Capital Markets

After a Sarbox Bump, Finance Cuts Costs

Finance-related costs resume a 14-year downward trend, a survey finds.
Stephen TaubNovember 17, 2006

So much for fears that Sarbanes-Oxley will permanently break finance department budgets. After two years of cost hikes related to internal-controls compliance, the “typical” company reported a 3 percent dip in the cost of finance operations in 2006, according to a report by The Hackett Group.

The decline in finance-related costs resumes what the consulting firm calls a 14-year downward trend at typical companies, after an 18 percent surge in the 2004–2005 period, in part due to Sarbox compliance efforts.

Hackett also found that what it calls “world-class finance organizations” cut costs by an impressive 8 percent in 2006, after actually reducing costs by 5 percent in the 2004–2005 period. The research firm defines a world-class company as one that ranks in the top 25 percent among peer companies in both efficiency and effectiveness of any given benchmark metric.

Such organizations have cut the cost of finance to 0.67 percent of revenue, 45 percent lower than typical companies, for which costs are now 1.22 percent of revenue, according to the report. Hackett based its findings on a survey of 500 companies, of which the median revenue is between $3 billion and $4 billion.

World-class finance organizations also rely on 56 percent fewer finance staff as a percentage of revenue, the firm reported.

How do the top-performing finance units control compliance costs? Hackett found that those companies spend 55 percent less than their typical peers on finance controls, and report compliance costs that are 53 percent lower.

An important part of this strategy is what the firm calls “complexity reduction.” The top companies have 40 percent to 60 percent fewer controls than typical companies in five key finance areas: general accounting, revenue cycle, cash disbursements, tax management, and treasury, according to Hackett.

Besides streamlining compliance processes, the world-class finance outfits slash complexity in other areas. For example, they have 45 percent fewer legal entities and 33 percent fewer tax domains, and in budgeting, they rely on 33 percent fewer line items.

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