VideoIn the decade-long marathon known as "finance transformation," CFOs have been chasing two goals. One is efficiency: the routine work of finance — from paying vendors to making reconciliations — should be done centrally and cheaply. The other is business analysis: the finance professionals who work in the business units ought to spend their time helping managers think about how to make money.
When a company attains both goals, the results can be spectacular. Consider the experience of Agilent Technologies Inc. Three years ago, the Palo Alto, California-based scientific-equipment maker was in a deep post-dot-com slump. Orders for its high-tech products had dropped 60 percent in just nine months. The company was losing hundreds of millions of dollars annually. The finance function wasn't in much better shape: some processes were inconsistent, and employees were frequently too busy finding, reconciling, reworking, or inputting numbers to help with important business decisions.
Agilent brought in a new CFO, Adrian Dillon, and gave him a mandate to overhaul finance. Dillon pushed to simplify and standardize finance processes across the company and, where appropriate, move them to offshore shared-services centers. These steps cut the cost of finance by 50 percent. He also changed the way finance supports the business, dedicating analysts to each division. These analysts have helped business managers reach decisions about which businesses to sell and which operations to relocate.
"Our company has had to make very fast decisions such as whether to shift operations from, say, Western Europe to Malaysia," says Dillon. "Those kinds of decisions are all now cosponsored by the finance team along with the general managers. In the past, finance would have never been involved."
Agilent's transformation is far easier to describe than to replicate. The trouble is that attaining the two goals requires two very different efforts. One is to wrench back-office processes away from business units to gain economies of scale. The other is to dispatch finance employees out to the business to play the unfamiliar role of strategic adviser.
Failure in the first effort could be a career ender. "Whenever you go through one of these consolidations, everyone fights you," says Greg Hackett, founder of The Hackett Group and now president of MergerShop, a Bath, Ohio-based advisory firm. "And often the person who tries to force it dies on the road to implementation."
Those who survive the consolidation find they may have won only a partial victory: cost savings for finance but little real value for the business. Indeed, while the cost of finance since the early 1990s has fallen from 1.9 percent of revenues to 1.26 percent today, the proportion of time finance employees spend advising the businesses has barely budged. (It remains just under half.) In other words, many finance functions are more efficient than smart.
How should CFOs go about creating a finance operation that is both? Now is a good time to ask the question. According to a new study by The Hackett Group, companies are still rushing to centralize as many finance processes as they can, including activities that many regard as the purview of business units, such as budgeting and planning. Twenty-seven percent of finance processes on average are performed in the business units today; three years from now, companies expect that number will drop to 11 percent. "There's no question — we are still moving very quickly toward centralization," says Rick Roth, chief research officer of The Hackett Group.
At the same time, most companies face an ever-growing list of competitive threats. They can't afford a finance operation that is merely inexpensive.
An Echo of the Past
There is a good reason why finance transformation is proving to be an uphill fight at many companies. By attempting to consolidate finance processes, CFOs are moving in exactly the opposite direction from the rest of their companies, which are generally becoming more decentralized.
Until about 20 years ago, most businesses and their supporting functions were highly centralized, a legacy of the command-and-control model popular since the days of Henry Ford. Then, beginning in the late 1980s, managers discovered that with the help of new technologies such as E-mail, they could radically decentralize their businesses and dramatically improve business performance. "Companies are finding that in our knowledge-based and innovation-driven economy, the factors for business success are the same as the benefits of decentralization: motivation, flexibility, and innovation," says Thomas Malone, a professor at the Massachusetts Institute of Technology Sloan School of Management and the author of The Future of Work.
Finance dispersed along with the business units. That wasn't an accident. "The one word business managers were used to hearing from people who did accounting at the corporate level was 'no,'" comments Hackett. "So people said, 'I'm tired of this — I'm responsible for this business unit and will make the investments in it.' So they hired their own finance staff."
Reader Comments» Post a comment