What Makes a Finance Function World-Class?

Companies with world-class finance departments operate at a significantly lower cost and with a smaller staff than the typical organization. That’s the headline news from a recent analysis by The Hackett Group.

The firm defines “world-class” by evaluating the performance of Global 1000 companies across a range of measures of finance efficiency and effectiveness. It then weights the different metrics and identifies the top-performing finance functions, which it labels “world-class.” Typically, about 15 percent of finance organizations in the study receive this designation, according to The Hackett Group.

In the firm’s latest “World-Class Advantage” research, these high-performing finance organizations have several advantages, including:

• 36 percent lower cost overall as a percentage of corporate revenue,
• 45 percent fewer full-time equivalent (FTE) finance staff per $1 billion of revenue,
• 36 percent lower labor cost, and
• 59 percent lower transaction-processing cost as a proportion of revenue.

The key question, then, is how a typical finance function can become world-class. A few points jump out in the Hackett analysis. One is that world-class finance teams are 70 percent more likely to have staff with direct operations experience. Another is that compared with their peers, world-class finance functions spend more time analyzing data and less time collecting and compiling information.

World-class finance teams allocate 98 percent more FTEs to business analysis than does the average finance group. They also focus more attention on analyses of the future, rather than historical data, and spend twice as much time using sophisticated analysis techniques. They are 23 percent more likely to include both financial and nonfinancial metrics in reports for senior management, and—crucially—they are 41 percent more likely to be viewed by stakeholders as a valued business partner.

Where to Go

For many finance teams, achieving a less siloed and more future-focused orientation may require a fundamental restructuring. “The next-generation operating model for finance represents a major shift, from functional to enterprise alignment of resources,” says Jim O’Connor, global finance and GBS advisory practice leader for The Hackett Group. “In an optimal future-state operating model, finance resources in the business units become business enablement leaders, with no transactional or finance specialist work remaining in those entities.”

The Hackett Group’s “World-Class Advantage” report delineates a vision for the next-generation finance function that spans five service delivery nodes:

Business enablement leaders.  These are individuals who have finance expertise and who sit in operations groups throughout the company, including in each plant, business unit, region, and support function. The business enablement leaders provide a strategic finance perspective to the local organization, helping to orchestrate the execution of finance processes within that specific part of the company.

Specialized functional teams.  These are groups such as treasury, tax, internal audit, and financial planning and analysis (FP&A) that perform specific tasks at the corporate level and spearhead strategic finance initiatives in their area of domain expertise.

Enterprise capability centers.  These are corporate-level hubs for analytics activities that support decision-making around enterprise risk management (ERM), compliance, mergers and acquisitions (M&A), business development, and HR.

Transformative execution.  The Hackett Group envisions an enterprise transformation office that provides high-level management of the corporate portfolio. Overseeing continuous improvement and tracking value realization from strategic initiatives are responsibilities of the enterprise transformation office.

Digital operations.  Finally, Hackett sees a customer-centric digital services team that is responsible for optimization of the enterprise technology architecture.

In this model, O’Connor clarifies, “the CFO’s role shifts from leading a silo of protected resources to coordinating various teams that contribute to finance objectives.” He adds, “This transition represents a major cultural change and radical departure from traditional finance organization design and governance. It involves breaking down functional process barriers within the function and creating enterprise capability to catapult the organization into the next normal.”

How to Get There

The Hackett Group’s action plan for reaching this new model for finance starts with determining the value of the finance group’s current operating model, assessing its capabilities and resource allocation, and evaluating its performance in terms of both efficiency and effectiveness. Identification of any performance gaps helps the finance team make a case for the next phase of the function’s transformation: designing future-state capabilities that fit with the business model the organization wants to have. From there, finance needs to develop a roadmap defining the path forward.

Bryan Hall, principal in the finance transformation practice at The Hackett Group, suggests that treasury and finance leaders looking to follow this advice need to evaluate, and perhaps rethink, their staffing priorities. “Finance must reinvest in both people and technology, while making significant changes to how and where work is done,” he says. “It must also up-skill and re-skill its workforce to improve expertise in a wide array of areas, including advanced analytics, technical IQ, digital savviness, and customer-oriented service design. Finally, enhancing business-partnering skills, such as emotional intelligence and relationship management, is key.”

The “World-Class Advantage” study seems to make clear the benefits of such an approach. “‘World-class’ has always been a moving target,” Hall says, “but today finance can no longer rely on incremental improvement initiatives. It must take bold, accelerated action to adopt digital capabilities and transform its operating model. … Digital world-class companies are able to accelerate innovation and product development, respond more quickly to opportunities and disruptive events, and dramatically improve customer loyalty and intimacy.

“The effort required to achieve these results is significant,” he concludes. “But it’s more than worthwhile.”