Lynne Schneider: One of the things we've found in the past couple of years' worth of studies is that companies have been strengthening the foundation in these areas by making sure they're getting the most out of what they have. Many companies haven't had money recently to buy new large technology systems, but when they've looked at what they have in place, they've realized that they haven't exploited those systems to their fullest potential.

So we've seen people strengthening their foundational technology systems by making sure they're getting all the data consistent and clean within their ERP systems. And they've been taking the same approach with processes. Some companies that moved toward shared services or global business services in years past haven't caught up with all of the cost synergies that they expected, so they're going back and capturing those.

T&R: So, how does a strong foundation support agility for the finance function overall?

RC: We see finance organizations having agility when they've built a really good platform and have the right solutions in place. Let's say a company makes an acquisition. How can it absorb that acquisition really quickly without incurring a lot of cost? If it's built its foundation properly with shared services, and those functions can absorb the acquisition without having to take on another N number of finance people and bolt on another technology platform, they are demonstrating agility. For those that don't have that foundation, an acquisition might mean having to create—or accept—another new environment every time they engage in an M&A transaction.

LS: For me, it brings to mind the rebar inside of concrete, with someone pouring concrete over it. It's almost more getting the connections between the processes, building a whole connected platform where you've really thought about the entire service delivery model. An agile foundation for the finance function can accommodate a wide variety of processes and technologies.

RC: End-to-end process orientation is pretty important to becoming an agile organization as well. Agility involves looking at, for example: 'If I change something in my order management subprocess, how does that affect my accounts receivable process—terms and conditions in the contract, flexibility in my payment terms, things like that?' If I don't have that end-to-end process orientation, I lose sight of that. I don't have the ability to automatically adjust for changes upstream or downstream.

T&R: Is moving to shared services the best way to build agility in these foundational areas of finance?

RC: Yes. But a lot of companies have squeezed the water out of the rock with respect to shared services. There are some companies that haven't started, but more mature organizations that are working to build agility are focusing their attention on EPM [enterprise performance management].

T&R: That's your imperative #2. 'Unleash EPM decision-making excellence.'

RC: It is. Here the pendulum swings from increasing efficiency to more effectiveness. This is simplifying things, but you can generally break the finance function into three big buckets. One involves the transaction processing areas: payables, receivables, T&E, those sorts of things. Those are the areas where you want to drive costs as low as possible.

The second bucket is planning, budgeting, and forecasting—what we affectionately call FP&A, financial planning and analysis. That's where you want to be really good, and where low-cost is not necessarily the target. Low-cost might be a nice by-product, but some companies are willing to pay a premium in these areas because there is immense value in being very insightful, analytical, and having accurate forecasts.

Most finance functions spend 80 to 90 percent of their resources in the first two buckets. The third bucket includes tax, treasury, audit, and investor relations. There's very little cost in those departments—they're pretty small compared with the others—although they add huge value.

Agility efforts generally focus on the first two buckets. That's why this notion of world-class is important for finance—because it's a balance. On one hand, we're trying to reduce costs. On the other hand, we're trying to increase effectiveness. You find the balance by looking at the subsets of finance. The foundational pieces are: Can I take the cost out as much as possible in the transaction processing areas without sacrificing controls? And then in the enterprise performance management area, you're looking to drive greater analytical capabilities, to achieve imperative number two.

T&R: So, what does a finance function do to 'unleash EPM excellence'?

LS: EPM excellence is not about having a fancy technology tool. It's about getting the right analyses and the right key performance indicators in place. It's about building the relationship between the people in finance and in operations so that they can talk about what are the right metrics to have in place: How can I serve you with the information that helps you make a better decision? Figure 1 [below] shows how much more confidence management teams at world-class companies have in their finance team's decision support.

RC: One key to improving EPM capabilities is this notion of 'business partnering.' That's a term we hear over and over. Every organization we walk into, people define it a little differently, but basically it entails constructing an FP&A organization that has subsets, centers of excellence [CoE] or what I'll call the 'shared services of FP&A.' The people in the center of excellence support the basic FP&A activity of the company.

Having an FP&A center of excellence enables the FP&A people in the business units, who are sitting side-by-side with the general managers or presidents of those divisions, to really be a strategic adviser, to be prepared to support decisions like: What acquisition should we be making? What markets should we penetrate? What products should we be retiring? What works in the West but doesn't work in the East? Supporting those decisions requires a CoE that is both efficient and flexible. The company arrives at that enterprise performance management environment through a combination of process change around planning budgeting, forecasting, and reporting; organizational change around the structure of the CoE; and technology and data changes around KPIs and the ability to deliver them. You have to look at all the dimensions of service delivery, specifically for FP&A, and make sure you have the right combination in place.

Another way world-class companies are improving their EPM capabilities is by extending EPM beyond P&L, the balance sheet, cash flow, those kinds of things. Now we're seeing companies tackling supplier effectiveness, customer profitability, product profitability, inventory—they're looking beyond finance at more of the operational and strategic metrics of the organization.

T&R: So, your imperative #3 is to 'Build an adaptive finance organization.' What specific actions can finance leaders take to make their function more adaptive?

LS: We did a study last year looking at finance transformation initiatives. One of the characteristics that really stood out among organizations that were more successful in conducting change was having an environment where people within the finance organization understand what finance is supposed to be about. They have a shared vision, so that then leadership can take the function there. At companies that were not world-class, only 27 percent of respondents said their company's vision for finance is clear, focused, understood, and embraced, compared with 63 percent of respondents from world-class companies. If you don't understand where you're going, any road can take you there. A better, crisper understanding of where finance should be going helps the finance function get there.

RC: I agree. To be adaptive, one really has to understand what they're trying to accomplish. What are the needs of the people we're trying to serve? What are they asking for—do they have a clear vision of what that is? Of course, there's the balance of cost constraints. They may ask for the world, in which case finance has to go back and help them understand the costs, and prioritize their requests. We tell CFOs all the time: 'You can do anything they ask for. The question is: How much is it going to cost, and does everyone understand the tradeoffs they need to make to get that level of service?'

T&R: Does having people in internal finance transformation roles help a company become more agile and adaptive?

RC: Yes. We have several different clients right now that have finance transformation offices. Basically, they're subsets within finance that are charged with driving transformation. They ensure that somebody is responsible for making sure the change takes place. And these are changes across all dimensions of the service delivery model. If you're implementing new planning software, for example, this person would be responsible not only for overseeing the project, but also for driving changes in the planning calendar and process changes in the company's forecasting. The person might also be responsible for defining new roles for the FP&A CoE, defining new data structures and data elements and levels of detail, and perhaps dimensionality for planning output. This needs to be a fairly senior person, someone with clout to drive these kinds of changes broadly in the organization.

It's also important to note that the finance transformation office needs to be permanent. You can't have people in the organization thinking, 'Hey, if I can wait this out long enough, I won't have to change, because six months from now this group will be gone.' There needs to be a culture of built-in, continuous improvement. But those companies that have a permanent organization for finance transformation are far more effective in driving transformation than those companies that either don't have them, or put them in place temporarily and then disband them.

T&R: And are companies that have an office, or at least an individual, whose responsibility is internal finance transformation—are those finance functions better able to respond when the external environment changes dramatically?

RC: The short answer is yes. Because they have a blueprint on someone's wall that shows how everything plugs in. They can more easily answer questions like 'If we make a change here, how will it impact these four different areas?' When an acquisition comes on board, they can look at that wall and figure out: What are the things finance has to do? What are the questions we have to ask the acquisition? What are the requirements we need to tell them to provide so that we can plug them in?

The transformation office has a holistic, comprehensive view of what aligns with the blueprint and what doesn't. If you don't have that, whenever you face a major change initiative, you have to set off on projects of discovery before you can figure it out. It takes a long time, which means you're not as responsive.

T&R: Do you have any other recommendations around cultural changes for finance teams looking to become more agile?

LS: Adaptability and agility need to be a part of the finance function's culture. Finance people aren't always known for their flexibility and adaptability. It's a change of mind-set to let people experiment, to try new things. A lot of times the finance mind-set is 'I've got a group of rules. I have to enforce these rules. I need to maintain control.' But finance functions need to also put a priority on being adaptable. There's a duality there: You can look to transform while also maintaining control.

T&R: Have you seen a shift over the past decade or two in the types of people finance teams are hiring, and in the competencies they're looking for in new hires?

RC: Yes, and it follows the evolution of the profile of finance. Ten or 15 years ago, the majority of activities within a finance function were transaction processing activities. A small subset of finance was devoted to analytics. But then people recognized that the value of finance is going to come out of the analytics space. They began to change the mix of the finance organization so that analytical capabilities became more and more important.

Today finance functions tend to be looking not just for the basic finance capabilities around income statement and balance sheet, the pure accounting background, but more of what I'll call an MBA background. They're interested in some of the analytics around customer profitability, product profitability, supplier analytics, spend analytics, what-if scenario modeling. It's a different skill set they're looking for.

Also, in the past half-dozen years or so, finance functions have started looking more for people who can churn through the company's 'big data,' doing things like sensitivity analysis and trend analysis. Some large financial institutions are hiring doctorates in math and economics to build financial models, to do currency projections, inflation projections, and GDP projections. Nonfinancial companies may soon start to build these kinds of capabilities as well because organizations that can do more insightful analytics are going to see a competitive advantage.

LS: The other piece is around soft skills. Finance has typically looked for hard skills—whether bookkeeping and accounting, or now in the analytics area. And it's easy to tell whether a candidate has mastered the hard skills. But as finance leadership is growing and developing the organization, they need to be looking at candidates' soft skills as well, at their ability to build relationships and to manage other people.