cfo finance transformation for 21st century

CFOs:DRIVING FINANCETRANSFORMATIONFOR THE 21ST CENTURYA report prepared by CFO Research Services in collaboration withCap Gemini Ernst & Young

CFOs: DRIVING FINANCETRANSFORMATIONFOR THE 21ST CENTURYA report prepared by CFO Research Services in collaboration withCap Gemini Ernst & Young

©© 22000022 CFO PUBLISHING CORP. AUGUST 2002

ABOUT THIS REPORT

In May 2002, CFO Research Services (a unit of CFO Publishing Corp.) andCap Gemini Ernst & Young conducted a research program to examine whatprogress large U.S. companies have made in transforming the finance function.CFOs: Driving Finance Transformation for the 21st Century summarizes the findings of a mail survey of 265 senior finance executives and interviews conducted with 12 more. Cap Gemini Ernst & Young, a global managementconsulting and IT services firm, funded the study and the publication of thefindings.

The organizations that participated in the interview program and agreed to becited are:

■ Allergan■ American Express■ Chevron Phillips■ Cinergy■ Converium■ EMC■ Fairchild Semiconductor■ GE Capital Equipment Financing■ Hillenbrand Industries■ ING U.S. Financial Services■ Intel■ Public Service Enterprise Group

The research hypotheses for this report were developed jointly by CFOResearch Services and Cap Gemini Ernst & Young. At Cap Gemini Ernst &Young, we would like to thank Karen Cohen, Rich de Moll, John Karr, andAlexis Miller for their analysis and editorial contributions. CFO ResearchServices 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 themany CFOs and other senior finance executives who provided us with theirtime and insights.

CFOs: Driving Finance Transformation for the 21st Century is published by CFO Publishing Corp., 253 Summer Street, Boston, Massachusetts 02210. Web site: www.cfo.com

Please direct inquiries to Lisa Nelson at (617) 345-9700, ext. 249, or [email protected]

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

CFOs: Driving Finance Transformation for the 21st Century

AUGUST 2002 ©© 22000022 CFO PUBLISHING CORP.

TABLE OF CONTENTS

Executive Summary

Chapter 1: The CFO’s Changing Agenda

Close up: CFOs Respond to Corporate Scandal

Chapter 2: Finance’s Current and Future State

Case Study: Intel

Chapter 3: Undertaking a Transformation

Case Study: American Express

Case Study: Hillenbrand Industries

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2

EXECUTIVE SUMMARY

Finance has not kept paceThe euphoria of the high-growth 1990s drove an unprecedented level of corporateactivity. Globalization and rapid economic expansion forced companies intoaggressive programs of investment, deal making, and deployment of new businessmodels and technology. Despite the continued economic slowdown, the businessenvironment 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, supplementedby 12 in-person interviews, indicates that few CFOs are satisfied with finance’sstrategic 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 theneed to navigate a weak economy, increased scrutiny of accounting practicesand reporting, greater demands for actionable information, and demand for analmost immediate positive return on investment. In essence, many financialexecutives feel challenged to do much more with much less.

Certainly, the rising number of accounting scandals is rapidly shifting CFOs’attention as companies rush to respond to the short-term crises related toimproved forecasting accuracy and external financial reporting transparency.Survey results indicate that CFOs are committed to longer-term finance transformation by reducing the cost of transaction processing while increasingthe effectiveness of decision support and strategic activity. However, the gapbetween stated finance transformation intentions of the last five to ten years andthe minimal overall progress evident in the survey results brings finance’s abilityto address both short- and long-term demands into question. History suggeststhat without a significant change in approach, there is a strong likelihood thatfinance will implement short-term, band-aid solutions that fail to launch or sustain longer-term transformation efforts.

Notable findings:

■ Accounting scandals and recession drive focus on reporting accuracy. 81% offinance executives polled say that accuracy of revenue and earnings forecast is ahigh or the highest priority in 2002. While most (93%) believe they are complyingwith current external reporting requirements, 58% cited financial reportingtransparency as a priority. CFOs believe they are following the external reportingprocess as defined today and that they are not perpetrating an Enron- orWorldCom-type accounting fraud. They do, however, recognize the need to providemore transparency detail and accuracy.

■ CFOs are committed to long-term company growth, but doubt finance’s ability to meet the challenge. 60% of those polled cite their role in the developmentof corporate strategy as a priority. Senior finance executives report they are personally involved in strategic activities; however, only 25% say the rest of theorganization views finance as a value-added function to be consulted on allimportant decisions. Similarly, only 39% are very satisfied that finance consistentlyinfluences the decisions that drive shareholder value.

■ Inadequate IT systems are a roadblock to finance transformation. Whilea great majority of respondents (81%) said that accurate earnings and revenueforecasting is a high priority, 63% are saddled with inadequate, non- or partially-integrated budgeting, forecasting, and decision support systems.When asked what obstacles are holding back transformation, 56% cited tech-nology and 59% identified lack of senior management support—a signal that many companies have yet to connect IT capabilities with finance production.

■ Finance remains bogged down by transaction processing. Increased financialreporting demands aside, too much of finance’s time (39% on average) is stillspent on transaction processing. Over the next three years, a large majority ofCFOs are committed to using shared services and/or partial outsourcing toaccomplish a reduction to 27% of time allocated to transaction processing.

■ Leading companies focus on overcoming barriers to finance transformation.According to respondents, the top challenges to finance transformation arepeople- and technology-related. These include developing the necessary personnel skills (64% report this as very significant), building senior management support (59%), acquiring the necessary technology (56%), andbuilding business unit perception that finance should be a partner (53%).


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Potential CFO actions

■ Demand top-to-bottom financial transparency supported by CEO and board endorsement of finance transformation. While the CFO needs to take the lead in defining and driving the processes and architecture for ensuring financial transparency,sustained CEO and board commitment is essential for successful implementation. CEOs and boards must champion finance transformation as the method to meet both the short-term regulatory and shareholder demands, as well as prepare the company for new demands as they evolve. Strong, top-down sponsorship and leadership is necessary to resolve “turf issues.”Further, CEO support is needed to ensure that the multi-year investment is sustained even as other corporate priorities emerge.Survey results indicate that successful finance transformation depends on the combined resolve of senior management.

■ Accelerate improvements in both cost efficiency and shareholder value. Finance can meet the demands placed on it by its various constituencies only by successfully executing the full transformation agenda of cost efficiency and shareholder valueimprovements. 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 theprocesses 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 consolidatedand 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. Leadingdecision support practices include modeling the impact of financial and non-financial measures on shareholder value, deployingthese value metrics in key decision-making activity, implementing web-based planning and reporting tools, and enhancing theskills 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 technologyalone, 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 ultimatepayoff is much higher.



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CHAPTER 1: THE CFO’S CHANGING AGENDA

These are turbulent times for finance. Over the past year, CFOs and other seniorfinance executives have confronted a host of challenges. The recession and slowrecovery have put them in the role of identifying growth opportunities andways to reduce costs. The increased threat of terrorism has led to demands forbetter risk management. And then there are the corporate accounting scandals— the collapse of Enron and the troubles at companies such as Global Crossingand WorldCom have cast a harsh light on the finance profession, putting intensepressure on CFOs to demonstrate the accuracy of their own company’s results.

Finance executives are responding to these pressures. As we will discussbelow, the main priorities for finance now include improving the accuracy of forecasts, providing better decision support for the business, participatingin the development of corporate strategy, and increasing the transparency of reported results. The result will be a more active role for the CFO and the finance function. “Boards and CEOs are turning to the CFOs and saying,‘Guide us,’” says Joseph Martin, CFO of Fairchild Semiconductor, a $1.4 billion technology firm. “‘Show us where the costs are; show us what buttonsto push; show us how to manage the cash; tell us how long we can continueon this path or whether we should take another path.’”

At the same time, CFOs are attempting to make their finance departmentsmore efficient and responsive to the needs of the business. This effort—oftenreferred to as finance transformation—has been underway at many companiesfor 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. Forexample, providing managers with a better view of growth drivers willrequire better data and, in turn, more integrated IT systems. Likewise, greaterstrategic support by finance calls for new skills among finance employees aswell 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 hasemerged between the small group of companies that have reshaped financeand those that have not. But this gap can be closed. In Chapter Three we willexplain how leading companies have overcome obstacles to develop efficient,valuable finance organizations.

Study demographicsTo understand how the finance executive’s agenda is changing, we conduct-ed a survey of senior finance executives at large U.S. companies. The 265respondents work at companies with over $500 million in annual revenues(82% are from companies with over $1 billion in revenues). Most of therespondents are CFOs, with the rest being VPs of finance and controllers. Thetwo 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 withthe CFOs of companies such as American Express, Cinergy, Allergan, andEMC.

A new focus for financeOur survey found that the most important near-term priority for finance executives is to help their companies adapt to weak economic conditions. Thistakes several forms: providing better insight into what future results will be,helping support operational decisions to improve performance, formulatingcorporate-level strategy to cope with the environment, and understanding theprofitability dynamics of the company. As figure 1.1 shows, the top three priorities are the accuracy of earnings and revenue forecasts (81% cited this as“high” or “highest priority”), operational decision support (60%), and the formulation of corporate strategy (60%).

In part, this reflects the evolution of the finance executive’s job toward morestrategic activities. It is also a product of economic conditions. According tomany CFOs, finance functions have historically done an inadequate job of providing line-of-business managers with a true sense of the company’sgrowth prospects or a quantifiable assessment of the risks and opportunities ofdifferent 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 thefinance organization for leadership,” says Bill Teuber, EVP and CFO of electronics manufacturer EMC. “[The business asks us] to explain where we are going, how we are going to get there, and what we need to do.”


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27%

34%

36%

42%

49%

51%

56%

58%

60%

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81%

0% 20% 40% 60% 80% 100%

Management of fixed asset investments

Flexible cost structures

M&A / Alliance management

Modeling the drivers ofshareholder value

Overcoming barriers totransforming finance

Risk management

Profitability measurement

External financial reporting transparency

Formulation of corporate strategy

Operational decision support

Accuracy of earnings andrevenue forecasts

Figure 1.1

What priority does your finance group currently apply to the following issues?

% responding "high priority" or "highest priority"

Source: CFO Research Services



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Financial reporting transparency is another urgent issue for finance, with 58%citing this as top priority. Transparency is especially pressing for energy companies— 74% of finance executives in the energy / chemicals sector cite this as a topissue (figure 1.2).

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 changesto external reporting. Our interviews provided some insight into this apparentcontradiction. While many do expect to provide greater financial detail to outsiders (see sidebar, “CFOs respond to corporate scandal”), few planchanges to the process of communicating financial results to the outsideworld, including the work of investor relations and the CFO’s communica-tions with Wall Street analysts. In fact, only 17% of respondents indicate thatthey feel significant pressure to change the investor relations function.

Accuracy of earnings and revenue forecasts

Formulation of corporate strategy

Operational decision support

External financial reporting transparency

Profitability measurement

Risk management

Overcoming barriers to finance transformation

Modeling the drivers of shareholder value

M&A / Alliance management

Flexible cost structures

Management of fixed asset investments

84%

65%

65%

55%

37%

49%

Reta

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76%

63%

55%

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58%

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Man

ufac

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52%

Figure 1.2

What priority does your finance group currently apply to thefollowing issues?

% responding "high priority" or "highest priority"

>70%50-69%<50%

47%

39%

39%

38%36%39%

41% 34% 48% 39% 29%

38%29%18%37%

31% 21% 28% 26% 19%


74%

Finance transformation remains high on finance executives’ agendas. Indeed,nearly half of all respondents report that overcoming the barriers to finance trans-formation is a top priority. The number of companies planning atransformation is likely to be even higher, since the top three priorities—forecasting, decision support, and strategy development—are largely dependenton progress in transforming finance’s capabilities. For instance, at the U.S. oper-ations of the Dutch financial services giant ING, one of the CFO’s goals is to turneach business unit’s finance group into a true decision-support team. For that tohappen, the company first needs to shift the finance function’s focus away fromtransaction processing toward more value-added activities. One key step in accomplishing that shift is the implementation of a company-wide finance database, according to Chris Schreier, CFO of ING U.S. Financial Services.

The next chapter will examine the current state of the finance function andwhere finance executives hope to be in three years. As we will explain, whileCFOs have a consistent view of how the finance function should look, fewbelieve they have achieved their vision.

CFOs respond to corporate scandal

Just how much is the CFO’s job changing as a result of this year’s corporate finance scandals?While there is some debate, interviews conducted during the Spring of 2002 suggest that the change has been extensive, reaching into areas such as external reporting, the transactionaltools available to the finance executive, and the CFO’s relationship with the audit committee.

One area of agreement is that CFOs face far greater scrutiny from investors thanbefore. As a result, some transactions and accounting practices that were previouslywell-accepted—even such standard techniques as share buybacks and issuing debt tobolster the capital structure—are now regarded with suspicion. “Many of the toolsavailable for managing the business are now unavailable,” says Eric Brandt, CFO ofAllergan, a $1.7 billion pharmaceutical company.

There are also demands for reporting financial performance in greater detail. At GE, thefinance function is working to provide more detailed information to investors, includinginformation about the financing and net income of its business units. “Our view is thatthis will be an ongoing change in the way we do business,” says Chris Jacobs, CFO of GECapital Equipment Financing. “Investors are going to be seeking more informationabout 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 inhow 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 findthemselves pressed into a closer relationship with audit committees (note: the survey was conducted in May of 2002, before the revelation of problems at WorldComand the ensuing push by Congress to enact new corporate governance rules).

In fact, several of the CFOs we interviewed are already working more closely withboard members. One is R. Foster Duncan, EVP and CFO of Cinergy, a major energy firmbased in Cincinnati. According to Duncan, because of Enron and other recent events, henow spends far more time working with audit committee members to ensure they haveall the information they need about the company’s operations and policies. Among thesteps the company has taken are conducting a best practices session with the auditcommittee and launching a secure extranet for board members, giving them real-timeaccess to key corporate information.


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CHAPTER 2: FINANCE’S CURRENT AND FUTURE STATE

The myth of finance transformationAfter more than a decade of discussion, the fact remains: few companies havefully transformed their finance organizations. Most CFOs are dissatisfiedwith the contribution finance makes to shareholder value—only 39% are verysatisfied that finance consistently influences the decisions that drive shareholder value. Likewise, only a quarter of finance executives believe thatthe rest of the organization views finance as a value-added function to be consulted on all important decisions.

This stands in contrast to the CFO’s own increasingly central role in corporate decision making. Consider the following numbers from the survey:

■ 69% of senior finance executives say they are deeply involved in commu-nicating and advocating strategy internally

■ 67% are highly involved in translating strategy into operational actions

■ 64% are highly involved in providing analysis to link strategy to shareholdervalue

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

A consistent vision of financeWe asked survey participants to describe how their finance functions will look in the future. Although the focus of finance transformation hasshifted over the past decade, the overarching objectives have remainedconstant. Ideally, say executives, finance functions should be able to perform back-office duties more efficiently while devoting increased timeto activities that contribute more directly to shareholder value. Theseinclude providing customized analysis to the business unit heads andhelping formulate strategy.

Gary Crittenden, CFO of American Express, summed up the goals of many ofthe executives we spoke with: “An ideal finance function spends very little time on reconciliation and a minimal amount of time reporting on what hashappened. Instead, a great organization spends the majority of its time trying to anticipate what’s going to happen in the future, making sure the company’s resources are allocated to the most important opportunities that ithas, and to ensuring that the company operates with tight controls and greatprocesses.”

Additionally, respondents believe their finance functions will have some ofthe following characteristics in three years:

8 CFOs: Driving Finance Transformation for the 21st Century

■ On average, time spent on transaction processing will fall from 39% of thefunction’s time to 27%—the time will be reallocated to more forward-lookingactivities such as strategy development and decision support

■ The finance function’s ability to predict the company’s future performancewill improve: budgets and forecasts will be dynamic (rolling) and based onoperational drivers at 52% of companies (compared with 14% today)

■ Transaction processes will be fully standardized, centralized, or outsourcedat 50% of companies (compared with 11% today)

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

Four levels of transformationOnly a relatively small number of companies possess these characteristicstoday. Using respondents’ answers to our survey questions, we have assigneda score to each respondent’s company to reflect its level of sophistication infive areas: how finance allocates its time; budgeting and forecasting processes;the technology supporting budgeting and forecasting; transaction processes;and the technology supporting transactions.

The result is four levels of transformation:

■ Leaders. These are companies on the leading edge of finance transformation.Nearly all transaction processing is performed through shared services or isoutsourced, information systems are completely integrated (and in manycases, Web-based), and decision-support teams provide customized analysisfor most important business issues.

■ Early adopters. The finance functions of these companies have made significant progress in most areas of transformation. Transaction processes aremostly consolidated in shared services, information systems are largely integrated and ERP-based, and finance employees provide decision supporton demand.

■ Followers. These companies have made selected improvements to finance, but generally have not implemented any program to shift finance’s role.There is some rationalization of processes, minimal integration of informationsystems, and employees focus on transactions while providing limited decisionsupport.

■ Cautious observers. These are companies that have made few, if any,changes to the way finance operates. Finance processes are duplicated withinbusiness units, information systems are disconnected, and employees focuson transactions.

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


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Who are the leaders?The companies in the top two categories (leaders and early adopters) come from a range of industries. The two best-represented industries are high tech /telecommunications (46% are classified as leaders or early adopters) and chemicals/energy (45%). Behind these are financial services (38%), manu-facturing (33%), and retail/consumer products (29%). (Bear in mind that insome cases these broad rankings mask underlying differences. For example,although chemicals/energy companies score higher in transaction processing,budgeting and technology, on average, they spend less time on decision sup-port than other companies.)

Firms in the top two groups are more likely to be large (with annual revenuesover $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, leadersand early adopters spend somewhat less on finance as a percentage of corpo-rate revenues.

Transformation boosts efficiency and effectivenessTo what degree does transformation yield an improvement in financefunction performance? From the perspective of the senior finance executive,at least, the improvement is significant. The leaders and early adoptersreport higher levels of efficiency and effectiveness than the followers andcautious observers. For example, 60% of respondents in the leader/earlyadopter group say that the efficiency level of their finance group is “verygood” or “outstanding”. That number is only 40% for the bottom twogroups. Likewise, 47% of the leaders/early adopters give a high effectivenessrating to finance, compared with 41% of the followers/cautious observers.

Cautious observers•46% of finance function time spenton transaction processing•Generally have line-item basedbudgets, static forecasts•Budgeting / forecasting mostlyspreadsheet-based•Transaction processing generallydone in multiple B.U.s• Transaction systems mostlylegacy and non-integrated

Followers•42% of finance function timespent on transaction processing•Budgets partly based onoperational drivers; staticforecasts•Partly integrated tools for budgeting /forecasting, non-standard decision-support tools•Transaction processes somewhatstandardized across B.U.s•Transaction systems partlyintegrated with ERP components

Early adopters•35% of finance function timespent on transaction processing• Budgets partly based onoperational drivers; dynamicforecasts•Partly integrated budgeting/forecasting, sophisticateddecision-support tools•Mostly shared services fortransaction processes•Transaction systems largelyintegrated; some are primarilyERP-based•Partly integrated budgeting/forecasting, sophisticateddecision-support tools

Leaders•24% of finance function time spenton transaction processing•Dynamic budgets and forecastsbased on operational drivers•Most have partly integratedbudgeting / forecasting; some havefully-integrated, web-based systems•Mostly shared services for transactionprocesses; some fully outsource•Transaction systems primarilyERP-based; some fully integratedwithin company and with suppliers

Figure 2.1

The evolution of finance: Four levels of transformation6%

17%

46%

31%


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These improvements come from a few different sources. American Expressreports that it has saved a great deal of money by consolidating nearly allof its transaction processing into shared services centers (the company iscurrently consolidating its reporting processes). “We have had the benefitof headcount reduction, but also the benefit of lower factor costs, becausea large part of the shared services operation is in India, and the cost thereis a fraction of what it is elsewhere,” says Gary Crittenden. The companyalso believes that it has been able to increase the effectiveness of back-officeprocessing, partly because it is easier to implement new systems when operations are in one place.

A greater strategic contribution from financeAt leading companies, finance is also making a greater contribution to strategyand to many day-to-day operational decisions. The finance functions of theleaders/early adopters are more likely to influence the drivers of shareholdervalue: 46% of these respondents say they are very satisfied that finance consistently influences shareholder value, compared with 35% of companies in the bottom two groups.

We found that across a range of activities, transformed finance groups are consistently more involved in strategic activities than their peers. This is especially true in the areas of profitability analysis, partnering decisions, pricing decisions, and supply and demand forecasting (figure 2.2 ).


New productdevelopment

Management of company-wideIT investments

Forecasting of supply anddemand

Pricing decisions

Partnering decisions andmeasurement

Development of operating unitperformance metrics

Product, customer, channel, or B.U. profit analysis

Development of company-wide performance metrics

Strategic investmentanalysis

M&A analysis

10%

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Followers/Observers Leaders/Early adopters

Figure 2.2

What contribution do representatives from the finance organization makein any of the following initiatives?

% responding "leadership role" or "important role"


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

Five aspects of finance transformationCompanies have not made equal progress across the various dimensions offinance transformation. Some areas have seen progress; for instance, companiesappear to be spending less time on transaction processing today than they didseveral years ago. Supporting technology for transaction processing and forecasting has seen less improvement, however.

■ Allocation of finance’s time. Over the next three years, respondents expect to spend less time on transaction processing and more on corporate strategydevelopment and consultative decision support (figure 2.3). Finance functionscurrently spend, on average, 39% of their time on transaction processing. This willdrop to 27%, with the difference being reallocated to strategy and decision support.

At many individual companies, the amount of time spent on transactions isfar higher than the average. One CFO estimates that his department currentlyspends two-thirds of its time on transaction processing. In two years, hehopes to shift his employees’ focus so that 80% of their time is spent on morestrategic activities.

■ Transaction processing. One particularly troublesome area for companiestoday is transaction processing. For most finance operations, this work is themost resource-intensive part of their responsibilities. It is not just a matter oftime and money, though—manual transaction processes that are non-integrated



0

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Corporate strategydevelopment

Consultativedecision support

Fiduciaryresponsibilities

Transactionprocessing

14%

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21%

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27%

TodayIn 3 years

Figure 2.3

Approximately what percentage of your finance function's time is devoted tothe following activities?

% finance employee time


are more error-prone and prevent senior management from having an up-to-date, enterprise-wide view of the firm’s financial situation.

Today, about half of companies have mostly decentralized transaction processing (figure 2.4). 23% perform processing in multiple business units,and 27% have some degree of standardization. A handful of leaders have usedoutsourcing or shared services to fully standardize or centralize transactionprocesses. In three years, respondents expect a dramatic shift toward centralization:50% expect to have fully standardized/centralized transaction processing,and an additional 33% expect to have mostly centralized processes.

■ IT for transactions. CFOs recognize that in most cases the IT infrastructuresupporting transactions will also need to be upgraded. Today, most companieslabor with non-integrated IT systems or systems that are only partly integrated (figure 2.5). This makes standardization difficult, if not impossible,and requires expensive rekeying of data for senior management to havean aggregated view. In three years, companies hope to move toward sys-tems that are mostly ERP-based and at least partly integrated—77%expect to have partly- or fullyintegrated ERP-based systems.

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23%27%

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Performed inmultiple businessunits

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TodayIn 3 years

Figure 2.4

Which statement best describes your financial transaction processes?

% respondents


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Non-integrated andprimarily legacy

Partiallyintegrated withERP components

Primarily ERP-based and partlyintegrated

Primarily ERP-based and fullyintegrated

TodayIn 3 years

Figure 2.5

Which statement best describes your IT capabilities related to financialtransaction processing?

% respondents




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One company that has made significant progress in automating its transactionprocessing is Intel. The company has created a Web-based system for handlingmany transactions, including supplier invoicing (see case study, next page).

■ Budgeting and forecasting. Companies have made more progress in thearea of budgets and forecasts. According to our survey, 39% of companiesnow have dynamic forecasts and budgets at least partly based on operationaldrivers, although only 14% have both a dynamic forecast and a dynamic budgetbased on operational drivers. In three years, 52% of companies expect to havedynamic forecasts based on operational drivers (figure 2.6). This will providecorporate decision makers with a significantly improved tool for planning.

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

19%27%

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Budget line-itembased; forecastbased on staticyear

Budget partlybased onoperationaldrivers; staticforecast

Budget partlybased onoperationaldrivers; dynamicforecast

Dynamic budgetand forecast basedon operationaldrivers

TodayIn 3 years

Figure 2.6

Which statement best describes your budgeting and forecasting processes?

% respondents


0%

10%

20%

30%

40%

50%

60%

Non-integratedtool for budgetingand forecasting;no decision-support tools

Partially integratedtools for budgetingand forecasting;non-standarddecision-supporttools

Partially integratedtools for budgetingand forecasting;sophisticateddecision-supporttools

Fully integrated web-based budgeting andforecasting tools;sophisticateddecision-supporttools and web-basedaccess to information

26%

37%33%

4%3%

13%

36%

48%TodayIn 3 years

Figure 2.7

Which statement best describes your IT capabilities related to budgeting,forecasting, and decision support?

% respondents


At the other end of the spectrum, 26% have non-integrated budgeting and forecasting, and no decision-support tools. In the future, finance executiveshope to make great improvements: 36% expect to have partly integrated toolsfor budgeting and forecasting and sophisticated decision-support tools; 48% say they will have fully integrated, Web-based forecasting and budgeting, aswell as sophisticated decision-support tools.

What will it take for companies to move from where they are today to theirvision of finance? In the next chapter we will examine the obstacles to trans-formation, and discuss how companies are overcoming them to improve thefinance organization’s performance.

Intel: The online finance function

As many companies backed away from their e-business initiatives after 2001, Intel continued its projects, quietly making progress toward its goal of becoming a 100% “e-corporation.” An important component of this effort has been to move the financefunction online. As Leslie Culbertson, vice president of finance and enterprise servicesfor Intel, explained, the finance function is now working to achieve totally paperlessaccounts payable processing within two years.

The benefits of hands-free A/PThe motto is “‘key-no-more in 2004’,” says Culbertson. With over 4,000 suppliers currentlyregistered to do Web-based invoicing, the finance group of the $26 billion company is wellon its way to receiving only electronic invoices from suppliers. More than half of its monthlytransactions are currently paper-free. Culbertson predicts the benefits of “hands-free AP”will include more accurate data, reduced throughput time, reduced cost-per-transaction,and less human involvement in the process. The rewards will spill over to the company atlarge. “When we can communicate in real time on a demand-supply basis, we can reduceour inventory,” says Culbertson. The Web-invoicing project is one piece of that. In April 2001,Intel conducted a pilot of its Web-invoicing program, and completed full implementation inMay 2002 (although new suppliers are coming online with the system all the time). The systemcurrently processes 16,000 invoice transactions per month. In addition to its work on Webinvoicing, Intel has co-led the open-standards group RossettaNet, which has developedXML-based standard data formats. “We didn’t want this to be a one-off [operation].Whatever we develop has to work for other companies, not just Intel,” says Culbertson.

The application has been a success, although challenges remain. For infrastructure reasons, not all suppliers—particularly those in Asia—can submit online invoices yet.“It’s just a question of where they are in the cycle of being computerized or of restrictionsdue 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’ invoicingprocedures, in terms of both business processes and systems. Hooking up a supplier’s platform to use the XML interface to Intel’s systems is not a trivial matter.

The e-transformation continuesIntel’s finance function will reap the benefits of more technology-enabled advancements whenthe company completes its implementation of SAP’s R/3 General Ledger (GL) module earlynext year. The company has already implemented the customer-facing R/3 modules.

This year Intel will implement a planning system. That application will be fully integratedinto the SAP R/3 platform, along with the GL module. Soon, Intel will have one standardsystem and one set of processes deployed worldwide. “We will eliminate a lot of manualactivity,” says Culbertson. “We will have standardized forecasting processes based onthe single system throughout all of Intel. We’ll have more real-time data, which will letus reduce the amount of inventory we carry. Our financial reporting will be better andwe’ll be much more in tune with our customers.”

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CHAPTER 3: UNDERTAKING A TRANSFORMATION

The challenges of transformationAs we explained in the last chapter, most companies have not completed thetransformation of their finance organizations, and only a few have reached atruly advanced level. Transformation is not a simple undertaking—it can beexpensive and time-consuming, and may encounter significant cultural andorganizational barriers.

Our survey asked finance executives to rate the main challenges to transformation(figure 3.1). We found that most of these challenges are organizational andcultural in nature:

■ Developing personnel skills to support transformation (64% cited this as“very significant” or “extremely significant”)

■ Building senior management support (59%)

■ Acquiring the necessary enabling technology (56%)

■ Increasing business unit perception that finance should be a partner (53%)

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 inAmerica that have really transformed their finance departments have done

0% 20% 40% 60% 80%

Managing perceived risk of giving up controlover transactions

Building finance employee buy-in

Aligning compensation withtransformation goals

Building business unit perception that financeshould be a partner

Acquiring the right enabling technology

Building senior management support

Developing the right personnel skills tosupport transformation

Figure 3.1

How significant will the following challenges be to transforming the finance organization?

% responding "very significant" or "extremely significant"

Building a convincing business case

64%

59%

56%

53%

53%

51%

51%

29%


it by changing people,” says Kent Potter, CFO of Chevron Phillips, a $6 billionchemicals joint venture between Chevron Texaco and Phillips Petroleum. The concern of many CFOs—and what others overlook—is that even the bestprocesses and systems will require finance employees with the background and skills to analyze the data, approach business units as customers, and provide timely analysis to drive decisions. Without the appropriate skills, even a “successful” technology or process implementation could be perceived as a failure because finance cannot demonstrate the benefits of that investmentto the rest of the business.

CFOs also spoke about the need for active CEO support, for technology that can deliver detailed financial information to decision makers, and for the ability to demonstrate to business unit leaders that consulting finance on important decisions will do more than merely slow down the process. This lastpoint is especially important—the perception that finance isn’t the place to gowhen the business needs help making a decision may be the root cause (andthe result) of many failed transformations. Additionally, many finance execu-tives confront the natural reluctance of companies to invest in finance duringan economic downturn. “We’re in an environment where we’re trying tomanage costs tightly,” says Schreier of ING. “It’s not easy to make long-terminvestments 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 seea need to change the rest of the organization’s opinion about finance.


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61%

61%

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mer

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Hig

h te

ch/

Tele

com

60%

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65%

65%

65%

68%

60%

Man

ufac

turi

ng

Che

mic

als/

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Fina

ncia

l

Figure 3.2

How significant will the following challenges be to transforming thefinance organization?

% responding "very significant" or "extremely significant"

>60%50-59%<50%

54%

49%

53%

50%

47%

49%

59% 47%

49%

29%23%40%16%31%

49% 55% 56% 48%

52%48%53%

55% 44% 45%

40%58% 51%

56%42%

Managing perceived risk of giving up controlover transactions

Building finance employee buy-in

Aligning compensation withtransformation goals

Building business unit perception that financeshould be a partner

Acquiring the right enabling technology

Building senior management support

Developing the right personnel skills tosupport transformation

Building a convincing business case




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

Three areas of observed transformationCFOs who are transforming finance are generally concentrating their efforts in three broad areas: transforming transaction management, turning finance into a source of business intelligence to support decisions, and improving the performance management framework to link operational actions with strategic direction.

1. Transforming transaction managementThe most basic area of work is to alter the way a company handles transactions.There are several areas of opportunity: improving the quality and timelinessof financial information, reducing the cost of processing, and allowing a shiftof resources toward analysis.

Several of the CFOs we spoke with emphasized that this last opportunity is the most important. “Our transformation is not only about saving money,” says Crittenden of American Express, “it’s all about making sure we can spend more time and resources on anticipating the future and providing theopportunity for the company to be steered correctly.” Being able to devote time to the company’s future means performing transaction processes with as few people as possible, and with a greater degree of consistency. It also suggests that the business case for transformation should include cost reallocation as well as cost reduction.

As we described in Chapter Two, finance executives expect to spend less time on transactions over the next three years. They also expect a dramatic movetoward the centralization of these processes. Shared services will be a crucialpart of making this happen. The reason is simple: by consolidating the location,processes, and technology associated with a company’s transaction processing,finance functions can achieve economies of scale, ensure a consistent process,and potentially move the entire operation offshore to take advantage of lowercosts. Our survey found that 60% of respondents are considering shared services to make the cost structure more flexible; other steps include digitization (54%) and partial outsourcing (47%).

While the most common activities for shared services are accountspayable/receivable, cash management, fixed asset management, and payroll(figure 3.3), some companies, such as American Express, have gone further byconsolidating virtually all financial transaction processing, including functionaland 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-strategicareas such as payroll, benefits, tax processes, and internal audit.


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Cost accounting

Planning and budgeting

Credit management

Collections

Reporting

Internal audit

Tax process

Insurance buying

Benefits

Expense reports

General Accounting

Payroll

Fixed asset management

Cash management

Accounts payable /receivable

Figure 3.3

For which of the following finance processes do you have shared services?

% respondents

75%

63%

61%

TodayPlan to

59%

59%

57%

57%

57%

55%

55%

54%

49%

48%

40%

38%

Source: CFO Research Services 0% 10% 20% 30% 40% 50% 60% 70% 80%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Planning and budgeting

Reporting

General accounting

Fixed asset management

Accounts payable /receivable

Collections

Tax process

Payroll TodayPlan to

Figure 3.4

Which of the following finance processes do you outsource?

% respondents

Benefits

Internal audit

Insurance buying

Expense reports

Credit management

Cash management

Cost accounting

36%

24%

18%

14%

12%

12%

11%

9%

7%

6%

5%

5%

4%

3%

2%




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American Express: The shift to shared services for finance

Although the idea of creating shared services for finance activities is not new, few companies have attempted a transition on the scale that American Express has. Thecompany’s move to shared services for finance began in 1993, with the decision to centralize certain transaction processes. Since then, the company has expanded itsshared services operations to all finance transactions across the corporation, tax compliance, and—more recently—reporting.

According to CFO Gary Crittenden, the overriding objective for shared services is notmere cost cutting (although the company claims to have saved a great deal), but to freethe 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 canspend more time focusing on the business and on what the future performance of thecompany is going to be,” says Crittenden.

Today, American Express has three shared services centers: one in Phoenix, Delhi, andBrighton, England. These operations, which have thousands of employees, supply financial information to the business unit CFOs.

The advantage in sharingAccording to Crittenden, this change has yielded several benefits:■ Most obviously, shared services create cost savings. These savings have come partlythrough reduced headcount, but also through the lower costs of operating in sites suchas India. Some of the savings have been reinvested elsewhere in the finance function.

■ Second, the centralization of transaction processing and reporting has made it easierto make improvements. “It’s advantageous to move reporting out, because you can dothings in a common way across the enterprise and you can afford to invest in systemswhich 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-officeemployees. By adding reporting to the shared services operations, employees whobegin 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 ahedge against the disruption of the back office. “When September 11 happened, itwould have been difficult for us to close our books had we not had reporting distributed around the world,” says Crittenden.

The cultural challengeChanging the finance structure has required American Express to overcome some obstacles. The biggest challenge, particularly in the early stages, was the concern bybusiness leaders that they would be giving up control of processing—a natural reaction,given the importance of the information coming out of the back office. According toCrittenden, overcoming this difficulty required a dedicated team to carefully map thetransition and manage the switch. The success of that first shift to shared services builtsupport for later efforts. “If the first reporting move had not worked in some way, itwould have been the last reporting move for many years,” he says.

More recently, the company has worked to build confidence in the shared servicesoperations through the exchange of employees. For example, the reporting for thecompany’s Argentina operations is now done in India. Before moving reporting out ofArgentina, the company brought some employees from India to work in the Argentinaoperation. Those employees returned to India, and then the company sent Argentineemployees over to India for the first few closes. “We try to invest the time to makesure there’s good cross-fertilization between India and Argentina now, even after thetransition has taken place,” says Crittenden.

2. Decision supportCreating a finance team that can provide analytical support to business decision makers is also a central goal of transformation. The support canrange 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 andthe business. “We are a partner with the business units,” says ThomasO’Flynn, CFO of PSEG, a New Jersey-based energy company. “Our role is tohelp them think through the financial implications of their decisions.”

Providing decision support calls for different skills than a CFO and thefinance team were traditionally required to have. “The CFO can’t be a strate-gic neophyte,” says Scott Sorensen, CFO of Hillenbrand Industries, anIndiana-based health care and funeral services company. “That person has tobe 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 anyarea of the business that may trip up that strategy.”

To provide better support to the business, many finance functions are creatingdecentralized decision-support teams that work within the business units andare coordinated and supported by the central finance function. Most transactionprocessing is consolidated in shared services centers, and an integrated IT system allows finance analysts at the local level to work with the same datathat is available at the corporate level.

Chevron Phillips recently implemented such a structure. Each business unithas a finance group that serves as a member of that unit’s management teamand reports to the business vice president. To ensure consistency, one memberof each finance group sits on a central management committee with the corporate CFO. The finance groups perform a range of services for their busi-ness units, including budgeting for capital allocations and analytical reviewsfor capital investment decisions. According to Kent Potter, the objective is tocompletely integrate these decision-support groups into the businesses. “Ithas taken away the labels of accounting and finance department so that theyhave become part of the business units,” says Potter.

This connection to the business units can be reinforced with employee compensation. At American Express, 70% of decision-support employees’goal is based on how successful they have been in supporting their businessunits’ objectives.

3. Strategic performance managementOne of the quickest ways to be accepted into the company’s circle of strategic decision makers is to know what factors drive shareholder value. This knowledge — demonstrated with a well-defined, linked set of indicatorsthat model and predict changes in market performance—can arm a CFO with a unique, fact-based perspective on strategic decision making. The ability to do this typically goes hand-in-hand with a finance transformation: senior management needs real-time access to consolidated financial information from across the organization, and the finance organization needs the skills


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and the tools to create and maintain an effective performance management system.

One company that recently implemented a new performance management program is Hillenbrand Industries. Prompted by a desire for better internal visibility and the need to provide better guidance to investors, the CFO led an effort to identify the metrics that provide the best view of the company’s current situation and likely future performance (see case study, next page).

On a related topic, the use of value-based metrics (e.g., EVA, RAROC, etc.) tends to be more pervasive in organizations with a transformed finance function.However, this does not suggest that financial indicators are the only factorsthat CFOs are concerned about when it comes to influencing market performance. In fact, nearly 60% of CFOs believe that “intangibles” such asability to execute strategies and corporate leadership capabilities can have asignificant impact on shareholder value.

Part of the challenge in implementing a good performance management system is deciding how best to present the information. Allergan has devised arelatively simple way of allowing the executive committee to gauge the businesses’ health. According to CFO Eric Brandt, he tracks the progress ofeach of the company’s five businesses and each of four regions with a 20-boxgrid. The goal is to display the second derivative of the growth rate—in otherwords, whether growth is accelerating or decelerating. If the growth ratedrops from that previously forecasted by more than one point, the box is colored yellow. If it drops by more than one point for two forecast periods, thebox is colored red. If the rate meets or exceeds the original forecast, it is colored green. Senior management reviews the growth rates quarterly, butchanges in revenue and pre-tax earnings are updated weekly to provideestimated quarterly results.

Overcoming finance transformation barriersAs discussed previously, obstacles to transformation exist and tend to be similaracross industries. As the experience of leading finance functions shows, however,there are ways to address and overcome these barriers. The remainder of this chapter describes methods CFOs have used to overcome their top four barriers:building the necessary employee skills, implementing the right enabling technology,building business unit support, and ensuring senior management support.

1. Building the necessary employee skillsFinance executives regard the development of finance employee skills as one of the major challenges of finance transformation. The problem is clear: forthe traditional finance organization, the ideal employee is one who is skilledin the administrative (and often manual) aspects of finance transformation.An employee whose focus is on analysis and decision support requires very different skills, including the ability to think strategically, to apply financeexpertise to different business situations, and to build strong relationshipsacross the organization. Few companies have such skills today. As one CFOput it: “Most companies have very good skills for the business problems ofyesterday.”

Hillenbrand: Transforming performance management

When Scott Sorensen joined Hillenbrand industries as CFO in February 2001, many of thecompany’s financial-oriented processes were outdated, overly complex, and producingdata rather than insights. Because of a legacy of highly autonomous business units andlittle standardization of policy, the Indiana-based healthcare and funeral services companyhad various customized IT systems, including nine accounts payable systems. Each businesshad its own set of metrics, few of which captured the ultimate drivers of financialresults. In the late 1990s, senior management’s view of the firm’s consolidated financialperformance was so limited that Hillenbrand failed to offer any earnings or financial guidanceto shareholders. “When something would happen or a trend would begin in one of the businesses that would ultimately manifest itself in a revenue or cost issue, it took so long tohave visibility that the implications would simply slam you in the face,” says Sorensen.

A performance scorecardFred Rockwood became CEO of Hillenbrand in December 2000, just two months before Sorensen joined Hillenbrand. He asked Sorensen to devise a new planning andperformance management process for the company. The goal was to create a processto improve the company’s strategy execution. The centerpiece was a scorecard thatwould 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 identifiedfinancial and non-financial measures for all of the main factors affecting the implementationof strategy. To avoid an excess of measures, Sorensen limited the number to roughly 30per business, and 20 consolidated at the corporate level. The measures are grouped infour cascading levels:

1. Financial: High-level financial metrics such as revenue growth, asset utilization, and profit margins

2. Customer: Metrics such as customer retention and revenue from key customers

3. Process: Measures for activities such as manufacturing, logistics, research and development, and sales

4. Organizational learning: Measures of talent redeployment and business transformation activities

ImplementationThe first step in the implementation was to ensure that the CEO would be the project’smain champion, since the project extends well beyond the finance function. Sorensenalso needed to obtain the support of the business unit managers. In general this wasn’tdifficult, since managers recognized the advantage in creating a consistent set of metricsthat accurately reflected the business’ performance.

Nevertheless, the new system required a cultural adjustment. “A lot of people weren’tused 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 agreementthat this is what we’ll measure and this is how we’ll measure it, rather than having itdependent on a huge technology investment.”


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Ultimately, the solution involves some combination of new hires and retraining.Many CFOs are skeptical about broad retraining efforts, however. They saythat the capabilities required for more value-added work are sufficiently different that usually a new type of employee is called for. “You may have areally good accounting manager, but is that guy really set to be an assistanttreasurer?” asks Potter. “I think if you’re truthful, the answer is often no.”

Chevron Phillips’ model is based on targeted hiring as well as development. The company targets mid-career professionals with an MBA and a deep background in both the operations and commercial sides of the chemicals business. Potter cautions that one danger for companies planning a transformation is that the company will hire skilled financial analysts too quickly—if finance lacks a seat at the decision-making table, these skilledemployees may be insufficiently challenged.

Other companies put more faith in development. Intel, for example, has aproject underway to develop its finance employees’ skills. This includesbuilding leadership abilities, and training people to think strategically.According to Leslie Culbertson, VP of finance, changing the way financeoperates requires people at all levels of the function who can help drivechange. Additionally, finance needs employees who can communicate withother parts of the business. “A big piece of this is the ability to have a goodnetwork inside the company and working relationships with the rest of thesenior managers within the corporation so that you’re viewed as a supportiverole, helping the business make the right call.”

2. Implementing the right enabling technologyTechnology is an important building block of a successful finance transformation.However, there are three key items to consider regarding technology. First,technology itself is not the solution—it enables the solution. Second, an integrated and efficient underlying technology infrastructure is not effectiveif management can’t quickly extract the information that it needs to run thebusiness. Finally, technology is only as good as the data it manipulates.

■ Technology enables the solution. The first point to bear in mind is that,ideally, process redesign should precede the implementation of new technology.This helps ensure that the technology supports the goals of transformationinstead of becoming a major constraint. “You have to do the thinking upfrontrather than investing in the infrastructure first,” says Sorensen of Hillenbrand.“Implementing technology before doing your homework spells disaster.”

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


aspects of the data. While survey results suggest that few companies have thisadvanced capability today, many aspire to within the next three years.

Similarly, Converium, the Swiss reinsurance giant (formerly Zurich Re) isbuilding forecasting capability on top of its SAP global finance platform.According to Martin Kauer, group CFO, the goal is to move away from a pointforecast to one that is closer to a probability distribution. The system will alsoallow scenario planning. For example, if the Euro declines 10% against theU.S. dollar, how will that affect the quarter’s forecast? Or what happens if the current low interest rate environment continues? How will that affect the netbottom line when money must be reinvested at lower interest rates?

■ Technology is only as good as the data it manipulates. The adoption of asingle system throughout the corporation is important, but a common systemmust be coupled with established data standards and processes to ensuredata consistency. According to Kauer, this is largely a matter of education—making sure employees at the local level understand why data quality anddata consistency are essential for the company’s consolidated financials andfor the accuracy of forecasts and plans.

3. Building business unit supportThe implications of finance transformation extend beyond the finance depart-ment itself—many company-wide business processes will change as will the relationship between the business units and finance. This can produce resistancefrom the business units. For instance, if finance is centralizing transactionmanagement, business unit CEOs may be reluctant to give up direct control,since such processes are crucial for the success of their operation. If the CFOimplements new corporate metrics, business heads may be unwilling to giveup the way they have been able to view their own reports. And then there istransparency—a good transformation program provides corporate manage-ment with an uncomfortable degree of insight into the real performance ofoperating units.

The key to creating business unit support, say CFOs, is to show what value the program will bring to them. This includes a better view of the business’sperformance drivers, a lower cost of finance (or at least a higher value for what is being spent), and customized support from the function.

4. Ensuring senior management supportCFOs believe that the active support of the CEO and board is essential.Gaining this support will require the CFO to present a compelling businesscase: how much money can be saved, how much data quality and service willimprove, how this will better enable customers to do business with the company, and how much better managers will be able to understand the current situation and forecast future performance. “A business case is imperative,because you have to go through the discipline of seeing where the benefits aregoing to be,” says Sorensen. “Some benefits are clearly economic, some ofthem are strategic, while others are so-called softer benefits, which are harderto quantify but vitally important. You owe it to your colleagues and seniormanagement to present a well thought out and documented business case sothat everyone’s expectations are clear.”


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A business case calls for the ability to measure the results of transformation.For certain aspects of the effort, this is not difficult. Traditional measures offinance efficiency, such as FTEs per million in revenues or finance expendituresas a percentage of revenue, may be sufficient for this purpose. But the deepervalue of transformation—which includes the ability to forecast more quicklyfor longer periods, better visibility into the sources of shareholder value creation, and an improved ability to steer the corporation in response—ismuch harder to quantify. How do you capture the quantitative benefits ofavoiding earnings surprises? At least, say executives, such improvementsshould be demonstrated qualitatively.

Intel has tried to be more rigorous about quantifying finance’s strategic contribution. According to Leslie Culbertson, the finance function presentscash-savings and ROI calculations of projects for its regular review with theCEO. In addition to cost per unit of output for finance, the organization alsocaptures the value of the decisions finance has influenced by assigning a dollarvalue to the outcome of those decisions. “It’s pretty easy for us to quantify theopportunities we influenced,” says Culbertson. “Last year, we were able toinfluence over $1 billion.”

ConclusionFinance departments are in the midst of a slow transformation journey.Although the ideas behind finance transformation have been with us for overten years, surprisingly few companies have made true progress. Judging fromthe handful of companies that have transformed, the results are worth theeffort. These companies report not just a lower cost of finance but, moreimportantly, a greater strategic contribution from finance.

Although CFO priorities have shifted over the past year, finance transformationhas not taken a back seat. In fact, for some companies it has taken on a newurgency. Many of the most pressing issues CFOs face—including pressure forgreater reporting transparency and requests from the CEO for better instrumentsto steer the company—all depend on enhancing finance’s capabilities in arange of areas.

Success requires that CFOs overcome a number of obstacles. Most prominentare the cultural and organizational challenges, including developing newskills among finance employees, and convincing business unit heads and corporate senior management to support the project. The good news is thatsuccessful transformation efforts acquire their own momentum. As GaryCrittenden of American Express explained, each successive move the companymade to consolidate transaction processing and shift finance to a decision-support footing met with more support as business leaders began to see thevalue the change was creating. The greatest challenge for many companieswill be to make that first move.

cfo finance transformation for 21st century

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