the renewed finance function

8/14/2019 The Renewed Finance Function

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The Renewed FinanceFunctionExtendingPerformance ManagementBeyond Finance

A report prepared by CFO Research Services in collaboration with SAP


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The Renewed FinanceFunctionExtendingPerformance ManagementBeyond Finance

A report prepared by CFO Research Services in collaboration with SAP


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The Renewed Finance FunctionExtending Performance Management Beyond Finance is published by CFO Publishing Corp.

253 Summer Street, Boston, MA 02210. Please direct inquiries to Jane Coulter at 617-345-9700, ext. 211 or

[email protected]. At CFO Research Services, Elaine Appleton Grant conducted the interview program and wrote the

report. Sam Knox directed the research and managed the project.

CFO Research Services is the sponsored research group within CFO Publishing Corporation, which producesCFO magazine in the United States, Europe, Asia, and China. CFO Publishing is part of The Economist Group.

November 2007

Copyright 2007 CFO Publishing Corp., which is solely responsible for its content. All rights reserved. No part of

this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without

written permission.


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1

Contents

About this Report 2

Executive Summary 3

Chapter 1: The Strategic CFO 5

Chapter 2: The New Role: A Holistic Leader 11and PartnerNot Merely a Technician

Chapter 3: Standardizing and Streamlining 17

Chapter 4: Conclusion 24

Sponsors Perspective 25


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About this Report

In August 2007, CFO Research Services (a unit of CFO

Publishing Corp.) launched a research program to

explore the ways in which the role of the finance team

has changed in recent years due to increased oversight

from regulators, more active investors, and company-

specific changes in business operations.

We wanted to better understand the internal and exter-

nal forces that are causing these transformations and the

steps that companies and their finance teams are taking

to respond to these forces. This research program

which includes an electronic survey and a series of inter-

views among senior finance executivesfinds that the

finance team is indeed under new pressure from more

demanding external stakeholders. This pressure, espe-

cially from regulators, has prompted finance teams to

document and often repair core finance and operating

activities.

But companies arent in business just to comply with

regulations. They are in the business of making valuable

products, rendering high-quality services, serving

customers, and generating value for shareholders. Amid

a marked increase in investors expectations from com-

panies and their finance teams, executives in this studyshow new enthusiasm for closer collaboration with

business unit management in an effort to improve

business performance and lessen risk. By doing so, they

will contribute to the core business activities that

satisfy customers and shareholdersas well as stake-

holders such as regulators, business unit managers, and

employees at large.

This report presents the findings of our online survey of

255 senior finance executives and in-depth interviews

with executives at the following companies:

ABB

Bank of Montreal

CB Richard Ellis Group, Inc.

Cengage Learning (formerly Thomson Learning)

Cleveland-Cliffs, Inc.

CMA CGM (America) Inc.

Cox Communications, Inc.

Levi Strauss & Co.

MGM Mirage

Silgan Plastics Corp.

Turbocam

Verigy Ltd.

Wyndham Worldwide Corporation

Executives at several other companies in North Amer-

ica, Europe, and Asia that

asked not to be cited by name in this report

CFO Research Services and SAP developed the hypotheses

for this research jointly. SAP funded the research and

publication of our findings, and we would like to

acknowledge Erin Halfnight, Barbara Dischner, and Jim

DAddario for their contributions and support. At CFO

Research Services, Elaine Appleton Grant conducted the

interview program and wrote the report. Sam Knox

directed the research and managed the project.

NOVEMBER 2007 2007 CFO PUBLISHING CORP

The Renewed Finance Function2

Pressure from more demandingexternal stakeholders has prompted finance

teams to document and often repair corefinance and operating activities.


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2007 CFO PUBLISHING CORP. NOVEMBER 2007

Extending Performance Management Beyond Finance

Executive Summary

These are demanding times for senior finance executives.

Investors want higher returns. Regulators require more

complete documentation of companies compliance with

stricter requirements. And in the face of stiffer market

competition, business managers want more capital to

invest in the business and more assistance in making

investment and operating decisions for their increasingly

complex businesses.

Companies and their stakeholders have always had high

expectations for their finance teams. But this research

program reveals that, most recently, these pressures

from regulators, from investors, and from competitors

are pushing companies to look for more from their

finance teams in two main, but often conflicting, areas.

Regulatory pressures, especially the Sarbanes-Oxley Act,

push finance teams toward more rigor in their transac-

tional duties of controllership and financial reporting. At

the same time, competitive pressures, demands from

line-of-business management, and higher expectations

from investors pull finance executives toward a more

active role in setting, validating, overseeing, and ensuring

execution of business strategy.

The need for finance executives to play a greater role in

business performance management creates the demand

for new and different skills among finance management

and staff. To use these skills, finance executives need

technology and systems that often go beyond standard

transaction processing and core accounting. And finance

executives need a cultural mandate from business and

functional management to work collaboratively on

improving performance.

Sources interviewed for this study are voluble on the

importance of the finance function playing a higher-value

role. One CFO says, I think the business environment

is absolutely demanding it. When you think about the

financial returns from the stock market in the last ten

years, theyve been extremely attractive. Now, CEOs are

actually seeking out more financial guidance and part-

nering because its harder to drive superior shareholder

return. He continues, As we look at the next ten years,

its not going to be as easy to drive that type of produc-

tivity and value creation. So, I think most businesses are

longing for that strategic partner and the insights, so

that they can make better decisions, drive transforma-

tional productivity, and ensure theyre choosing the right

strategies.

Whether or not finance embraces an emerging mandate

to contribute more fully to performance management,

the finance function remains responsible for companies

core transaction processing, financial reporting, audit

management, and other traditional controllership

activities. The demand to keep transactional processes

running with close control, improve their efficiency, and

lower their cost pushes finance into a continual evolu-

tion of its processes and systems. This evolution inprocessessometimes gradual, sometimes rapid

allows the finance team to standardize, streamline, and

simplify routine transaction processing. Companies are

then able to execute routine activities more quickly and

with fewer errors, to free up finance executives time to

act as a partner to the CEO and operational leaders, and

to provide better and faster information for competitive

decision making throughout the corporation.

When you think about the financialreturns from the stock market in the last ten

years, theyve been extremely attractive. Now,

CEOs are actually seeking out more financial

guidance and partnering because its harder to

drive superior shareholder return, says one

CFO interviewed for this report.


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Key Findings The role of the finance function is changed by three

things: Regulations on the one hand, with competition

and investor expectations on the other. As a result, the

finance function is pulled in two directions.

Most finance executives seem to agree that as the role

of the finance professional becomes more strategic,

the skills of the new finance employee must become

broadermuch like those of a CEO, without diluting the

technical skills of finances traditional controllership

role. Finance leaders in this study call for business schools

and company-run training programs to provide their

finance and operating executives with a broader base

in both finance and business support skills.

As the opportunity for top-line growth slows, growth in

profitability becomes a more important source of value,

and information to support decisions made by operations

and functional managers becomes critical.

Companies that have elevated CFOs to strategic leadership

positions have done so in part to satisfy the needs of

stakeholders, such as investors. CFOs can speak their

language.

In order for finance to play a greater role in driving

business performance, say executives, it needs to

collaborate more closely with business unit and line

management. A majority of respondents say such

collaboration is underwayalthough its not without

challengesat all levels of the organization, including

partnerships with the CEO and Boards of Directors.

While respondents in this study say the finance function

often has broad credibility with business unit managers,finances assessment of operations managers

understanding of finance is far less favorable. Finance

executives report that business unit managers do not

understand the world of finance as well as they should.

Moreand more formalizedfinancial education for

business unit managers would help finance executives

have better internal dialogue about performance.

In response to regulatory and internal requirements

companies have focused on documenting, standardizing

streamlining, and automating their accounts receivable

(A/R), accounts payable (A/P), and other core financia

processes. More than half of the companies in this study

have completed or are currently executing projects to

standardize their charts of accounts, to streamline their

financial close processes, or to simplify/standardize

core finance processes. However, while large-scale

investments in enterprise IT systems are commonplace,

current or recent technology projects are less likely to

be dedicated to automating regulatory compliance or

to measuring and managing risk.

Finance executives are also seeking to distribute

performance management systems to a broader

coalition of decision makers. In many cases, they are

pushing performance management and measurement

systems out into their organizationsthus, distributing

financial and operating information in an effort to allow

business and functional managers to make more timely

decisions in extraordinarily competitive markets.



The role ofthe finance function ischanged by three things: Regulations on the

one hand, with competition and investor

expectations on the other. As a result, the

finance function is pulled in two directions.


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Chapter 1: The Strategic CFO

Over the last decade, finance executives have evolved

from serving primarily as chief accountants to becoming

more closely engaged with business unit managers.

Rather than focusing on keeping a historical record of

company activity and performance, CFOs and their

teams are providing advice, counsel, and decision sup-

port to business managers on a broader array of finan-

cial and operating activities. While the role of the finance

team varies with the unique requirements of each com-

pany, executives in this research program affirm that

business activities and the role of the finance function

have been altered in recent years by shifts in their com-

petitive environment, increased complexity of business

operations, and investors scrutiny of company performance.

Accordingly, they aspire to contribute more materially

to developing business strategy. (See Figure 1.)

At the same time, regulatory oversight has weighed

heavily on companies in recent years. In this survey of

more than 200 senior finance executives, fully 38 percent

of respondents said regulatory compliance require-

ments (e.g., SEC regulations, privacy, security, environ-

mental, trade, labor, and other regulations) had a dra-

matic impact on their companies business activities in

the last two years. Although we are now five years

beyond the passage of Sarbanes-Oxley, and most com-

panies have concluded their initial investments and

internal controls assessments, the stringent audit

requirements of Sarbanes-Oxley still draw finance teams

away from activities that support decision making

and presumably generate value for customers and

shareholders.

There are two forces over the last few years that have

been pulling in opposite directions, says Laurie Brlas,

chief financial officer of Cleveland-Cliffs, Inc., a $1.9 billion

mining company in Cleveland, Ohio. I think Sarbanes-

Oxley has pushed finance executives to be less strategic

and more control focusedkind of the cop, she says.

On the other hand, she adds, most folks recognize that

the skill set and the approach that a finance executive

brings to the table are very valuable in strategic decision

making, so companies are always pulling in that direction.

The Recent Effects of Sarbanes-Oxley



The stringent audit requirements ofSarbanes-Oxley still draw finance teams away

from activities that support decision making

and presumably generate value for customers

and shareholders.

> Figure 1. Survey respondents seek a greater role indeveloping business strategy.

Our finance team seeks to play a more active role indetermining business strategy.

Percentage of all respondents

Disagree stronglyDisagree somewhat

Neutral Agree somewhat

Agree strongly

46%

40%

10%

3%


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The tension between these two rolesstrategy and con-

trollershipis significant. At the minimum, it can stretch

resources thin. At the extreme, it can go so far as to con-

tribute to decisions to cast off the burdens of Sarbanes-

Oxley altogether. Until six weeks ago, I would have said

what kept me up at night was interacting with our exter-

nal auditors to get compliant with Sarbanes-Oxley, said

a finance executive at a food-service conglomerate earli-

er this year. He calls the Sarbanes-Oxley work a night-

mare: We were not allowed any incremental resources.

We had to basically come under compliance with the

existing resources that we had. But this summer, the

food-service conglomerate delisted from the NYSE, in

part to escape the onerous Sarbanes-Oxley requirements.

Still, it will take some time for their finance department

to overcome the effects of those resource constraints, the

finance executive says, because Sarbanes-Oxley forced

the finance team to lessen its role guiding operations

management in strategic decisions and moved it into a

more nuts-and-bolts control function, a move that he

says has been a point of contention.

Other finance executives working for U.S. public compa-

nies also say the Sarbanes-Oxley compliance require-

ments have reduced their abilitiesbut not the desire

nor the needto contribute to developing, executing,

and measuring business strategy. Meeting Sarbanes-

Oxley compliance without adding to staff has challenged

his team, says Rick Arpin, vice president of financial

accounting for gaming company MGM Mirage in Las

Vegas. A project comes up and we say, Whos going to

do this project? Whos going to look at this changing

environment? Whos going to look at this deal we might

do? And all the finance and accounting people are busy

doing flowcharts and the other work that needs to be

done for 404, he says. Mr. Arpin adds that in the lastyear the initial work for Sarbanes-Oxley compliance has

abated somewhat, and, as a result, the finance and

accounting group has been able to reassign some Sar-

banes-Oxley compliance duties into other areas of the

company, and has been able to take on more strategic

projects as a result.

However, the impact of Sarbanes-Oxley and other regulato-

ry regimens may not be entirely negative, say some execu-

tives interviewed for this study. Sarbanes-Oxley has had a

lasting impact on the way we run our finance back office

all the way from a more robust audit program to more dis-

closure in our forms 10K and 10Q, says Gil Borok, executive

vice president of finance at CB Richard Ellis Group, Inc

(CBRE), a large commercial real estate services company

with operations in 50 countries. He continues, Theres

always the argument that the costs dont justify the bene-

fits, but there are some good things that have come of it. It

has made us function differently. The demands have gone

up significantly. I think its overall good, overall positive.

While Compliance RequirementsMount, Markets Mature and BecomeMore CompetitiveThe rigors of Sarbanes-Oxley aside, more than one-third of

survey respondents and many of the executives we inter-

viewed for this study say that a shifting competitive environ-

ment has had a dramatic impact on their companies in recent

years. Globalization (of capital, labor, information, and sup-

ply chains), new competitors, industry maturation, and M&A

each have increased the pace and intensity of competition in

many industries. And in response, companies are turning to

their finance teams as strategic advisors to help develop busi-

ness strategies, manage risk more effectively, and extract

organic growth from current lines of business.

The trends have to do partly with globalization, which in

turn has spurred on the need for discovery of where the next

incremental growth and shareholder value will come from,

says Ashish Gupta, vice president of pricing and business ini-

tiatives for Cengage Learnings Academic Group. Industries

mature and consolidate, so the top-line growth from just rev-

enue and business as weve known it in the past cannot con-tinue at the pace it used to in most industries. Mr. Gupta

argues that in many industries, finance executives work to

bring business unit management to the table. Growth does-

nt have to always come from top-line sources. Sometimes,

its the traditional sales channel or could be alternative sales.

It could be different ways of structuring your business to get

to the desired target.




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The maturing gaming industry provides a case study.

Because the industry is crowded with casinos, gaming

companies are beginning to look elsewhere for growth,

cash flow, and profits. For instance, rather than using any

available real estate to build casinos, companies such as

MGM Mirage are experimenting with other value-creation

models. So theres an option analysis, I guess you might

call it, of What should we actually do with these assets

and is there a better way than just owning and operating

a casino resort? Mr. Arpin explains. Should we own

and operate a mixed-use development? Should we

partner with someone to do a project? Should we

master-plan the property like a real estate company?

As the questions become more complex, MGM Mirage

looks to its finance team to help determine which options

will create the most value in the future, Mr. Arpin says.

Other finance executives, such as Bill Fitzsimmons, vice

president of accounting, financial planning, and analysis

at Cox Communications, Inc., find themselves in similar

positions. For the last several years, the Atlanta-based

cable company acquired market share as fast as it could.

Now, though, markets are becoming saturated; the pool

of prospective customers from which to draw is shrink-

ing; and voice, cable, and data service providers are

muscling in on each others markets. As a result, the

whole telecommunications industry is scrambling for the

same customers. Mr. Fitzsimmons says, Its going to

cost more to acquire [new customers]. Weve got to real-

ly understand our costs of acquisition, whereas in the

past that was not as important as just managing volume

growth. As the competitive landscape becomes more

complex, operating decisionsfor instance, how much

to spend on marketing to these scarce customers, for

what return, and so onbecome more difficult to make

and require a greater depth of financial input, such asanalysis of marketing campaign costs versus the

ultimate payback thats associated with that kind of

campaign, including the monthly revenue generated by

new customers. The nature of our industry is getting

more competitive and so theres a greater reliance on the

role of finance as an advisor, Mr. Fitzsimmons says.

Additional competition from globalization, new market

entrants, or industry maturation puts pressure on prices

and margins. And as the opportunity for top-line growth

slows, growth in profitability often becomes a more

important source of value. With this in mind, many

finance executives are seeking to provide more up-to-

date information to operating managers in an effort to

support better decision making. Such decisions vary

broadly, of coursefrom near-term tactical spending on

marketing programs, to headcount, to investment and

asset allocation decisions.

At the American subsidiary of CMA CGM S.A., a multi-

billion dollar privately held container-shipping company

headquartered in Marseilles, France, senior vice presi-

dent and chief financial officer Jim Arnold is driving activ-

ities to shrink costs. We have a lot of rate pressure in

the shipping industry, and competition caused rate

decreases last year, he says. To help pull costs out, the

new CFOhes been there for a yearis sponsoring a

data warehouse project that, along with new perform-

ance dashboards, will allow operating executives

throughout the company to make decisions about

shipping and inland transportation routes, pricing, andsourcing much faster than theyve been able to

previouslyactivities that should improve both margins

and competitive position.



As the opportunity for top-linegrowth slows, growth in profitability often

becomes a more important source of value.

With this in mind, many finance executives

are seeking to provide more up-to-date

information to operating managers in an

effort to support better decision making.


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Industry maturity and margin erosionalong with

access to capitalcan breed M&A activity, as compa-

nies constrained in stalling markets look to acquisitions

for growth or fall prey to others acquisition strategies.

Opportunities for mergers and acquisitions and the need

to make deal decisions quickly also transform the role of

the finance executive; many of the executives we spoke

with were deeply and regularly involved in analyzing deal

opportunities. Some were new to organizations that had

recently been spun out of larger companies; others were

brought on to help initiate acquisition processes or inte-

grate recent purchases. While the circumstances of each

executive we interviewed are different, the finance func-

tion plays a pivotal role in M&A targeting, evaluation,

and structuring in nearly every instance.

Derek Schmidt, chief financial officer of the Plastic divi-

sion at Silgan Holdings, Inc., a $2.7 billion manufacturer

of metal and plastic food containers, explains how the

maturation of his companys industry drives both acqui-

sitions and an expanded role for the finance function.

The plastics [market] is very fragmented, and theres a

substantial amount of consolidation happening.

Organic growth in our industry is typically lower single-

digits, so acquisitions represent a viable option to grow

more rapidly. As we start to look at acquisitions, not onlydo we look for [cost] synergies, but we look at whether

we can expand our geographical capabilities and get into

different consumer segments than we currently have

today.

A large part of the companys business strategy, says

Mr. Schmidt, hinges on the acquisitions, not just from an

operating point of view but also from a financial value

perspective. Mr. Schmidt argues for including the business

development function within the broader finance

functionin part due to finances independence and

broad analytical capabilities: We need someone with

a strong mindset around value creation who can

objectively look at acquisition candidates and choose

those that not only have strategic fit but also those

where theres considerable financial value-creation

potential.

Investors Call for More Informationand Closer Relations with FinanceWhile globalization, regulation, and competition have

driven changes in the role of finance in recent years,

investors in companies both public and private now have

higher expectations for companies and their finance

teams. Queried on investors expectations, a solid major-

ity of respondents in our survey say their investors

demand more information, more access to the CFO, and

better performance from the companies in which they

hold shares. (See Figure 2, next page.)

The heightened scrutiny has increased the demand for

outward-looking CFOs who can speak to the investor

community in ways that CEOs, COOs, and other operat-

ing executives cannot. When Cleveland-Cliffs former

CEOwho was also the companys CFOleft, its board

decided the company needed a sitting CFO, in part to

have an executive who could communicate with an

active investor community, says current chief financia

officer Ms. Brlas.



Investor scrutiny has increased thedemand for outward-looking CFOs who can

speak to the investor community in ways that

CEOs, COOs, and other operating executives

cannot.


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Elsewhere in the survey, a solid majority of respondents

say that increased scrutiny from investors has had a

moderate-to-dramatic effect on their companies

business activities. I think that our investor relations

function has needed a lot more support than it might

have needed three or four years ago, says Mr. Borok, of

the Los Angeles-based CBRE. We have a very active

investor relations program, which requires us to stream-

line information, summarize it, and make it user-friend-

ly. We have most of the data, but we have to make it such

that its easily interpreted by investors and sharehold-

ers. And I think that investors ask a lot more questions

today than they did years ago and that does put anadditional strain on the organization.

Moreover, a growing flood of acquisitions, buyouts,

mergers, and spin-offs creates more demand for infor-

mation from an investor community that must make buy,

sell, and hold decisions on companies they may know

little about. About a year ago, Cendant Corporation spun

off $3.8 billion Wyndham Worldwide Corporation as a

new public company; Virginia Wilson, the Parsippany,

New Jersey, companys executive vice president and chief

financial officer, says, Many of the people in the invest-

ing community who ended up owning our shares after

the spin-off hadnt necessarily bought the old Cendant

shares because they wanted to be involved in the

hospitality space So there was a big decision for themto make about whether they wanted to continue to own

the shares.



> Figure 2. Investors want moreand they expect to get it from the finance team.

Our investors


0 20 40 60 80 100%

No opinionDisagreeAgree

Have a more sophisticated understandingof our company, its businesses, strategies,

and/or competitors than in recent years

...Want more information from andinteraction with our CFO

and/or finance team

...Have higher expectations for companyperformance than in recent years

...Expect more detailed information oncompany performance, operations,

and strategies than in recent years


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Whether investors are as informed as they would like to be,

it is finances job to step in and give investors the information

they seek. Verigy Ltd., a $778 million semiconductor test

manufacturer based in Singapore, was spun off from Agilent

Technologies in 2006 (which was itself an offshoot from

Hewlett-Packard) and has had a similar experience in man-

aging shareholder relations after a spin-off, albeit with

investors more informed about industry performance, says

Michael Jung, vice president of corporate financial planning

and analysis. We used to be part of a conglomerate. Now

were a pure play semiconductor test company, and as a

result, weve got investors who are familiar with the industry

and are more focused. He says, These new investors have

probably raised the bar a notch, and the rest of the share-

holders get more keen insight into Verigy and are likely to

drive the bar higher, too.

Investor Demand for Better PerformanceNot only do investors want more information, they demand

better performance. For instance, as $7.1 billion MGM Mirage

reacts to its competitive landscape by moving into new busi-

nesses, investors want accelerated rates of activity and of

return, says Rick Arpin: When operating as just a gaming

company, it might be okay to open up a property, generate

some cash flow, pay down the debt and then say, In five

years Ill open the next property. Real estate investors dont

want to hear that. They want to know what land you are buy-

ing next and what building is going up next.

Increased expectations for performance can translate into

fundamental organization changes, resulting in dramatical-

ly new and more encompassing roles for the finance team.

In mid-2007, Silgan Plastics, a division of Silgan Holdings in

Chesterfield, Missouri, created a new CFO position and hired

Derek Schmidt, who now oversees finance, IT, and corporate

development. Our purpose is all about driving shareholdervalue, Mr. Schmidt says, hence the need to combine corpo-

rate development and finance. Regarding IT, we have strong

technical people, but they had no clear vision, no strategy as

to how IT would actually create a competitive advantage for

the entire business. Moreover, he adds, a lot of the diver-

sity in my role has to do with the fact that were in a lower

margin, competitive industry, so you cant necessarily afford

to have a CIO, CFO, and chief strategy officer.

While investors have always clamored for higher perform-

ance and better returnswhen wouldnt they want more

from their investments?investor expectations have driv-

en CFOs and their teams toward enhancing business advi-

sory capabilities, even in the face of daunting compliance

requirements. By doing this well, say sources, the finance

function can fulfill an expanded mandate as the steward of

both controls and company performance. Says Cathy

Cranston, senior vice president of financial strategy at the $16

billion Bank of Montreal, The last few years have been just

crazy with governance, with Sarbanes-Oxley, Basel II, and

all the rest. And as a result, her companys finance team has

had to focus on compliance matters more than it would like.

She continues, Our investors are very demanding in terms

of the returns they want, and our industry is extremely com-

petitive. Absolutely, the force from investors is pulling us for-

ward to improve our performance. We in finance have a role

to play, and its a lost opportunity when the full value we can

bring to the table isnt harnessed and leveraged. Its a huge

missed opportunity [to focus on governance at the risk of

ignoring performance improvement].



When operating asjust a gaming

company, it might be okay to open up aproperty, generate some cash flow, pay down

the debt and then say, In five years Ill open

the next property. Real estate investors dont

want to hear that. They want to know what

land you are buying next and what building is

going up next, says Rick Arpin, VP of financial

accounting for MGM Mirage.


14/30

Chapter 2: The New Role: AHolistic Leader and Partner

Not Merely a TechnicianSenior finance executives say they serve as partners to

the CEO and to operational leaders as companies strive

to improve performance. In some cases, this has been

long-standing practice. At CBRE, Gil Borok says his com-

panys business management seeks out the finance func-

tion for thoughtful analysis and the impact of decisions

on their business. He continues, Ive always tried to be

client service-oriented, and the lines of business are a

client of ours. Thats just what we do. The business

comes first. They are the ones generating the revenue. I

think that the finance organization here has improved.

It has become recognized that we can add value to the

businesses, and they come to us more frequently. In

other organizationsincluding a majority of the com-

panies represented in this surveythe finance team has

recently assumed an expanded role as a counselor to

functional and business unit leaders. (See Figure 3.)

At educational materials publisher Cengage Learning in

Belmont, California, Ashish Gupta says finance works on

strategic projects more closely with the companys CEO

and Board than it had it the past. This trend, says Mr.

Gupta, spans across industries, but Ive seen it more in

my current position, perhaps because of our recent sale

to private equity. He says, Finance is a key player in

various metrics-driven projects to analyze where the

gaps are in the business, to find opportunities for improv-

ing not only revenue but margin, and therefore cash flow,

as cash flow becomes extremely important across

businesses.


Extending Performance Management Beyond Finance 1

In a majority ofthe companiesrepresented in this survey, the finance team

has recently assumed an expanded role as

a counselor to functional and business

unit leaders.

> Figure 3. Boards of Directors and CEOs want more from the senior finance teamespecially in managingbusiness performance.

In your opinion, do your CEO and Board of Directors rely on the finance team for decision support more, thesame amount, or less than they did two years ago in the following categories?


0 20 40 60 80 100%

Less relianceon finance team

No change in relianceon finance team

Greater relianceon finance team

Investor and debt-holder relations

Input on mergers, acquisitions,and divestitures

Developing and validatingbusiness strategy

Analysis and reviewof business risk

Analysis and guidance oncompany performance


15/30

Cengage Learning is exploring ways to improve yield

optimizationfor instance, by looking creatively at how

to make money in the used textbook market. (The $1.8

billion company, formerly Thomson Learning, was spun

off from Thomson Corporation in mid-2007 and was pur-

chased by private equity group Apex Partners.) Mr.

Gupta is also exploring ways to improve the bottom line

and generate more free cash flow by providing incentives

to its distributors to reduce textbook returns. These

kinds of incremental opportunitiesand in some cases,

quantum opportunitiesare the kinds of out-of-the-box

scenarios that the Board seems to be more and more

interested in, Mr. Gupta says.

Why are Boards and CEOs turning to finance executives

for guidance on these sorts of decisions, rather than

relying exclusively on operational executives, such as the

COO? Our research suggests some fundamental

reasons. First, the finance team is often responsible for

performance measurement activities and therefore has

the metrics-driven knowledge to contribute to decision

making at this level. (See Figure 4.)

Simultaneously, investors are demanding more commu-

nication withand a deeper, more strategic level of

information fromsenior finance executives. According

to a U.K.-based senior finance executive for a global

chemical company, both investors and analysts expect

the CFO to present strategic information, and they also

expect the first point of contact to be with the CFO, not

the CEO. If youre going to go out and represent your

companyeither to rating agencies, banks, or

investorsif youre looking for funds, I think they need

or expect the CFO to have a broader view and a business

view that they can represent to these potential stake-

holders, he says. Has that changed significantly over

the years? Perhaps. I just think that with all things, as

the Internet has opened up levels of communication,

it drives information hunger. People expect more

Certainly, the City [of London] expects more from

the CFO.



> Figure 4. Finance is intimately engaged with a broad array of performance management activitiesin close collaboration with business management.

In your organization, who is primarily responsible for the following performance measurement activities?


0 20 40 60 80 100%Business

unit staffBoth finance

and business unit staffFinance

staff

Making operating decisions

Intervening early toavoid poor performance

Developing performance

metrics

Making investing decisions

Developing plans,budgets, and forecasts

Comparing actualto planned results


16/30

As investors raise their expectations for performance

metrics-driven data, CEOs have begun to turn to finance

teams to serve as independent voices within companies

that challenge the assumptions of operational leaders,

particularly when they assess new opportunities. (In this

way, the finance team is acting as a surrogate for the

investment community, asking the hard questions that

they expect from investors and analysts in the future.) I

tell everyone on my team, I look to you to be the CFO of

your team and that doesnt mean just putting together

the numbers. You need to provide the insight, you need

to challenge peoples assumptions. You need to really

act as though youre running the organization, says

Michael Jung, vice president of corporate financial plan-ning and analysis at Verigy, the semiconductor test man-

ufacturer that was spun out of Agilent Technologies in

2006. By necessity, I need those people to play that

devils advocate role, to challenge the team and make

sure that what comes out of the team is strong.

Partnership at Many LevelsFinance executives are increasingly partnering with busi-

ness unit and functional leaders in addition to support-

ing the Board and CEO. More than 80 percent of respon-

dents to our survey agreed either strongly or somewhat

that business unit and functional leaders are seeking a

greater contribution from and closer collaboration with

the finance team. (See Figure 5.)



> Figure 5. There is widespread agreement on collaborating more closely with business managers

To what extent do you agree with these statements?

But theres a disconnection between finance and business unit knowledge of each others worlds.In your opinion, how well do finance staff understand business unit managements problems, concerns, and priorities?


0 20 40 60 80 100%

Disagree stronglyDisagree somewhatNeutralAgree somewhatAgree strongly

Our business unit and functionalleaders seek a greater contribution

and closer collaboration withthe finance function.

Our finance team seeks to playa more active role in determining

business strategy.

0 20 40 60 80 100%

Poor understandingAdequate understandingExcellent understanding

How well do business unit managersunderstand the finance functions

problems, concerns, and priorities?

How well do finance staff understandbusiness unit managements problems,

concerns, and priorities?

CEOs have begun to turn to financeteams to serve as independent voices within

companies that challenge the assumptions of

operational leaders, particularly when theyassess new opportunities.


17/30

Indeed, survey respondents say that business unit lead-

ers give finance executives high marks for their abilities

to contribute to solving a broad range of problems. To do

so requires candor, good information, and trust devel-

oped over the long term. (See Figure 6.) Says Cathy

Cranston of the Bank of Montreal, I think the onus is on

the finance group to earn the right to be at the table. You

do that by being goodby bringing useful, actionable

information to the table, by being a devils advocate, by

bringing information forward that sometimes people

simply dont want to hear. She says finance executivesshould work to become trusted advisors, and in some

cases, finance people have earned that position. Theyve

proven their value. Conversely, she says, if finance peo-

ple stay in the backgroundjust doing what theyre

told, producing the numbers but not challenging them

never bringing anything more to the table, they have not

earned the right to be at the table, and they wont be.

At a well-known international information aggregator, a

vice president of finance points out the change in busi-

ness managers thinking about how to work with the

finance team. Finance was typically a scorekeeper; it

produced these reports that would make sure that the

rules are followed. I think what the business is saying

now is, Look, finance, its great that youre showing me

these reports, but theyre not enough. We want you to

understand a few things and convey your understanding

to us to provide us with insight in business decision mak-

ing so that were more knowledgeable. He calls onfinance executives to truly master the underlying busi-

ness: Understanding the business itself so that you can

predict financial results better and more accurately and

analyze the mass of information that is out there will

help the business have key insights into where it can

improve itself.



> Figure 6. Strong marks from financeespecially for core finance activities.

To what extent do you agree or disagree with these statements about your finance teams relationship

with the rest of your organization?

0 20 40 60 80 100%

Disagree stronglyDisagreeNeutralAgreeAgree strongly

Finance team is able to collaborateeffectively and build consensus with

business management

Finance team has strong knowledgeof the industry and company

operations

Finance team has great credibilitywith business unit managers

Finance team has strong knowledgeof core financial, analytical,

regulatory, accounting, and riskmanagement

matters



18/30

Collaborating with business leaders to assess potential

value-creation opportunities may be CFO Virginia Wilsons

most important role at Wyndham Worldwide. Were help-

ing people make decisions about whether there is a greater

growth opportunity if you pursue one set of options versus

alternatives. Is there risk associated with that? It is impor-

tant for us to both help guide [business unit leaders] and

then to communicate [these opportunities and risks] to our

investing community, Ms. Wilson says.

Less Confidence in Business ManagementA Call for Training EmergesUnfortunately for the health of such partnerships, the

finance team doesnt give such high marks to their business

unit peers when it comes to understanding finance. In fact,

only 2 percent of respondents reported that business unit

managers have an excellent understanding of the finance

function. Recently, says a finance executive at the food-service conglomerate, operators have really focused pri-

marily on just performing their duty and keeping their

employees happy and almost divested themselves from any

financial responsibility because they had a finance guy

attached to the hip. Thats a problem, he continues,

because some of our operators in the field dont have the

ability to see niches and opportunities in the market because

they dont have the full financial pallet available to them.

Yet there is a chasm between finances doubts and the

actual responsibilities of most business unit managers.

Our research shows that business managers are routine-

ly held accountable for performance tied to financial and

operating metrics. (See Figure 7.) Executives interviewed

for this study confirm this focus on accountability among

business managers for performance results. Cathy

Cranston at the Bank of Montreal says, My CEO recent-

ly asked my group to create a much better line-of-sight

into how we were going to meet our targets for next year,

so we had to work across the organization to create met-

rics and targets at a lower level to really be able to see

how we were going to get there, and to be able to track

them more rigorously. We already do that; this was sort

of an extra effort that was meant to create transparen-

cy and accountability. As a result of this effort, says Ms.

Cranston, weve got much better metrics, and thats

because we want to create that transparency to set upthe right discussions. Its not enough to just say at the

end of the year Oops, we missed. There are monthly

performance meetings with every group.



> Figure 7. Business unit management is usually and routinely held accountable for financial performance.

At your company, are business managers held accountable for financial metrics such as budget conformance,profitability, and returns on invested capital?


0 20 40 60 80 100%

SeldomOccasionallyFrequently

Through ad hoc reviews

In response tonegative variances

As a routine component ofperformance evaluations


19/30

Despite the need, less than one-third of companies have

formalized programs in place to better educate business

managers on financial concepts and how to apply them to

the business. (See Figure 8.) Such programs for nonfinan-

cial managers are often optional, but, according to our

research, companies are starting to put training programs

into place to bring financial and analytical expertise to their

functional and managerial leaders.

Silgan Plastics, for instance, currently has no formal pro-

gram in place to train business managers in financea sit-

uation new CFO Derek Schmidt plans to remedy. That is

one of my objectives, he says. At the end of the day, its

the frontline managers within our plants and sales force

that are making the decisions, and we need to do our bestto equip them with the right knowledge to make great

financial choices for the company. At the food-service con-

glomerate, the finance team is just beginning to train oper-

ations managers in finance. Says a finance executive at the

food-service organization, We want a better, well-round-

ed operator who not only can interface with a client, who

can not only manage the careers of our associates, but who

also can analyze and report his own financials.

Its important to note that, at least according to our inter-

views, finance executives do look critically at their own

departments, not just at those of their operations counter-

parts. In fact, for finance teams that are transforming from

transaction-oriented groups into strategic ones, upgrading

their talent may be the first order of business. Silgans Mr.

Schmidt previously worked for Masterbrand Cabinets, which

had grown from a $300 million-plus company to a $2 billion-

plus business in less than ten years via organic growth and

acquisitions. They had grown so fast that the investment in

finance talent and IT systems was far behind what a $2 bil-

lion organization needed, Mr. Schmidt says. I was brought

into that role to overhaul talent, implement performance

management systems, upgrade key financial processes, and

bring more financial partnering to the key business leaders.

Out of a 33-person finance team, he replaced 13 positions

with very strategically minded and savvy business people,

he says. After repositioning talent, the second most impor-

tant action was instilling that performance management

system and an operational focus around things that truly

drove financial success for the business.



> Figure 8. Less than one in three respondents have formalprograms in place to teach finance to business unit managers.

Does your company have programs in place to teach financial

concepts to business unit managers?


NoYes, informal program in placeYes, formal programs in place

29%

34%

37%

Less than one-third of companies

have formalized programs in place to bettereducate business managers on financial

concepts and how to apply them to the

business. According to our research,

companies are starting to put training

programs into place to bring financial and

analytical expertise to their functional and

managerial leaders.


20/30

Chapter 3: Standardizingand StreamliningLike Y2K before it, the passage of Sarbanes-Oxley in 2002

spurred significant investments in information technology.

Five years down the road, most finance executives feel

companies have the software and systems that they need,

but that companies arent using this technology to its full

advantage. (Note that there is a significant minority, in cer-

tain industries, still suffering with manual processes.)

Thus, the finance team has been spending its time and

resources standardizing processes, linking systems

together for better information flow, introducing more

performance measurement resources companywide, and

improving upon existing organizational structures.

At container shipping company CMA CGM, for instance,

Jim Arnold is working on a large, 14-month data-

warehousing initiative. Hes using existing technology.

The parent company has most of the systems, Mr.

Arnold says. Its just they havent always deployed those

systems into the subsidiaries in the past. When I came

onboard and started probing, [I discovered that] we have

all these very robust systems and I said, Well, weve got

to be able to utilize those systems in the subsidiaries. This

doesnt mean the current systems are a data warehouse;

it just means the systems that house the data are

available and they utilize well-known technology that can

be developed to provide the company with real-time

decision-making tools.

Similarly, when Derek Schmidt arrived in his new role at

Silgan Plastics, he and his team decided to initiate a major

project to introduce performance dashboards into all areas

of the company so that, eventually, all key employees will

have access to information for instantaneous decisionmaking. Its a phased project that will take two years to

completebut it wont require major new technology

investments. We [had] already bought the functionality

as part of our broader software package. So, there is no

incremental expenditure in terms of software purchase,

Mr. Schmidt says. Were going to have roughly three or

four individuals primarily dedicated to this internally. [And]

weve already contracted with an outside consulting firm.

Process ImprovementsClearly, finance teams are becoming more assertive when

it comes to maximizing the technology and the systems

at their fingertips. Over the last two years, respondents

say, theyve undertaken or completed significant process

changes, mostly intended to ensure that all parts of the

organization are using accurate and timely information,

and also intended to improve efficiency and accountabil-

ity (for instance, centralizing certain accounting activi-

ties). As one example, well over 60 percent are working

on or have completed substantial process review and doc-

umentation projects for compliance purposes (an obvi-

ous effect of Sarbanes-Oxley); more than 60 percent are

working on standardizing their charts of accounts or have

completed doing so. (See Figure 9., next page)

Most of our interview subjects indicated that by

standardizing processes, they and their business unit

counterparts can both spend less time and effort on

recording transactions and have better information with

which to then drive strategy. For instance, Cox Commu-

nications, part of $13.3 billion (2006 annual revenue)

media company Cox Enterprises, Inc., is a highly decen-

tralized company, says Bill Fitzsimmons. While he

acknowledges that decentralization has its strengths on

the customer side, for the past six years he has been

working on centralizing and standardizing all of the

financial procedures, regardless of where they reside in

the company. We standardized how the accounts were

structured; we streamlined departments; we got people

using a standard chart of accounts consistently. That set

up our conversion into a new system, he says.

Now were on a common platform and we have

common measurements, Mr. Fitzsimmons says. By

standardizing, he says, you can draw efficiencies bydoing things better and faster and the result is a cleaner

and more accurate product. If I were out in the field, I

would be grateful for that, because that will allow me to

spend more of my time on true analysis as opposed

to just cranking through the brute-force number

calculations.




21/30

If youre the CFO, efficiency in process has to be thedrumbeat that you march to, says another senior finance

executive at a division of a major pharmaceutical

company, who recently finished standardizing the

organizations accounts receivable management. The

result: The organization can reduce head count by four

or five people this year.

Simply because these initiatives are happening, however,doesnt mean its easy for strategy-minded executives to

make them happen, particularly in transaction-oriented

cultures. The pharmaceutical executive says, Its

because we have pushed and pushed, but it takes a lot of

effort from the inside of the organization to get that

change to happen.



> Figure 9. Document, standardize, streamline, simplify.

Has your company made substantial changes in the following areas in the last two years?


0 20 40 60 80 100%

Few if anysubstantial initiatives

Substantial projectsunder consideration

Substantialprojects underway

Substantialprojects completed

Technology for measuringand managing risk

Outsourcing core finance activities

(e.g., A/R, A/P, tax, etc.)

Technology for automatingcompliance with regulation

Revising and/or expandingbusiness performance metrics

Large-scale investments for enterpriseIT systems (e.g., ERP and other

transaction systems)

Simplifying and standardizing corefinance processes (e.g. , A/R, A/P,

cash management, etc.)

Streamlining and/or standardizingthe monthly/quarterly close process

Process review and documentationfor compliance with regulation

Standardizing charts of accounts


22/30

That acknowledgment nods at a truth within even the

highest-performing organizations: There is still much

progress to be made in streamlining processes and sys-

temsand making sure the right information is avail-

able for various activities. Our research indicates that

finance executives feel they are well prepared in some

areas to execute on their companies business strategiesover the next three to five years, but highly unsatisfied

in others. (See Figure 10.) Namely, more than 90 percent

say they are fairly or very well equipped when it comes

to having well-documented and controlled processes for

routine finance activities such as A/R, A/P, and so on.

That number dips to just over 60 percent when it comes

to IT systems for use in performance management and

business planningreflecting, perhaps, the fact that

finance teams are truly still in the midst of transforming

from the traditional backwards-looking finance cul-

tureone schooled in post-mortemsto the 21st cen-

turys forward-looking finance environment.



> Figure 10. Finance gets the basics rights; business support lags.

In your opinion, how well equipped is your corporate finance function to contribute to executing yourcompanys business strategy over the next three to five years in the following areas?


0 20 40 60 80 100%

Dont know/NAPoorly equippedFairly well equippedVery well equipped

IT systems for performancemanagement and business planning(including business intelligence and

other analytical applications)

Number of finance employeesat the staff level

Processes for planning,budgeting, and forecasting

Enterprise IT for transaction processing(e.g., systems for A/P, A/R,financial reporting, etc.)

Access to timely and accurate informationon finance and operating activities

Number of finance employees atthe senior level (e.g., directors,

VPs, and above)

Well-documented and controlledprocesses for routine finance activities

(e.g., A/R, A/P, cash management, etc.)

There is still much progress to be madein streamlining processes and systemsandmaking sure the right information is available

for various activities.


23/30

Consider, for example, how some of these issues play out

at MGM Mirage. As the gaming company enters new

business arenas in response to the industrys mature,

highly competitive environment, its incumbent upon

finance to gather different information in support of

these new arenas (requiring, in fact, some technology

investments). But constrained resources mean that

finance still lives with some manual processes, reports

Rick Arpin. Weve been able to find systems that can do

what we want in specific areas, he says. Its just that

ultimately wed like to link solutions end-to-end.

[Presently] our systems require a manual intervention,

taking information from one system and putting it into

another. I think thats a challenge and it probably wont

go away in the near term, but we keep looking for

efficiencies in the process.

Cengages Ashish Gupta acknowledges that systems

complexity does sometimes force the finance team to

make less-than-perfect decisions. The optimal business

decision needs be balanced with operational and sys-

tems complexity. Sometimes, given the 80/20, its easi-

er to trade-off elements of the former with ease of imple-

menting, managing and updating [systems], he says.

Also at play, of course, is that because the enterprise

keeps growing and changing, you cannot find a one-size-

fits-all solution and be done. Mergers, acquisitions, and

spin-offs force companies to change their processes

often, and often drastically. According to Wyndhams Vir-

ginia Wilson, In connection with our transaction last

year [when Wyndham was spun out of Cendant], we

essentially had one very large company split into four

very large companies and we pretty much had to pul

apart all of the technology stufftelecommunications

systems, mainframes, the data center, everything

E-mail, securityall of that had to be re-implemented

So that has been an enormous undertaking over the last

18 months.

Given those two driversthe difficulty of working with

outdated systems and the need for technology

nvestment as a result of M&A activityit should not be

surprising that finance is still making some investments

in IT. Of greatest interest is ERP systems: A third of our

survey respondents call investing in ERP systems their

first priority, when it comes to financial applications, over

the next two years. (See Figure 11, next page.)

Performance Measurementand ManagementJudging from survey and interview research, finance

teams that have not yet begun significant performance

measurement and management initiatives may do so in

the next few years, as the Board, CEOs, and investors

search for continuously higher performance in a compet-

itive, global environment. Our research indicates that

business managers and finance are not on the same

page, so to speak, when it comes to accessing critica

information. In 50 percent of companies, finance and

business managers equally share performance-reporting dashboardsand for most companies, thats

not good enough, according to our interview subjects.

Business and finance share other applications even less

of the timefor instance, they share planning,

budgeting, and forecasting applications equally in only

36 percent of organizations. (See Figure 12, next page.)



A third of our survey respondents callinvesting in ERP systems their first priority,

when it comes to financial applications, over

the next two years.


24/30



> Figure 11. Continued investment is being made in current systems and on business planning andanalysis applications.

Which of the following finance technologies will receive the greatest investment over the next two years?


0 20 40 60 80 100%

Fifth priorityFourth priorityThird priority Second priorityFirst priority

Risk management applications

Performance reporting dashboards

Planning, budgeting, andforecasting applications

Business intelligence applications

ERP and transactionprocessing systems

> Figure 12. Use of collaborative technology for business planning may fall short of business unit and finance needs.

Who within your company are the primary users of the following types of applications?


0 20 40 60 80 100%

N/AUsed equally byfinance and business unit staffUsed primarily by

business unit staff Used primarily

by finance staff

Performance reporting dashboards

Business intelligence applications

ERP and transactionprocessing systems

Planning, budgeting, andforecasting applications


25/30

Cox Communications is among those companies rolling

dashboards out to all of its professional employees (in

Coxs case, to 18 locations). It uses the dashboards,

which employ a simple-to-understand graphic, not only

to inform operations managers but also to motivate

them. We have what we call a frog in a blender analy-

sis, says Mr. Fitzsimmons. If youre in the top third in

a given statistic, youre rated greenyou look pretty

much like a frog. If youre in the middle third, youre rated

white and if youre in the bottom third, youre red

youre going to look more like a blended frog, he says.

So thats an easy way to see visually where things areand then, obviously, you can drill through into the num-

bers to really understand [the underlying characteristics

driving performance].

Smaller companies, too, are beginning to adopt perform-

ance measurement tools such as dashboards. Doug Pat-

teson joined Turbocam, a $45 million, privately held man-

ufacturer in Barrington, New Hampshire, two years ago

as the companys first CFO. He was brought on specifi-

cally to work as a strategic partner to the CEO, who was

readying for a growth spurt (the company has doubled

in size since then). Mr. Patteson is an enthusiastic sup-

porter of dashboarding, but can do so only in a limited

fashion, because of resource constraints that dont allow

him to purchase necessary systems. When you talk

about transforming what has historically been an infra-

structure support function into a strategic one, that may

require fairly extensive capital outlays. Thats a hard sel

and were not there yet, he says. So we do [dashboard-

ing] manually, he says. But the concept is huge, so lets

do whatever we can to adopt the concept now and then

lets adopt ever-better tools to deliver on [its promise].

Sources interviewed for this study maintain that finance-

driven performance management requires very high-

quality information from companies various IT systems,

analyzed and presented with clearly defined business

decision making in mind. But they caution that perform-

ance management isnt a pure technology problem

one that can be solved with the ultimate spreadsheet or

leading-edge application. The CFO of Levi Strauss & Co.,

the $4.2 billion global manufacturer and retailer, says,

Finance and business managers have to learn to give

and take. The spreadsheet wont give you the answer. It

will give you a number on a piece of paper but then deter-

mining what is the right solution is a matter of leader-

ship. He says finance executives should provide good

information and help managers find the right answers

themselves. Once people get the tools they need and

keep them simpleand if finance keeps asking the rightquestionspeople will arrive at the answer themselves

Most people prefer to have a clear understanding of why

the answer is strategically correct, instead of having

finance push the answer to them. I think thats also

about leadership style. Just ask the right questions and

then people will come to the right answer themselves.



> Figure 13. Risk management is formalized under the CFOat nearly half of respondents companies.

Does your company have a dedicated risk managementdepartment or job function?


No, we don't have a risk management organization Yes, but risk management does not report to the CFO

Yes, risk management reports to the CFO

nnnnn

48%

24%

28%


26/30

As companies seek to squeeze out better performance from

existing resources, they not only must assess opportuni-

ties, they must also evaluate potential risk. Our research

indicates that 72 percent of organizations have a dedicat-

ed risk management function; almost half of all risk man-

agers report to the CFO. (See Figure 13, previous page.)

However, there exists the possibility that these dedicat-

ed risk managers do not have all of the information they

need to perform their jobs optimally, because technolo-

gy investments in risk assessment are insufficient. Only

8 percent of companies have completed substantial risk

management technology projects during the last two

years; another 22 percent have significant projects under

way. (See Figure 9, page 18.)

Sources interviewed for this study suggest that evaluating

operating riskthe negative outcomes from business

process failures, poor strategic and tactical decisions, and so

onis as much a collaborative mental exercise as it is a sci-

entific analysis of probability and expected values. The finance

executive at the information aggregator says this about oper-

ating risk management: The problem with our business is

its so diverse that we have a knowledge sharing portal, but

thats really it. Risk management at this international infor-

mation company, he says, requires a lot of talking with peo-

ple, a lot of analysis of information that is out there and avail-

able, and then it requires a cognitive process of thinking things

through, sort of like thinking of a chess board. What happens

if this occurs? Its a very logical, critical-thinking position. The

abstract problems of risk management are best solved, he

says, through human analysis based on experience and sup-

ported by information technology.

This executive cites diagnostic and therapeutic information

as an example. Lets say you have a doctor with a handhelddevice, he says. The doctor observes that the client has a

condition, and through our handheld device, he pulls up infor-

mation about the patient and his other prescriptions. We pro-

vide a recommendation on what dosage of a particular drug

to take. Now, if that dosage is wrong, were in trouble. So the

risks of some of our information and [its use] are critical. They

[operating risks] must be well managed.

Other sources cite a risk management model that consid-

ers purely financial risksthose that stem from currency

fluctuation, interest rate, product liability, and workforce

injury, for exampleseparately from operating risk. At

ABB, a global electrical engineering firm based in Switzer-

land, senior vice president and chief financial officer for

North America Herbert Parker says the company has two

classes of risk management: major projects and more tra-

ditional insurable risk. Says Mr. Parker, Prior to us signing

any large contract of say, $15 million or so, our risk review

committee thoroughly reviews the details of contracts

while they are still in the proposal stage. During this review,

we assess the risk of such items as new technology, coun-

try risk (labor, political, safety, etc.), prior experience with

the customer, consequential liquidated damages, and any

other type of typical risks inherent in large projects. The

finance organization is instrumental, he says, in these

reviews. In addition, he says, the company has a separate

group for conventional risk management thats more on

the insurance side, looking at product liability claims and

any type of major catastrophes that could happen in a nor-

mal business transaction, including large projects.

But sources are adamant that their risk review function not

inhibit business growth or productivity. Says one Europeanexecutive, We realize as a company that without taking

risk, were not going to get growth. So the businesses in

and of themselves are definitely the engine for growth; we

in finance just act as a counterbalance to them. They also

must manage their own risk and thats one thing that we

demand of them, but there are cases when theyre taking

risks that are not in our best interest that we need to

highlight.



Sources interviewed for this studysuggest that evaluating operating riskthenegative outcomes from business process

failures, poor strategic and tactical decisions,

and so onis as much a collaborative mental

exercise as it is a scientific analysis of

probability and expected values.


27/30

Chapter 4: Conclusion

Surely the desire for finance executives to become more

strategic has existed within companies, and within the

finance team, for several years. Over the last two years,

the demand for finance to provide strategic guidance in

pursuit of corporate performance has accelerated.

Pushed by a number of factorsmost significantly an

increasingly difficult competitive environment, combined

with a vigilant and sophisticated investor community

the majority of finance teams have indeed moved further

along this continuum, despite a continued need to pay

attention to transactions and regulatory compliance.

Why, exactly? Over the last decade, large companies

have achieved significant growth and earnings. There-

fore, CEOs are seeking creative ways to generate new

profitsand theyre looking to finance for help. In addi-

tion, the growth of private equity into the acquisition

marketplace has placed a new emphasis on the role of

cash flow. This new emphasis places demands upon

finance executives for metrics-driven analysis of the

ways in which organizations useand tie uptheir

cash and how to free it up. In sum, these influences areforcing companies to look for growth in other places than

the top line. The finance professional, says Cengages Mr.

Gupta, is the best person to seek those nontraditional

levers that [can] spur the engine of growth.

The good news: Finance teams have made significant

progress in standardizing and streamlining their systems

and processes over the last two years. However, they stil

have additional responsibility when it comes to imple-

menting performance reporting and measurement appli-

cations throughout the organization and in training

operations on the functions of the finance team.

Furthermore, companies evolving finance into a more

strategic role must attract and retain better educated

finance executives, because the skills needed in a strate-

gic finance organizationas counselor to functional and

business unit leaders, collaborator with the CEO and the

Board, and voice for the investor communityare dra-

matically different than those required in a transaction-

al finance group. Being a strategic partner requires a

whole different skill set, says a senior finance executive

at a division of a global pharmaceutical company. You

have to be more of a holistic thinker. You cant be just a

person who sits in your office and grinds away at the

numbers all day. Says Silgans Mr. Schmidt, They have

to understand how technology, purchasing, finance,

marketing, sales, and operations all play a critical yet

interdependent role in business strategy and execution.

Our interview subjects all indicate that such talent is

hard to find, and demographics would indicate that the

search for talent will only become more grueling. Thats

going to be our challenge in the next decade and

beyond, Mr. Schmidt says. Its very challenging to find

an individual who has the capability to either grow into

that strategic partner role or who has the breadth of

business experience plus the technical finance founda-

tion to play both ends of the spectrum in a truly strate-

gic finance role.



The skills needed in a strategicfinance organizationas counselor to

functional and business unit leaders,

collaborator with the CEO and the Board,

and voice for the investor communityare

dramatically different than those required

in a transactional finance group.


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Sponsors Perspective

SAP partnered with CFO Research Services on this study

as part of our ongoing effort to better serve our cus-

tomers as well as understand how companies are pro-

gressing on their financial transformation journey. We

had two major goals in sponsoring this research. First,

we wanted to gain insight into the challenges and suc-

cesses that finance departments are experiencing as

they strive to make their operations more efficient and

play a more strategic role in the business. Second, we

wanted to deepen the knowledge we have gained

through both our own research and our 35 years of expe-

rience providing financial management solutions to the

worlds leading companies.

This study confirms what we have learned through that

experience as well as through the benchmarking

research conducted by SAPs Value Engineering group:

Investments in IT solutions that automate and stan-

dardize critical finance processes not only help decrease

costs and cycle times but pay additional dividends in the

form of strengthened compliance and improved financial

returns. Moreover, these benefits are being realized up

and down the financial value chain, beyond core

accounting and reporting, to encompass broader finan-

cial management processes such as payables process-

ing and cash management. From closing the books to

straight-through payment processing, technology solu-

tions are helping companies harmonize financial data

across systems and organizational units, achieve greater

process consistency, minimize manual processing and

compliance risk, and enable their finance professionals

to apply their expertise to higher value-added work.

For example, companies are benefiting from greater

automation and strategic insight around the period endfinancial reporting cycle. Closing the books can be very

challenging and time-consuming, especially when data

from multiple systems has to be consolidated and tasks

must be coordinated across operating units located in

different locations and time zones. Businesses can great-

ly reduce the time and effort required to close the books

by investing in technology that helps to standardize,

automate, and coordinate the companywide closing

process. The right products can enable more consistent

processes and better task coordination, collaboration,

and workflow needed to efficiently close the books. And

when these products allow users to work with familiar

office tools such as Exceland give them graphical web

interfaces to centrally manage the closing process and

facilitate cross-unit coordinationcompanies benefit

from fast adoption and greater visibility. For example,

one customer found that SAP software that supports

business planning and consolidation was so easy to use

that in the same month that their financial reporting

went live, users successfully produced that month's

financial reports using the new software. At the same

time, it facilitated compliance with US GAAP regulations

and condensed their three-month consolidation process

to one week.

Strategic software investments can improve processes

in other areas as welland realize significant cost sav-

ings and higher returns. For example, companies can

reduce costs by taking advantage of Internet-based pay-

ment networks that streamline invoicing and payment

processes and provide real-time visibility into global cash

balances needed to manage liquidity effectively. One

SAP customera $6 billion firm in the oil and gas indus-

trycompletely automated its accounts payable and

cash management functions, enabling the company to

process thousands of payments every month with just

two full-time employees. The company also automated

its cash management activities, enabling the finance

department to perform reconciliations across its numer-

ous banking relationships in just a few hours a day.

Because of the automated processes, the company has

also reduced its bank fees, lowered its operating costs,

and generated higher returns on its cash positions.




29/30

Businesses can also leverage the transformative power

of performance management software to model and

optimize all drivers affecting profitability, and the

strength of governance, risk, and compliance (GRC) to

reduce risks and process costs. Using SAP software,

some companies have been able to substantially reduce

the cycle time needed to gain insight into profitability, as

well as dramatically lower their cost of ownership while

increasing net profits. From a GRC perspective, compa-

nies can significantly lower their external audit fees and

increase their internal audit efficiency, which can save

them hundreds of thousands of dollars per year. Most

also realize significant additional savings adding up to $1

million or more annually, thanks to improved compliance

and operational processes.

SAP is the worlds leading provider of business software.

For more than 35 years, we have provided companies

with robust financial management solutions for

automating core accounting and reporting functions,

optimizing their financial supply chains, and achieving

better business performance. More than 30,000 compa-

nies worldwide (including many of those mentioned in

this report) across over 25 industries depend on SAP

financial management solutions. SAP is proud to spon-

sor this research to help finance professionals gain

insight into how their peers in leading companies are

transforming their roles and helping their organizations

achieve better performance.


26

For more information about how

SAP financial management solutions helpbusinesses streamline finance processes,

ensure compliance, and equip their finance

professionals to provide more strategic

value to the company, please visit

http://www.sap.com/solutions/index.epx.

Youll discover why the best-run businesses

run SAP.


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the renewed finance function

Documents