FINANCE

Is Finance Wasting its Time?

Mar. 1, 2006

Editor’s note: The following is an excerpt from “Shifting Sands: Focusing Finance in the 21^st Century,” an original paper by David Axson and Greg Hackett and the first in the “Innovation in Action” series published by the Cognos Innovation Center for Performance Management™. Both Axson and Hackett are advisors to the Cognos Innovation Center.

Shifting Sands: Focusing Finance in the 21^st Century

By David A. J. Axson and Gregory P. Hackett

Over the past 15 years, finance has embarked on a much-needed turnaround from being unresponsive bean counters processing lower-value transactions and enforcing controls. Dissatisfied with being seen as expensive overhead, finance laid ambitious plans to operate more efficiently, refocus on higher value-added activities, and contribute as a true business partner.

That vision has only been partially realized. True, costs have declined and productivity has improved. In 1990, finance cost the typical company 2.2 percent of annual revenues; today that cost has dropped to 0.75 percent—a 66 percent reduction.

But looking more closely at the results reveals that transaction processing still accounts for two-thirds of finance work, unchanged over more than a decade. The job is only half done. Finance has not switched gears. The liberated resources were not redirected. Finance is still largely viewed as overhead. The bean counter image reigns.

Finance should not be in the business of transaction processing or management reporting in the 21^st century. Instead, it should be focusing exclusively on the shifting sands of organizational survival.

The tough battle for corporate survival

If the life cycle of a corporation were plotted on a standard bell curve, at any given time, only about 15 percent of companies would be in their ascendancy—today’s innovators and leaders. An additional 25 percent sit at the top of the bell, mature (and stagnating). The remaining 60 percent are encumbered by moribund products or markets and are in decline. Finance is best positioned to sound the wake-up call. But it cannot do this if its focus is on the wrong thing: processing transactions and reporting results.

Missing profound external changes

Unexpectedly, it is not poor execution that endangers organizational survival. There are two threats. One is external tumult, the other relates to management practices.

Very often, companies stagnate, decline, or die because they minimize or miss profound external changes. The factors are many. New competitors gain strength, and old ones deteriorate. Product life cycles compress. Innovation is stifled. Channels evolve. Demographics shift, and customer loyalty is tenuous at best. Stakeholders are increasingly active and vocal.

Such issues do not emerge overnight. But the cumulative effects across time are not noticed by companies because no one inside is answerable for watching. Unquestionably, individual issues are monitored in pockets of the company, but no one department or function is observing external factors holistically to assess their implications on the health of the company. Then a cascade of dominoes stuns—and wounds or kills.

Companies miss the danger signs for a number of reasons. For one, the challenge of running day-to-day operations is so great that little time is left to look outside. In addition, management and stakeholders have a short-term focus. No one has responsibility for understanding the environment—no one internal organization has ownership. No early warning mechanisms exist. Useful, actionable information on external factors is scarce, with no systematic collection and no one dedicated to its analysis.

A new management model needs to emerge

Virtually everything must change. There are seven critical steps companies must take to ensure the longest survival:

Stop all incremental process improvement efforts.
Initiate the outsourcing of all transaction processing and administrative work.
Establish a risk-based early-warning system, to recognize major threatening trends that take years to emerge and to assess the degree of exposure to the business.
Radically refocus performance reporting and analysis on relationships and linkages; rebalance measures in terms of leading, lagging, internal, and external information.
Gut the annual planning process so that it takes less effort and time and yields better results.
Recapture intuition as a factor in decision-making, utilizing scenarios and identifying the first signs of flawed decision-making.
Re-energize the corporate culture in terms of risk acceptance, contemplation of failure as well as success, market sensitivity, intuition, and internal dialogue, debate, and discovery.

Finance needs to be the vanguard in bringing these changes to the organization—and cannot get started too soon.