 60% of CFOs believe that “intangibles” such as ability to execute strategies and corporate leadership capabilities can have a significant impact on shareholder value. Part of the challenge in implementing a good performance management system is deciding how best to present the information. Allergan has devised a relatively simple way of allowing the executive committee to gauge the businesses’ health. According to CFO Eric Brandt, he tracks the progress of each of the company’s five businesses and each of four regions with a 20-box grid. The goal is to display the second derivative of the growth rate—in other words, whether growth is accelerating or decelerating. If the growth rate drops from that previously forecasted by more than one point, the box is colored yellow. If it drops by more than one point for two forecast periods, the box is colored red. If the rate meets or exceeds the original forecast, it is colored green. Senior management reviews the growth rates quarterly, but changes in revenue and pre-tax earnings are updated weekly to provide estimated quarterly results.

Overcoming finance transformation barriers
As discussed previously, obstacles to transformation exist and tend to be similar across industries. As the experience of leading finance functions shows, however, there are ways to address and overcome these barriers. The remainder of this chapter describes methods CFOs have used to overcome their top four barriers: building the necessary employee skills, implementing the right enabling technology, building business unit support, and ensuring senior management support. 1. Building the necessary employee skills Finance executives regard the development of finance employee skills as one of the major challenges of finance transformation. The problem is clear: for the traditional finance organization, the ideal employee is one who is skilled in the administrative (and often manual) aspects of finance transformation. An employee whose focus is on analysis and decision support requires very different skills, including the ability to think strategically, to apply finance expertise to different business situations, and to build strong relationships across the organization. Few companies have such skills today. As one CFO put it: “Most companies have very good skills for the business problems of yesterday.”

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Hillenbrand: Transforming performance management
When Scott Sorensen joined Hillenbrand industries as CFO in February 2001, many of the company’s financial-oriented processes were outdated, overly complex, and producing data rather than insights. Because of a legacy of highly autonomous business units and little standardization of policy, the Indiana-based healthcare and funeral services company had various customized IT systems, including nine accounts payable systems. Each business had its own set of metrics, few of which captured the ultimate drivers of financial results. In the late 1990s, senior management’s view of the firm’s consolidated financial performance was so limited that Hillenbrand failed to offer any earnings or financial guidance to shareholders. “When something would happen or a trend would begin in one of the businesses that would ultimately manifest itself in a revenue or cost issue, it took so long to have visibility that the implications would simply slam you in the face,” says Sorensen. A performance scorecard Fred Rockwood became CEO of Hillenbrand in December 2000, just two months before Sorensen joined Hillenbrand. He asked Sorensen to devise a new planning and performance management process for the company. The goal was to create a process to improve the company’s strategy execution. The centerpiece was a scorecard that would be updated in real time and that would allow the company’s leaders to set priorities quickly and drill down on any issues that call for more analysis. Over three months, the financial organization worked closely with the planning organization and business unit heads to develop the new system. The team identified financial and non-financial measures for all of the main factors affecting the implementation of strategy. To avoid an excess of measures, Sorensen limited the number to roughly 30 per business, and 20 consolidated at the corporate level. The measures are grouped in four cascading levels: 1. Financial: High-level financial metrics such as revenue growth, asset utilization, and profit margins 2. Customer: Metrics such as customer retention and revenue from key customers 3. Process: Measures for activities such as manufacturing, logistics, research and development, and sales 4. Organizational learning: Measures of talent redeployment and business transformation activities Implementation The first step in the implementation was to ensure that the CEO would be the project’s main champion, since the project extends well beyond the finance function. Sorensen also needed to obtain the support of the business unit managers. In general this wasn’t difficult, since managers recognized the advantage in creating a consistent set of metrics that accurately reflected the business’ performance. Nevertheless, the new system required a cultural adjustment. “A lot of people weren’t used to having this sort of information shared,” says Sorensen. The new scorecard indicates business units’ performance along 30 measures in green, yellow, and red. “If you have a red, it’s obvious. The tool brings instant visibility to the data, and requires accountability to say ‘I know that’s my problem; I’m going to fix it.’” Sorensen emphasizes that while technology plays an important role in the new management process, Hillenbrand is in the midst of an ERP implementation and therefore the process is not dependent on future systems or technology. “The real trick to getting it right is doing enough thinking upfront and then getting agreement that this is what we’ll measure and this is how we’ll measure it, rather than having it dependent on a huge technology investment.”

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Ultimately, the solution involves some combination of new hires and retraining. Many CFOs are skeptical about broad retraining efforts, however. They say that the capabilities required for more value-added work are sufficiently different that usually a new type of employee is called for. “You may have a really good accounting manager, but is that guy really set to be an assistant treasurer?” asks Potter. “I think if you’re truthful, the answer is often no.” Chevron Phillips’ model is based on targeted hiring as well as development. The company targets mid-career professionals with an MBA and a deep background in both the operations and commercial sides of the chemicals business. Potter cautions that one danger for companies planning a transformation is that the company will hire skilled financial analysts too quickly—if finance lacks a seat at the decision-making table, these skilled employees may be insufficiently challenged. Other companies put more faith in development. Intel, for example, has a project underway to develop its finance employees’ skills. This includes building leadership abilities, and training people to think strategically. According to Leslie Culbertson, VP of finance, changing the way finance operates requires people at all levels of the function who can help drive change. Additionally, finance needs employees who can communicate with other parts of the business. “A big piece of this is the ability to have a good network inside the company and working relationships with the rest of the senior managers within the corporation so that you’re viewed as a supportive role, helping the business make the right call.” 2. Implementing the right enabling technology Technology is an important building block of a successful finance transformation. However, there are three key items to consider regarding technology. First, technology itself is not the solution—it enables the solution. Second, an integrated and efficient underlying technology infrastructure is not effective if management can’t quickly extract the information that it needs to run the business. Finally, technology is only as good as the data it manipulates. ■ Technology enables the solution. The first point to bear in mind is that, ideally, process redesign should precede the implementation of new technology. This helps ensure that the technology supports the goals of transformation instead of becoming a major constraint. “You have to do the thinking upfront rather than investing in the infrastructure first,” says Sorensen of Hillenbrand. “Implementing technology before doing your homework spells disaster.”
■ Technology must give management timely access to key financial data.

Most CFOs we spoke with are undertaking a new technology initiative. The ultimate goal in most cases is to provide the CEO, CFO, and other leaders with a fuller, more consistent view of the data. The foundation technology is often an integrated suite of ERP and/or best-of-breed point solution technologies. Leading companies are also focusing efforts on providing their management with quick access to key financial and operational metrics, ideally through a Web-based, user-defined dashboard or portal. For example, American Express has a real-time dashboard of the company’s key financial metrics that allows the finance executive to instantly drill down on different

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aspects of the data. While survey results suggest that few companies have this advanced capability today, many aspire to within the next three years. Similarly, Converium, the Swiss reinsurance giant (formerly Zurich Re) is building forecasting capability on top of its SAP global finance platform. According to Martin Kauer, group CFO, the goal is to move away from a point forecast to one that is closer to a probability distribution. The system will also allow scenario planning. For example, if the Euro declines 10% against the U.S. dollar, how will that affect the quarter’s forecast? Or what happens if the current low interest rate environment continues? How will that affect the net bottom line when money must be reinvested at lower interest rates?
■ Technology is only as good as the data it manipulates. The adoption of a

single system throughout the corporation is important, but a common system must be coupled with established data standards and processes to ensure data consistency. According to Kauer, this is largely a matter of education— making sure employees at the local level understand why data quality and data consistency are essential for the company’s consolidated financials and for the accuracy of forecasts and plans. 3. Building business unit support The implications of finance transformation extend beyond the finance department itself—many company-wide business processes will change as will the relationship between the business units and finance. This can produce resistance from the business units. For instance, if finance is centralizing transaction management, business unit CEOs may be reluctant to give up direct control, since such processes are crucial for the success of their operation. If the CFO implements new corporate metrics, business heads may be unwilling to give up the way they have been able to view their own reports. And then there is transparency—a good transformation program provides corporate management with an uncomfortable degree of insight into the real performance of operating units. The key to creating business unit support, say CFOs, is to show what value the program will bring to them. This includes a better view of the business’s performance drivers, a lower cost of finance (or at least a higher value for what is being spent), and customized support from the function. 4. Ensuring senior management support CFOs believe that the active support of the CEO and board is essential. Gaining this support will require the CFO to present a compelling business case: how much money can be saved, how much data quality and service will improve, how this will better enable customers to do business with the company, and how much better managers will be able to understand the current situation and forecast future performance. “A business case is imperative, because you have to go through the discipline of seeing where the benefits are going to be,” says Sorensen. “Some benefits are clearly economic, some of them are strategic, while others are so-called softer benefits, which are harder to quantify but vitally important. You owe it to your colleagues and senior management to present a well thought out and documented business case so that everyone’s expectations are clear.”

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A business case calls for the ability to measure the results of transformation. For certain aspects of the effort, this is not difficult. Traditional measures of finance efficiency, such as FTEs per million in revenues or finance expenditures as a percentage of revenue, may be sufficient for this purpose. But the deeper value of transformation—which includes the ability to forecast more quickly for longer periods, better visibility into the sources of shareholder value creation, and an improved ability to steer the corporation in response—is much harder to quantify. How do you capture the quantitative benefits of avoiding earnings surprises? At least, say executives, such improvements should be demonstrated qualitatively. Intel has tried to be more rigorous about quantifying finance’s strategic contribution. According to Leslie Culbertson, the finance function presents cash-savings and ROI calculations of projects for its regular review with the CEO. In addition to cost per unit of output for finance, the organization also captures the value of the decisions finance has influenced by assigning a dollar value to the outcome of those decisions. “It’s pretty easy for us to quantify the opportunities we influenced,” says Culbertson. “Last year, we were able to influence over $1 billion.”

Conclusion
Finance departments are in the midst of a slow transformation journey. Although the ideas behind finance transformation have been with us for over ten years, surprisingly few companies have made true progress. Judging from the handful of companies that have transformed, the results are worth the effort. These companies report not just a lower cost of finance but, more importantly, a greater strategic contribution from finance. Although CFO priorities have shifted over the past year, finance transformation has not taken a back seat. In fact, for some companies it has taken on a new urgency. Many of the most pressing issues CFOs face—including pressure for greater reporting transparency and requests from the CEO for better instruments to steer the company—all depend on enhancing finance’s capabilities in a range of areas. Success requires that CFOs overcome a number of obstacles. Most prominent are the cultural and organizational challenges, including developing new skills among finance employees, and convincing business unit heads and corporate senior management to support the project. The good news is that successful transformation efforts acquire their own momentum. As Gary Crittenden of American Express explained, each successive move the company made to consolidate transaction processing and shift finance to a decisionsupport footing met with more support as business leaders began to see the value the change was creating. The greatest challenge for many companies will be to make that first move.

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