The future of finance: building a partnering approach

In the second of two articles which have been voted IFAC Articles of Merit, Stathis Gould and Martin Fahy look at effective finance business partnering.

Successful organisations are pursuing a three-legged approach to finance. They have moved routine transaction accounting and information processing to shared-service centres (or outsourcing providers) and have established centralised expert services – for example, tax, treasury and internal audit. But most have struggled to refocus their remaining finance resources on finance business partnering (FBP). This is partly because of increased regulatory and compliance requirements, but the complexities of the FBP role require finance directors to recognise the obstacles to change and to focus on several key success factors.

A study by CFO Research Services and Booz Allen Hamilton suggests that there are several obstacles to effective business partnering:

• Outmoded or missing business intelligence and planning capabilities.
• Multiple, fragmented IT systems preventing seamless integration.
• Inadequate resource firepower, unsophisticated processes for resource/capital prioritisation.
• Highly customised or unreliable financial processes supported by underdeveloped analytical tools.
• Uneven quality of leadership and consulting skills in finance.
• An inability to change a decades-old corporate culture.
• Strongly autonomous business units and a corporate centre that manages at arm’s length.
• A finance function that is bogged down in transaction processing and crisis management.
• A lack of stature and influence among senior financial managers.

Challenges of business partnering

Our work with the CIMA network forum of organisations, comprising 13 multinationals and large UK public sector bodies, confirms the seriousness of these obstacles. It has also given insights into the initiatives needed to transform the finance function. The structure, process and priorities of each organisation’s approach vary, but all are focused on tackling the complexities and challenges of FBP.

Our investigations highlight a trio of often neglected challenges that organisations must address in order to deliver FBP: talent, teamwork and tools. If you want finance people to participate fully in the decision-making process, these three areas are vital. In a three-legged model of finance that’s based on delivering expert services, there is a pressing need to find and cultivate finance professionals who can understand business requirements and deliver strategic insight. Our study suggests that many finance departments struggle to recruit and retain talented people using the coaching, analytical, consulting and facilitation skills that partnering requires. Every organisation in the study stressed the importance of offering appropriate career paths for emerging finance business partners. This involves changing recruitment and development practices.

Effective finance business partners are expected to be:

• Managers for value – that is, those who understand that delivering sustained shareholder value is the main goal when assessing alternative options.

• Keepers of the business model, who ensure that the whole organisation grasps the key performance drivers.

• Relentless pursuers of efficiency from the investment base, particularly in areas such as capital expenditure, working capital, brands and R&D.

• Executors as well as strategists, who understand that flawless execution is as important as strategy.

Grinding professionalism

As the Economist (January 27 2005) argued, winners 'focus on patient execution of sensible, but ambitious, plans… There are no takeovers, dramas or miracle cures – just relentless, grinding professionalism.'

Finance will find it hard to develop these skills without specific programmes to foster them. A key need, therefore, is to put in place the mechanisms and resources, including CPD activities and communication tools, that support good practice and improve the skills of finance business analysts.

Establishing career paths and succession planning for key finance roles will help firms to tackle the challenges created by new finance structures. Important questions include how to help people move between financial shared services and finance decision support – do people have the flexibility to move between these areas, and how do you manage career progression and the need for both experts and generalists? The importance of interpersonal skills and commercial acumen increases as decisions move from tactical areas, where rational arguments may suffice, into strategic areas, where discussions tend to be more rhetorical. At this level, finance’s input may need to be branded – for example, by McKinsey or Goldman Sachs – to gain credence in the decision-making process.

Freeing up finance’s time by removing activities such as internal control can serve to reinforce the silo mentality as expert services lose touch with business requirements. Recent moves to shared services have sometimes made finance more segregated in the organisation.

Marketing interface

If finance professionals engaged in FBP are to have an impact, they need to develop effective teamwork skills. Changing what these people do depends on altering behaviour embedded in a range of activities. This involves addressing factors such as organisational cultures and subcultures, identities and beliefs. Financial leaders need to recognise appropriate levers of change and make a case for better teamwork as part of key transformation projects.

When it comes to collaborating with marketing functions, a successful FBP approach will involve using sophisticated tools to provide analysis across processes such as brand, customer and channel or partner development. To succeed, cross-functional teams in the business units need to agree roles, expectations and accountabilities in brand management processes. Stakeholders such as IT, finance and customer development should all contribute.

In these situations, key questions for finance will concern its potential role at the marketing interface: who develops the tools and techniques, and what is the origin of the data? Currently, finance’s contribution to marketing and customer development varies. In some cases it assumes an advisory role; in others it monitors performance (see article in this month's Insight). The function’s integration into the business also depends on the maturity of the market and factors such as the firm’s share of that market and the level of local finance skills – specialist modelling requirements such as econometrics are often outsourced, for example. Rather than striving to own the marketing or brand process, finance could get involved by:

• leading analysis

• advising on financial effects

• challenging conventional wisdom about investment decisions, and

• evaluating and monitoring performance against targets.

New techniques

Businesses that depend on intensive research and development tend to be relatively clear about the role of finance in R&D: not to remove ownership of design and engineering processes and accountability for performance from the business. Where engineering capability is a key driver of performance, the main outcomes of the R&D process include driving customer value while ensuring manufacturing capability. Finance’s contribution tends to be in self-directed multidisciplinary teams at the front line. A first step towards changing this approach is for the decision support and analyst community to understand why its traditional contribution is outmoded and why activities such as persuasion, coaching and teamwork are important. It also needs to review structures, accountabilities and incentives.

Many finance professionals have to use new techniques to take on a FBP role. Firms in the fast-moving consumer goods sector, for example, have adopted sophisticated tools to improve decision-making on brand and customer development – for example, when assessing a brand’s return on investment. Typically, these encompass drivers of brand health and potential value creation, such as price, media and marketing mix. In engineering and R&D, the techniques include real options analysis, scenario planning, target costing, value engineering and TQM/Six Sigma techniques. The analysis required for brand issues helps finance to:

• understand the strengths and weaknesses of brands relative to others in the same category

• discern a brand’s growth potential

• continuously monitor advertising investments and effectiveness

• analyse ROI across the marketing mix to identify factors that affect sales, and

• manage price in a way that recognises its key role in value creation and considers the position of customers, retailers and competitors.

Brand health check

Although it’s tempting for finance professionals to covet the analysis and reporting activities associated with marketing, many organisations already have well-developed systems for managing media and assessing the health of a brand. Finance can take a back seat here, particularly if it’s not involved in developing marketing processes or tools. Its role can be to deliver insights to inform decisions from a financial perspective and to advise on actions to achieve brand objectives (or on revisions to objectives). For example, finance could conduct comprehensive reviews after product launches, negotiate retailer relationships and trade terms, or analyse what the competition is doing.

The precise contribution of finance to marketing depends on a range of factors. They include: the quality of data and analysis available; the maturity of the product or brand; pricing and marketing objectives; the skills that are available on the front line; and the nature of finance’s partnering role.

In an area such as R&D, companies typically have well-established processes. Engineering firms tend to have a staged procedure covering everything from understanding customers’ needs and assessing a new product’s economic viability, right up to production and fulfilling orders. In the early stages, finance is usually involved in R&D budget discussions. Later, it will engage in technical, maturity and risk assessments. By supporting and monitoring at production level, finance promotes operational excellence. It works with engineers to implement and improve the manufacturing process, using lean thinking to increase operational efficiency and to develop performance metrics that assess process capability and output. Finance is also central to discussions about where manufacturing is located and the structured capability required when moving from research to production.

For example, the pharmaceutical industry tends to have a long product development cycle in which the value of R&D depends on patents and clinical results. Finance professionals typically work in cross-functional R&D teams to find ways to shorten the product development cycle and manage strategic gambles using methods such as real options pricing. The competition for resources requires a balanced approach based on strong portfolio management and a focus on creating sustainable value rather than short-term profit.

Holistic view

Where finance has a holistic view of the organisation, it can help to ensure coherent and consistent decisions across functions by linking processes and performance to create value. But effective FBP can occur only where top executives – particularly CFOs – have created the right conditions for change. We have identified the following prerequisites:

• Manage perceptions and credibility. If finance fails to do this, the rest of the organisation will have no clear expectation of what the function can do. This is likely to have a negative effect on how it assesses finance’s performance. It’s crucial to manage what people expect of FBP and to get them to agree about what finance should and should not do.

• Gain high-level sponsorship. The finance director cannot drive and sell their vision for the finance function on their own. Securing strong leadership and sponsorship is an important part of the transformation process. Finance is unlikely to make much progress if the rest of the senior executive team is ambivalent about the changes.

• Maintain disciplined project management. A global finance transformation requires a programme board to steer the project, a clear timeline and well-defined activities. Poor project structuring and leadership stifle change initiatives.

• Provide development and a career path for finance staff. A structured development programme exposes people to CPD activities that will allow them to assume new roles.

The last challenge is the hardest and it can divert finance from the right priorities. The function needs a widely agreed and understood business model in order to make progress. This must be in place before it enters any discussions about developing better systems and processes and before it embarks on any change programmes. The process of discussing the model and making it explicit helps to drive FBP delivery. Although it’s crucial to be flexible, finance should not try to be all things to all people, because this could weaken its strategic focus. Senior managers must set out finance’s agenda and the scope of its role to create a clear view of the journey ahead.

Stathis Gould was a technical expert at CIMA (now working for IFAC) and Martin Fahy was a senior lecturer in information systems at the National University of Ireland, Galway (now development director, Asia Pacific, CIMA).

This article first appeared in the December/January 2005 edition of Financial Management.

See Gould and Fahy’s first article on the future of finance in November 2005 Insight.

September 2006