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Cfos:: Driving Finance Transformation For The 21 Century
Cfos:: Driving Finance Transformation For The 21 Century
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
■ 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.
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.
TABLE OF CONTENTS
Executive Summary 2
Chapter 1: The CFO’s Changing Agenda 4
Close up: CFOs Respond to Corporate Scandal 7
Chapter 2: Finance’s Current and Future State 8
Case Study: Intel 15
Chapter 3: Undertaking a Transformation 16
Case Study: American Express 20
Case Study: Hillenbrand Industries 23
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.
Notable findings:
■ 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.
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 funda-
mental 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 conduct-
ed 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 manufactur-
ing (19%). Other well-represented industries include retail/consumer prod-
ucts, 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.
Figure 1.1
What priority does your finance group currently apply to the following issues?
% responding "high priority" or "highest priority"
Overcoming barriers to
transforming finance 49%
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.”
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
Retail/Consumer prod.
% responding "high priority" or "highest priority"
High tech/Telecom
Chemicals/Energy
>70%
Manufacturing
50-69%
<50%
Financial
Accuracy of earnings and revenue forecasts 84% 76% 84% 77% 81%
Modeling the drivers of shareholder value 39% 50% 36% 52% 38%
But few finance executives report plans to change the way they handle exter-
nal 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 communica-
tions with Wall Street analysts. In fact, only 17% of respondents indicate that
they feel significant pressure to change the investor relations function.
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.
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 expecta-
tions. 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.
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
■ 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
■ 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”.
Figure 2.1
46%
17%
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 corpo-
rate revenues.
■ 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
are more error-prone and prevent senior management from having an up-to-
date, enterprise-wide view of the firm’s financial situation.
Figure 2.4
Figure 2.5
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).
Figure 2.6
Figure 2.7
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 trans-
formation, and discuss how companies are overcoming them to improve the
finance organization’s performance.
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.
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.”
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:
Figure 3.1
How significant will the following challenges be to transforming the finance organization?
% responding "very significant" or "extremely significant"
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
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 execu-
tives 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
Retail/Consumer prod.
% responding "very significant" or "extremely significant"
High tech/Telecom
Chemicals/Energy
>60%
Manufacturing
50-59%
<50%
Financial
Developing the right personnel skills to 66% 60% 65% 68%
support transformation 61%
Acquiring the right enabling technology 49% 50% 60% 42% 56%
Managing perceived risk of giving up control 31% 16% 40% 23% 29%
over transactions
Source: CFO Research Services
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.
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.
Figure 3.3
For which of the following finance processes do you have shared services?
% respondents
Accounts payable / 75%
receivable
Cash management 63%
Payroll 59%
Benefits 57%
Reporting 54%
Collections 49%
Source: CFO Research Services 0% 10% 20% 30% 40% 50% 60% 70% 80%
Figure 3.4
Which of the following finance processes do you outsource?
% respondents
Payroll 36% Today
Plan to
Benefits 24%
Collections 12%
Expense reports 9%
Credit management 6%
General accounting 5%
Cash management 5%
Reporting 4%
Cost accounting 3%
Source: CFO Research Services 0% 10% 20% 30% 40% 50% 60% 70% 80%
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.
■ 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.
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.
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 strate-
gic 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 risk-
adjusted perspective, and then have the ability to pivot and look at the organ-
ization 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.
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.
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:
2. Customer: Metrics such as customer retention and revenue from key customers
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.”
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.”
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.”
■ 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.”
aspects of the data. While survey results suggest that few companies have this
advanced capability today, many aspire to within the next three years.
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.
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.
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.