THE FINANCE FUNCTION OF
THE FUTURE: HOW LENDING
DEPARTMENTS ARE CHANGING

By Mark D'Arcy

Downsizing, right-sizing, restructuring, reengineering, process improvement--whatever name used--has become the latest in a long string of corporate fads. It is becoming a fad that has roots in the One-Minute Manager, Total Quality Management, Just-in-Time purchasing, and other attempts to improve the bottom line. Done correctly it can be rewarding for the company and its employees. Done incorrectly, or for the wrong reasons, it can have negative effects that are felt long after the project is completed. Over 70% of all major change efforts are failing. The worst cases are "slash-and-burn" restructuring that leave demoralized employees and shell-shocked management. Where lasting improvement is working is within organizations where there is a change in the view taken toward implementing such change. Rather than slash-and-burn, there is a renewed spirit of dynamism and cooperation.

Change is challenging under the best circumstances--when you have full management commitment and when the resulting improvement in cost or customer satisfaction is clear. One of the most difficult places to implement lasting change is within the finance function. In many companies, finance is historically perceived as a service department with little value other than producing monthly statements and processing transactions. As a result, the restructuring of the finance function is simply focused on cost and head count reduction. However, in leading-edge or best-practices finance departments, this is only one aspect of where finance is going. Best-practice finance departments are not only achieving a reduction in the overall costs of finance and accounting but are also increasing the value perceived by their customers. Best-practice CFOs have a renewed vision about the role of finance. They are reinventing themselves to add value to the organization and are fulfilling the needs articulated by the CEO.

Redefining the Finance Function

Today the average finance department spends a large portion of time in transaction processing and reporting--according to published studies, up to 75% in some organizations. It also spends significant time managing controls and risk. This leaves little time for adding value or business partnering. Leading-edge finance departments are driving toward a more equal distribution of resources among these three activities. They are utilizing new information systems to reduce overall costs and provide better support to make decisions. At the same time, the finance department is redesigning processes to optimize how work is performed by implementing new methods of doing work such as shared services and outsourcing. This leads to dramatic reductions in transaction processing costs and effort. In short, leading-edge finance departments are redefining how risk management, transaction processing, financial reporting, and business partnering are implemented within their organizations.

Finance is moving toward a new definition of risk management. During any major change entailing operations, finance is often involved to ensure that proper controls are in place to mitigate risk. However, rather than the traditional methods of command and control of financial risks, the trend is to allow finance departments to share responsibility with the operating units for business risk as well as cost control. This allows finance to integrate with the rest of the business while empowering the people in the operating units to control risk while they are improving processes.

Finance is also moving toward a new definition of transaction processing and reporting. The new definition is an evolution from historical to real-time indicators and from strategic support to strategic development. Rather than relying on institutional procedures that have existed for years, finance is challenging all processes. It is continuously looking for ways to spend less time and resources on transaction processing and reporting and reinvesting the time dividends on partnering, counseling, and strategic thinking.

Finally, the finance department is moving toward a new definition of business partnering. Rather than focusing on historical internal monitoring and external reporting, it is redefining how value is brought to the rest of the company by providing value-added services, with value being defined by the customer.

As an example, the finance department in a Northwest technology company worked hand-in-hand with their customers to define how they can provide maximum value. The value proposition is "...to provide relevant, timely, quality financial information and responsive, supportive, professional financial services..." They have moved transaction processing to a shared service center. Rather than having a core group of accountants at headquarters, the controller is sitting next to the customer. The mission is to implement the value proposition. It has redefined the way they think about financial reporting by refocusing their efforts less on external and regulatory reporting and more on management reporting and analysis.

The Role of the CFO

There is a new breed of CFO that focuses on showing internal clients that finance can add value. The new CFO is breaking the perceptual barrier that the finance function is simply accounting. By utilizing information systems to reduce work and delivering better information more quickly, the new CFO is recruiting a new mind into the department. In addition, seeking out knowledge about the organization and acting as internal consultants by delivering quality trend information and analysis is a priority. Furthermore, the CFO is reaching outside the corporate finance department and working within the operating units.

The new CFO is committed to organizing around skills and capabilities, not transactions. His staff is providing training, exposure to the rest of the company, team-building skills, and implementing customer-based performance measures to help their people become better business partners. The CFO believes that spending too much time on cost reduction suboptimizes controlling risk, providing information and insight, and acting as a value-added business partner. New ways are learned to serve a broad range of stakeholders including the stockholders, for earnings; the audit committee, for controls; customers, for satisfaction; employees, for a satisfying career; and suppliers, for win/win partnerships.

Finance Function Best Practices

Successful chance efforts have brought forward a number of best practices that are being implemented to create the finance function of the future. These best practices center along three major themes: information technology, processes and organization structures, and the skills and competencies of the professionals within finance.

Utilizing Information Technology. Best practice finance departments are finding innovative ways to streamline, automate, and centralize transaction processing. A decade ago, the need was to centralize the finance function in order to eliminate duplication in the plants and operating divisions. The problem was that finance centralized all functions and lost touch with the operating units. As a result of information technology and new financial systems, it is now possible to consolidate transaction processing into shared service centers while still distributing information for use by finance analysts within the operating units. This streamlines the providing of mandatory, but low value, activities such as processing accounts payable, expense reports, closing the books, and regulatory reporting. In addition to core information technology, finance is creating financial products and analytical tools that add value for other departments. These analytical tools supplement the traditional management reports and analysis. They are used not only by finance but are shared with operating units to allow them to gather their own data and provide additional meaning.

Motorola has extended its Six Sigma quality effort into the finance department and developed a relentless focus on errors and their causes. This has resulted in a streamlined process. As a division controller said, "Our focus is to eliminate or significantly reduce the potential for errors." The logic is that if an error occurs, it causes additional time and transactions to correct. That additional time does not add any value. These simplified processes have allowed them to achieve a two-day close, thereby providing financials to the operating units more quickly. This, in turn, frees up time for analyzing the results and providing additional trend and performance information.

At one high technology company, the finance department has recruited talented financial people who have skills in information technology. Over a three-month period, the company has gone from 100% paper distribution of reports to 100% electronic distribution of financials. They have implemented real-time revenue reporting that pulls sales information from distributors daily and reports revenue by product as well as location. They have implemented an internal intranet, and each controller maintains web pages highlighting the performance of his or her division.

Processes and Organization Structures. Best practice finance departments are reorganizing the way that finance supports the rest of the company. Finance is no longer a loose set of support functions. It is redefining the role of the CFO as someone who possesses broad knowledge of finance and the operating units being supported. Finance is working with the operating units to integrate controls into the processes and place responsibility for controls at the operating level. This achieves two goals: It gets the control to the level at which it is performed, and rather than finance demanding control, operations feel that they own the control. A major U.S. automaker has transferred all cost analysts to the plant floor, and the analysts work hand-in-hand with the operating managers to control costs at the process level. Significant cost reductions are achieved by catching problems on the floor rather than on a P&L or expense report when it is too late to make adjustments.

The finance department is also leveraging their core competency, turning data into meaningful information and extending it beyond purely financial measures of performance. Reporting packages that include nonfinancial indicators provide more meaningful data than traditional financials. Cost-based measures address the financial side of performance; quality-based measures examine how well products or services meet customer needs; and time-based measures focus on how quickly the organization responds. A heavy equipment manufacturer has reorganized the finance function around core competency networks. Rather than the traditional departmental view of finance, they now have a variety of networks: cost management, planning, customer sales and support, capital markets, and strategic services. These are all supported by shared service centers that provide transaction processing to the business units and controllers, who can cross several networks to get the answers to their customers' questions.

At the organizational level, the department is balancing oversight and control with business analysis and strategy. Best practice finance departments do not reduce the level of risk management and control in order to free up time to provide analysis and strategy support. A U.S. pharmaceutical company has found ways to achieve this balance. It has merged its control and treasury functions to create the financial evaluation and analysis unit. This unit focuses on a primary goal of developing professionals who can serve as overall financial advisors to their operational customers. They then integrate their knowledge of accounting, financial controls, financial analysis, and tax issues into their work. The CFO holds monthly strategy sessions to discuss the issues the business units are facing. Issues have included: R&D, productivity, asset utilization, capital structure, and manufacturing cost control.

Lasting change of this magnitude is difficult to implement because the organizational memory of the traditional finance function often prevails. People within the finance department are critical players in ensuring that this organizational memory is replaced by the new vision for finance.

Finance Professionals. In the best practice finance departments, the people are the most critical asset the organization has. In order to attract and retain the talent necessary to implement change, professionals need to have challenging opportunities and the tools necessary to be effective. It is important to involve finance professionals in operations and to incorporate them in crossfunctional teams. The CFO is being called on to provide expertise to companywide initiatives that offer the opportunity to involve finance from the beginning. At General Electric, new management talent is rotated through internal audit to allow them to get closer to the operational side of the business. The internal audit team focuses on risk and control issues as well as operational issues; the goal to is make the audited area perform better as a result of having been there. Boeing involved finance people from the beginning of the new airplane design effort on their Design Build Teams. These teams were crossfunctional and responsible for design of a given portion of the airplane. The finance representatives were able to provide real-time cost analysis and were familiar with all issues the team faced, which allowed them to give much higher quality information.

The finance department is providing additional training to its staff to broaden its business skills and, to the operations personnel, to broaden their financial skills. Many companies are basing their incentive programs and career development on participation in training. One financial services company maintains a comprehensive career tracking system to ensure that professionals are getting the training required. It internally produces extensive training programs and support materials.

An often overlooked best practice is the development of relevant customer oriented performance measures. Each line organization has key performance indicators that track how well they are meeting customer expectations. Finance can also put these measures in place to ensure it is meeting customers' expectations. These measures are often qualitative as well as quantitative and provide each person with an indicator of how well the goals of the organization are being met. An aerospace company developed customer-based performance measures to evaluate the timeliness and quality of internal audit. The old audit process was intrusive and threatening. It took an average of 88 days from the time the auditors left the field to the production of the final report. By that time it was old news. After streamlining the process and putting performance measures in place, a dramatic change occurred. The units were given 30- to 60-days notice prior to the audit. An interim report was produced prior to the time they left the field; a final report was available in less than 10 days. Most importantly, operations felt that the finance department was truly there to help and add value, rather than just to police them.

Results

Companies that are on the way to achieving the finance function of the future are reaping big rewards in cost savings, customer satisfaction, and employee morale. In the ultimate finance function of the future, results are significant:

* The organization is much more dynamic and interactive, with communication and continuous improvement facilitated throughout the organization.

* The business and its key business risks are much better understood.

* Finance personnel view operations personnel as their customers.

* Operations personnel view finance personnel as their partners.

But most important to management, in the ultimate finance function of the future, real-time, cost effective, and value-added information is available to improve decision making, and thus to better position the company to compete. *

Mark D'Arcy is a manager with the Portland office of Arthur Andersen LLP

Reprinted by permission of The Oregon Certified Public Accountant, March 1996.

Editor:

Michael Goldstein, CPA

The CPA Journal