Consultants Underperform Finance Staff on Decision Support

Business units and functions are far more likely to value internally conducted financial analyses over those farmed out to third parties.
David McCannJanuary 6, 2016
Consultants Underperform Finance Staff on Decision Support

This article has been updated to include insights from CFOs and to correct imprecise wording related to what respondents answered CEB survey questions.

Finance departments are notoriously under the gun these days, given the proliferation of requests for decision-support analyses from business units and functions. This has been going on for the past decade, but the pace is picking up: Just from 2014 to 2015, the volume of such requests per $1 billion of revenue leaped by an average of 10%, according to an analysis by research and advisory firm CEB.

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CEB logoIt makes sense, then, that companies often rely on consultants to supplement, or even take over, some decision-support activities. But as to that, CFOs should be aware of an unsettling fact: If you’re trying to upgrade the quality of your decision support, you’re far more likely to deliver analyses in line with the objectives for the guidance if the analyses are provided by internally built finance teams, as opposed to consultants.

CEB looked at finance departments’ self-assessment on the results of 50 projects — for example, a cost-synergy forecast for an acquisition, a pricing model for a new product line, an analysis of the optimal allocation of marketing dollars — for which business partners sought their help.

Among finance departments that were “more reliant on third parties” (defined as those that rated themselves 1, 2, or 3 on a 7-point scale in response to the statement, “Finance relies primarily on third parties to lead guidance improvement efforts”), only 56% delivered “most” of the forecasted benefits of their analyses.

But departments that were “less reliant on third parties” (i.e., rated themselves 5, 6, or 7 on the same scale) were 1.5 times more likely to deliver most of the forecasted benefits, delivering most of the guidance objectives 85% of the time.

“CFOs over-rely on consultants, which leaves the muscle in their own organizations under-developed,” says Tim Raiswell, CEB’s principal research leader for finance. “Often, when consultants leave at the end of engagements, a lot of knowledge leaves with them. You’ve hollowed out a capability that you should have been building while the consultants were in-house.”

That can surprisingly be the case even at high-performing companies, says Eileen Kamerick, who has taken on a number of CFO roles in the past decade and is currently finance chief at ConnectWise, a cloud-based business management platform developer. “I’ve walked into fast-growing, successful companies that have no [financial planning and analysis] department to help select, analyze and address their most valuable opportunities for profitable growth,” she says. “Once a robust FP&A department is established, there is typically enormous internal demand for its services.”

Partly to blame for the lack of internal talent development is the stigma assigned to fixed costs (employees) as opposed to variable ones (consultants). “It’s one way finance people look at the world that makes them behave like this,” Raiswell says.

There’s also what Raiswell calls a “strange phenomenon” in corporate finance, where a significant portion of the budget is allocated to a category called something like “discretionary spend” or “advisory spend.” Even in difficult financial times, “it is still acceptable to have a couple million dollars laid aside for high-quality advisory, yet it’s absolutely unacceptable to hire anybody while a hiring freeze is on,” he says, characterizing the practice as “murky.”

Raiswell acknowledges that the scope of demands on finance departments requires them to tap third-party assistance. The trick is using it for the proper purposes.

“Renting” expertise is more appropriate, for example, for activities that address a predefined set of mandatory requirements, whereas building in-house capability is more conducive for addressing a unique set of business challenges. Companies should also stay in-house with respect to areas where consistent improvements will be required as the business changes, as opposed to those where improvements will stay relevant for multiple years.

For Arlen Shenkman, CFO of SAP North America, it’s imperative to make sure consultants are working for you rather than running the show. “When we use outside parties, our internal experts actively drive the engagement, including the consultant in discussions with our business teams,” he says. “Consultants need to be actively managed to ensure they gain the necessary insights and knowledge into the organization.”

Another key to using consultants effectively is by forming strong, long-term relationships with them and having them perform repeat assignments and tasks. “Simply switching advisers in order to lower fees and spreading them around the business can result in substandard work product,” Shenkman says.

Inside Knowledge

A variation of over-reliance on third parties has to do with finance’s relationship with human resources. Just as finance over-relies on consultants, it over-relies on HR when it comes to talent acquisition.

“Finance employees often have unique skills gaps for delivering guidance to internal business partners,” Raiswell says. “Business partners can have alpha personalities and be pushy and persuasive. To engage and advise that kind of person requires sophisticated interpersonal skills. But HR doesn’t necessarily have time to distinguish among a dozen types of communications skills.”

Nor does HR necessarily have the ability to distinguish among many kinds of problem-solving competencies. For example, if finance knows that a business unit is going to be expanding into a new country in three years, it should be making sure to hire staff that’s conversant in that country’s language and foreign exchange environment. “Finance will be much more successful in doing that if they don’t just leave it to HR to figure out,” says Raiswell.

Unfortunately, many finance managers aren’t very up to speed on what effective talent management looks like and are all too happy to leave the task mostly to HR, he adds.

To think about corporate talent management, envision a T-shape, Raiswell suggests. Along the horizontal line at the top of the T is “the stuff you find posted in the company’s cafeteria” about leadership skills and capabilities, for example. The message is that to be a leader in our culture, you have to display these attributes, like caring about the team. “That’s where HR generally plays,” he says. “But corporate executives who don’t have much talent management in their backgrounds may think that’s enough.”

CEB research, he notes, shows that each corporate function, whether it’s finance, sales, marketing, or IT, needs to manage the vertical line of the T, which encompasses the more specific skills and behaviors that the function needs. Otherwise “you’ll have HR saying, ‘Hey, this guy did his MBA at Wharton and specialized in finance, so he’s a great candidate.’ And he might be. But unless HR is looking for specific skills gaps that are unique to finance, they may be wasting a whole lot of time and money on the wrong candidates.”

Some finance departments steer around that risk by putting the leaders of the various finance disciplines — controllership, treasury, tax, financial planning and analysis, etc. — in charge of managing their own talent. But even that is not optimal, according to CEB.

“When the controller has one view of what distinguishes talent and success and the treasurer has another, you should be worried,” Raiswell suggests. In such a scenario, there probably isn’t much cross-pollination between teams, with staff moving back and forth between treasury, accounting, and the other finance disciplines in order to gain different experiences. Perhaps worse, they’re not being prepared to gain further experience by moving outside of finance into other functional areas or business units, which is something many companies today are seeking.

Instead, CEB advises that the CFO should take direct responsibility for managing talent across the entire finance function. “Finance teams are more successful when the CFO takes a direct interest in developing specific competencies that line up with where the business is headed — and even more importantly, where business partners’ requests of finance are headed,” Raiswell says.

That might mean, for example, that the finance chief has a monthly meeting with his or her direct reports where all finance employees are placed on a 3-X-3 grid, where those in the lower left box are low performers with low potential and those in the upper right box are high performers with high potential. “That CFO is helping manage the full portfolio of finance talent,” Raiswell says.