It wasn’t so long ago that the term “finance” brought to mind large teams of accountants sitting at desks and slogging through spreadsheets day after day. Thank goodness for technological advances that made it possible for finance teams to do so much more in so much less time. Right?
Here’s the surprising truth: While much has changed in the last two decades, very little has changed at all for many companies in terms of the size of the finance function.
Out of 328 finance executives at large companies who completed APQC’s Open Standards Benchmarking assessment as of March 1, 2016, the best-performing 25% of companies spends 0.57% of revenue or less to run their finance operations, including the “biggie” functions such as accounts payable, accounts receivable, general accounting, and performance management. (See figure below.) Not bad at all, and certainly far better than the roughly 2% of revenue that even the most efficient organizations were spending on finance 20 years ago, according to the CFO archives.
You might assume that similar downward curve has happened across the board, benefiting even the least efficient companies. But today, the bottom 25% still spends at least 2.13% of their revenue to do the same tasks. Why is there still such a huge between the sprinters and the slowpokes?
Total Cost to Perform the Finance Function as a Percentage of Revenue
The numbers are even more curious when broken down by industry. The graph shows the five industries that are the biggest finance spenders. The last one on the list, distribution/transportation, shows its bottom-quartile contestants spending at least 4.63% of revenue on finance. Surely, industry-specific business models differ in terms of finance’s scope, capabilities, and priorities. Still, the gears are clogged by undeniable waste in more than a few cases.
Consider another angle. Among the five least efficient industries in terms of spending on the finance function, you’ll find startling gaps between the best and worst performers. For example, although the services industry’s best performers are on par with the “all industries” group at 0.57% of revenue, its poorest performers cross the finish line spending 3.96% of revenue on finance.
Why the enormous gap? From the consulting corner, we hear any number of reasonable explanations having to do with operating models, decision rights, resources, and so on. But I’m still left wondering why, in an era when the mention of productivity silences any economic debate, some companies continue to tolerate glaring inefficiency.
A Failure of Leadership
The disparity stems from the refusal by some companies to evolve with the times or to respond to new demands arising from rapid organizational growth. Then again, there are the staggering challenges of integrating disparate systems within a complex, expanding, global company. You could speculate about this all day long. But in the end, it boils down to a failure of leadership
In some organizations, the killer factor is a lack of a consistent vision for continuous improvement of financial management processes. Unless company leaders realize that financial management processes are crucial to the smooth running of the enterprise, meaningful improvements that could come to fruition never will.
Wise CFOs realized some time ago that the push to “do more with less” was just the beginning of a perpetual effort to provide top-notch services in support of strategic aims. They saw the trend toward globalization and increasing complexity, and they began to craft a vision for the evolving role of finance.
They expanded their companies’ finance operations from HQ-level administrative group to worldwide, interconnected strategic forces capable of local market finesse. They standardized definitions and technologies as much as they could, continuously taming the beast of disparate finance data and systems. What makes me so certain? These are the echoes I hear from senior finance executives who use our benchmarking database.
Focus on the Right Things
With 20/20 hindsight, it’s now clear that companies that have treated finance like a back-office function rife with waste – and focused primarily on reducing the number of finance employees – had it all wrong. It turns out that “How many employees can we cut?” was the wrong question to ask. The right question was, “How are our finance employees spending their time?”
The winning CFOs have proven to be those who saw and responded to the need for finance to be agile. They saw the need to help the organization bend and stretch through mergers, acquisitions, divestitures, and new markets—and to create capital allocation and process innovation strategies to satisfy customers and shareholders.
Rather than simply processing transactions at a low cost, these leaders positioned finance as a competent analytics partner for organizational leaders. These CFOs led the evolution of finance from balance sheet management to strategic leadership, and along the way, they created efficient finance teams that really do accomplish more work for less. What are the others waiting for?
Mary C. Driscoll is a senior research fellow in financial management at APQC, a nonprofit business benchmarking and research firm based in Houston.