CFO Agenda: Finance s Four Imperatives to Accelerate Business Value

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1 Finance Executive Insight Study Results Analysis January 2018 Complimentary Research CFO Agenda: Finance s Four Imperatives to Accelerate Business Value Supporting the enterprise through better insight is the number-one objective of finance executives this year By Nilly Essaides, Tom Willman and Jim O Connor Executive Summary Companies are struggling to protect margins while refocusing growth strategies on innovation and new product design to compete in the digital era. Against this backdrop, finance s mandate is to drive revenue and margin growth through improved analytics and insight generation. At the same time, it must effectively manage its own budget constraints. Quicker adoption of digital tools will be the key enabler for finance to deliver on that mandate and support the overall digital enablement of the business. The results of our 2018 Key Issues Study show the four main items on finance s must-do list this year if it is to enhance enterprise performance: 1. Balance the investments required to achieve better performance despite budget pressures, while helping the enterprise maintain a competitive cost structure. 2. Support the enterprise by delivering improved analytics that enhance business partnership and enterprise growth. 3. Leverage digital strategy to become more efficient, effective and agile, to act as an accelerator of the enterprise s overall objectives. 4. Reshape the finance service delivery model for better customer service at lower cost. Our 2018 Key Issues Study findings point to a gradual shift in the coming year toward innovation-led strategies, with a net increase of 5% of companies (compared to last year s study findings) expecting to focus on business model or product/service innovation as their primary business strategy. Today, innovation in product, service and business model is intrinsically linked to digital technology, which is changing the nature of business and transforming industries beyond recognition. Our study results indicate that 74% of companies expect digital transformation to disrupt their industry and change the competitive landscape, while an even higher percentage (82%) expect it to fundamentally change the operating model of their business. The numbers are even higher for finance organizations, where 96% expect digital transformation to bring step-change improvement to performance and 97% expect it to alter the function s operating model (Fig. 1). Indeed, 56% of finance organizations now have a digital strategy, compared to 44% last year. That may be due to the adoption of digital technologies, which will make finance both more efficient and more effective, in turn benefiting its internal customers and the organization overall. Finance Executive Insight I The Hackett Group I 1

2 About this research For the 2018 edition of The Hackett Group s annual Key Issues Study, executive management and leaders of finance, human resources, information technology and procurement organizations at a global set of midsized and large enterprises were asked in late 2017 about their strategic priorities and initiatives for the coming year. The study results, which are analyzed in separate reports for each function, also guided the creation of our 2018 research agenda. Issues cited by participants as top priorities or challenges will be addressed in our research, webcasts and other Advisory Program membership deliverables in the months to come, along with related best practices; empirical data to assist in building a business case for change; timetested and emerging solutions; and case studies. FIG. 1 Impact of digital transformation Digital transformation will fundamentally change the way finance services will be delivered over the next 3-5 years Digital transformation will offer step-change performance (cost, quality, cycle-time, etc.) improvement of the finance function Our finance function has developed and is executing a digital transformation strategy Our finance function has the resources and competencies in place to execute the digital transformation strategy Percentage of companies 32% 51% 45% 58% 4% 35% 11% 56% AGREE 46% 38% 97% 96% STRONGLY AGREE Study respondents highlighted four actions on finance s must-do list in 2018 that are necessary if the function is to fulfill its role as a strategic partner to the business. Finance impact Finance execution capability Must-Do #1: Balance Cost and Performance The overarching enterprise theme for 2018 is the need to unlock the value of digital transformation. This is no longer optional, but a strategic imperative. For finance, these efforts are further complicated by ongoing corporate pressure to lower expenses. More than other functions we study, finance executives expect their operating budget to decline in 2018 (Fig. 2). The only function anticipating a significant increase in its operating budget is IT, but given the critical nature of technology investment, that is perhaps not surprising. True, the cost-cutting expected in finance this year is less than it has been in the past couple of years. There s a reason for that: finance s existing automation initiatives and organizational changes have already driven out a lot of process inefficiencies. FIG. 2 Projected revenue and functional budget, YOY change Revenue growth 4.0% 3.4% 3.6% Business services operating budget 0.0% -0.3% 0.4% Finance operating budget -4.0% -2.0% -1.3% HR operating budget -0.3% -0.2% -0.7% IT operating budget 0.7% 0.6% 1.8% Procurement operating budget 1.2% -0.5% -0.3% Finance Executive Insight I The Hackett Group I 2

3 Finance Executive Insight

4 FIG. 4 Importance of improvements in finance capabilities and performance levels Improve finance analytical, modeling and reporting capabilities 22% 62% 84% Develop better business partnership with business units and functions 20% 53% 73% Improve finance agility 16% 55% 71% Align finance skills and talent with changing business needs 26% 45% 71% Take advantage of new finance applications, technologies and technology deployment models 15% 56% 71% CRITICAL HIGH That leaves two critical areas of improvement: talent and technology. Talent is perhaps the most important. In conversations with senior-level executives among our client base, we found that, while they can access new technologies, they have a very hard time finding the right people to implement and use them. They need professionals who understand systems and can deploy them within the appropriate context of their business. But they also need ones who can make sense of data and are able to tell a story and interpret results. These skills are a hard combination to find. As Fig. 5 below shows, some of these improvement areas are harder than others to address. FIG. 5 Finance improvement areas: Importance vs. ability to address Moderate/High Ability to address Moderate Improve compliance/ internal controls Improve integration of planning processes and data between finance and operations Improve finance s risk mgmt. capabilities Redeploy capacity to more value-creating activities Increase finance customer-centricity Reduce finance operating cost A B C Develop better partnership with BUs and functions Modernize finance application platforms D E A B C D E Critical development areas Optimize deployment of resources across the organization Improve finance agility Take advantage of new finance applications, technologies and deployment models Align finance skills and talent with changing business needs Improve finance analytical, modeling and reporting capabilities Moderate Importance High WELL- SUPPORTED IMPROVEMENT OPPORTUNITY CRITICAL DEVELOPMENT AREA Finance Executive Insight I The Hackett Group I 4

5 Without the skills and talent to keep up with changing finance requirements, it s difficult to remain agile or take advantage of new tools to deliver the essentials: cost, revenue and margin improvements. If finance is going to successfully transform itself for the digital era and meet its goals, it must take on new initiatives designed to identify and develop these capabilities; find ways to attract, develop and retain new talent; and offer new learning and experiential opportunities to allow existing staff to continue to hone the skills and competencies valued most by the business. Must-Do #3: Leverage Digital Tools While talent is a key hurdle for finance s success in delivering on enterprise expectations, one way to draw a short line between improving performance and keeping down cost is more-rapid adoption of digital technologies. Digital transformation will be a gamechanger in the quest to add value to the enterprise while reducing finance cost. In research we conducted in 2017, based on our finance benchmark database, we correlated the adoption of digital tools with finance performance. We found that digital tools can dramatically reduce the cost of finance processes (Fig. 6). This is true for both the peer group and world-class organizations. 1 The former can reduce process costs by 35% through digital transformation; the latter, by 20%. FIG. 6 The finance digital transformation opportunity Percentage of finance process cost ($ millions per $ billion revenue) 35% Savings from digital transformation Baseline Baseline 20% Savings from digital transformation Peer group World class Source: The Hackett Group, 2017 Moreover, digital transformation drives value beyond cost: it can raise finance s effectiveness and the quality of service it offers its internal customers (Fig. 7). Thanks to powerful new tools, finance will be able to spend more time analyzing data and coming up with options and guidance for management decisions. Other technologies will improve the quality of the receivables portfolio (increasing cash flow) and reduce billing errors (leading to faster payment from customers). 1 We define world-class finance organizations as those that simultaneously achieve top-quartile efficiency and effectiveness performance (typically 10% to 15% of benchmark participants). All others receive a peer group designation. Finance Executive Insight I The Hackett Group I 5

6 FIG. 7 The impact of digital transformation on finance effectiveness 6% difference 27% difference 40% difference 59% 75% 90% 95% 1.67% 1.00% Billing errors Percentage of time spent analyzing as opposed to collecting data Credit sales collected within terms BEFORE DIGITIZATION AFTER DIGITIZATION Source: Benchmark and publicly available market data, The Hackett Group, 2017 Before finance can fully realize the expected benefits of digital transformation, it has to close the gap between its strategies and its ability to execute them. Right now, while 56% of finance organizations have a strategy, only 35% say they have the competencies to execute it. One major factor is the plethora of initiatives on finance s agenda this year; it is difficult to set clear priorities when all of them compete for attention and many for the same resources (Fig. 8). FIG. 8 Organizations with major changes planned in 2018 Develop finance technology roadmap 36% 28% 64% Improve finance data stewardship, data governance, master data management strategy 27% 35% 62% Develop and expand business-partnering roles 26% 44% 70% Develop and implement finance KPI, information and reporting strategy, and related process improvements 25% 48% 73% Transform the forecasting, budgeting and planning processes 23% 39% 62% Reengineer (i.e., standardize, integrate, eliminate, automate) finance processes 22% 49% 71% Rationalize finance applications (consolidation, migration to common ERP platform, etc.) 22% 35% 57% Roll out finance BI/analytics applications in HQ or COE 21% 44% 65% Improve specialist skills in finance though training and development 19% 50% 69% Improve finance business acumen 13% 65% 78% TECHNOLOGY ANALYTICS PEOPLE/ TALENT MAJOR MODERATE Finance Executive Insight I The Hackett Group I 6

7 In addition, not every problem should be resolved with a digital solution. Digital tools need to make sense from a business perspective. The faster companies go through the business-case analysis, the better off they are. There s no time to wait and see, as competitors quickly adopt enabling technologies. While the payback on certain digital tools such as robotic process automation (RPA) can be calculated fairly easily, others, such as advanced analytics cannot. This underscores the need to prepare a robust business case that outlines the quantitative and qualitative benefits of digital tools to ensure these initiatives are prioritized appropriately (Fig. 9). FIG. 9 Value driver in scope of digital transformation project business case Customer satisfaction Business agility 27% 17% 57% 50% Quality of service Cycle time Business value Operating cost System usability Technology cost 46% 43% 39% 43% 39% 43% 32% 29% 17% 29% 5% 21% PEER GROUP TOP PERFORMERS Source: Digital Transformation Study, The Hackett Group, 2017 Having the right business case and well-thought-out priorities are both very important. Another contributing factor for the gap between the importance of digital transformation and finance s ability to execute its strategy is the dearth of resources specifically dedicated to it. According to our 2017 Digital Transformation Study, technology currently accounts for just 10.4% of finance s operational budget. Digital transformation receives only 5.3% of those funds (Fig. 10). That s going to get better. A significant number of organizations expect net increases in the percentage of their technology budget dedicated to digital transformation as well as the share of total transformation roles. Senior finance management is now aware of how important digital transformation is for the success of the modern finance function, and is beginning to reallocate resources to drive fuller adoption. Finance Executive Insight I The Hackett Group I 7

8 FIG. 10 Digital transformation resources: Key ratios Pct. of organizations expecting increase over next 2-3 years 65% 75% 77% 68% 76% Ratio 10.4% 5.3% 5.9% 8.1% 11.8% Finance technology cost* as a percentage of finance operating budget Digital transformation enabling technologies cost**/total finance technology cost FTEs delivering digital transformation initiatives/ total FTEs involved in business transformation Spend on finance digital transformation/ total spend on transformation and performance improvement Percentage of total finance roles impacted by digital transformation * Total technology cost (hardware, software, labor and outsourcing, incl. chargebacks, corporate allocations and SaaS fees) ** Total technology cost for technology specifically used to enable digital transformation such as SaaS, mobile, social technologies and advanced analytics Source: Digital Transformation Study, The Hackett Group, 2017 FIG. 11 Adoption of digital technologies, current and projected Difficult business cases and limited funding are not stopping finance from moving ahead, even if they might slow it down. The most prevalent technology entering the broadly adopted category in coming years will be cloud-based tools. According to our research, it s already gaining momentum in applications such as enterprise performance management (EPM), expense reporting and account reconciliation. We are even starting to see signs of a shift to ERP in the cloud, but that movement is still in its very early phases. The broad adoption data, however, likely reflects more of an emerging cloudfirst policy for new implementations, as finance considers attractive aspects of cloud such as lower cost of ownership, ability to quickly adopt best practices, and faster implementation (Fig. 11). 82% 82% 77% 80% 64% 38% 41% 34% 56% 45% 46% 46% 44% 40% 41% 39% 38% 27% 30% 44% 35% 38% 38% 41% 43% 35% 29% 36% 25% 29% 15% 2.9x 8.2x 5.4x 4.5x 4.2x 3.2x 5% 8% 8% 6% 9% Currently 2-3 years Currently 2-3 years Currently 2-3 years Currently 2-3 years Currently 2-3 years Currently 2-3 years Cloud-based applications/saas Advanced analytics* Master data mgmt. technologies Data visualization tools Mobile computing Social media/ collaboration *Including predictive modeling, big data analytics, unstructured data analytics LIMITED ADOPTION BROAD ADOPTION The two fastest-growing broadly adopted digital technologies are master data management (MDM) and advanced analytics. One is useless without the other. Absent a strong foundation of consistent data definitions and processes for how data is stored or changed, there is no guarantee of data integrity. And without data integrity, finance cannot trust the outcomes of analytics solutions, no matter how sophisticated. As we saw earlier, finance s number-one objective and improvement goal in 2018 is increasing the quality of its analytics to deliver better insight to the enterprise, in order to add shareholder value, increase revenue and improve cash flow. Thus, finance s greater investment in these two technologies is aligned with its major objectives. Finance Executive Insight I The Hackett Group I 8

9 Our study also points to significant growth in the use of data visualization tools, which could mean anything from simple graphics to interactive/drill-down solutions. That data is closely related to the growth in the use of advanced analytics. More sophisticated analyses like predictive or prescriptive methodologies require a different approach to both data discovery and presentation. Data patterns must be displayed visually in order to tell meaningful stories. For best effect, results also need to be shown in pictures. While the current adoption base for emerging digital technologies like RPA is still relatively low, finance expects a rapid escalation in their broader-based and limited adoption (Fig. 12). Particularly for RPA, respondents anticipate a 12.7X increase in the rate of mainstream adoption and a 3.2X increase in limited adoption. The picture is even more compelling for the adoption of RPA in global business services (GBS) organizations (not shown), where most of finance s transactional activities now take place. There, broad adoption is already at 10% and is expected to grow more than fivefold in the next two to three years. The use cases in areas such as finance close and general ledger accounting are more immediate as robots replace humans in activities such as reinputting data from one system to the other. FIG. 12 Adoption of emerging digital technologies, current and projected 78% 40% 21% 20% 31% 38% 16% 32% 18% 18% 14% 6.8x** 12.7x 7.0x 14% 6% 3% 5% 13% 3% 9% 3% 2% 6% 2% 2.5x 5% 3% 5.7x** 5% Currently 2-3 years Currently 2-3 years Currently 2-3 years Currently 2-3 years Currently 2-3 years Robotic process automation 34% 40% Internet of things Cognitive computing/ artificial intelligence* 37% Virtual assistants/ chatbots Blockchain * Including machine learning, natural language processing, speech recognition, expert systems, augmented reality ** Growth represents limited adoption plus broad adoption LIMITED ADOPTION BROAD ADOPTION Adoption of even newer technologies like blockchain and the internet of things is anticipated to be fairly low in the next two to three years. Finance is only beginning to explore how they may be applied to improve efficiency and effectiveness. These trends are confirmed in Fig. 13. Finance is performing its highest degree of piloting in RPA. This is an area where the business case is relatively easy to make. Nearly tied for second place are advanced analytics and cloud solutions. Both are becoming increasingly critical to the execution of finance s top enterprise objectives. FIG. 13 Percentage of finance organizations currently piloting various technologies 58% 46% 44% 39% 39% 38% 31% 30% 26% 26% 17% Robotic process automation Advanced analytics Cloud-based applications/ SaaS Data visualization tools Master data management technologies Cognitive computing/ AI Social media/ collaboration Mobile computing Internet of things Virtual assistants/ chatbots Blockchain MAINSTREAM TECHNOLOGY EMERGING TECHNOLOGY Finance Executive Insight I The Hackett Group I 9

10 Combined with Figs. 11 and 12, this data shows how the finance digital tools adoption future is shaping up. Today, 45% of finance organizations have either broadly or partially adopted cloud solutions, while an additional 44% or are piloting them. In addition, 21% of finance organizations have either broadly or partially adopted RPA solutions, and 58% are in piloting mode. The corresponding numbers for advanced analytics tools are 40% partial or full adoption and an additional 46% in pilots. This underscores just how critical digital technologies are going to be for finance in its initiatives to improve its performance while keeping costs down and helping the enterprise deliver on its performance objectives. Must-Do # 4: Reshape the Finance Service Delivery Model There is one more important item on that to-do list. As we saw earlier in Fig. 1, 97% of respondents expect digital transformation to alter the finance service delivery model. Big changes are already visible on the ground: in the business units, finance is reducing its headcount and activity level by 1.6% and 0.6% respectively. At the same time, it is significantly increasing headcount in COEs and GBS organizations as well as the amount of work handled there (Fig. 14). FIG. 14 How finance is rebalancing its workload and FTEs Percentage change from 2017 to % 4.4% -0.1% 0.8% -1.6% -0.6% 2.3% 3.9% 0.5% 1.5% 0.7% 1.8% FTEs Workload FTEs Workload FTEs Workload FTEs Workload FTEs Workload FTEs Workload Global business services (GBS) organization Finance HQ Business unit Centers of excellence Outsourced Offshored* *Captive only, excluding outsourced This trend toward the use of GBS and COEs is as much about improving service quality and customer satisfaction as it is about efficiency, if not more. Specialized entities can perform the same amount of work, using new technologies that deliver better results with fewer personnel; they can also be situated in lower-cost locations. Leveraging highly trained or scarce talent in COEs lets companies avoid having to hire staff with advanced skills to do the same work in multiple functions. For example, take the case of advanced analytics: more companies are choosing to bring together analytics experts and niche technologies into COEs that can provide high-end analytics support to other functions (Fig. 15). COEs can deliver advanced analytics to support the business and use their technology know-how to automate updates to recurring reports and provide answers to enterprise-level queries. Our 2018 Key Issues Study shows that analytics is increasingly going to be performed by standalone entities. In some cases, finance will act as the analytics hub of the enterprise. In two other common scenarios, analytics will be handled by COEs that either report into finance or are independent of a particular function. Finance Executive Insight I The Hackett Group I 10

11 FIG. 15 The analytics delivery model, current and projected 52% 54% 43% 48% 46% 30% 26% 16% 63% 32% Finance acts as the analytics hub of the organization Finance is in charge of an analytics/bi COE Finance is a client of an enterprise-level analytics COE that sits outside a particular function The analytics/bi COE reports into the IT function Each function has its own analytics capability without a centralized capability/coe CURRENT 2-3 YEARS Conclusion and Recommendations The expected impact of digital transformation on finance s performance and service delivery model makes it the critical path for finance to deliver on its top enterprise priorities: better insight, tighter business partnership, alignment with enterprise strategy, strategy formulation, cost control and helping the company enhance customer experience. How can finance get closer to reaching these goals? It should: 1. Leverage digital transformation as the pathway to improving customer service while keeping costs under control: Facing another year of budget cuts, finance needs to find a way to play its critical role as a strategic advisor to the enterprise by developing a digital strategy and bringing more value to the table by delivering better information so managers can make better decisions. While we see an increase in the number of finance organizations that have a strategy for digital transformation this year versus last year, overall that number is still only 56%. More finance organizations need to accelerate their transformation and develop a strategy aligned with that of the enterprise. They must have a roadmap to guide them from the basic stages of sorting out the enterprise data and governance strategy and identifying use cases for digital tools, to the more advanced stages of deploying tools to digitize processes, produce analytics and visualize data. 2. Attract, retain and train the right talent: Digital transformation will create entirely new roles in finance, some of them unknown today. Finance professionals will need to be knowledgeable about data science and use predictive models to see into the future of the business. Buying a new analytics tool set is relatively easy compared to finding the right people to deploy the technology. In many organizations, the biggest hurdle to realizing the promise of new tools is the inability to attract data-savvy talent. Moreover, candidates must understand how the business works and be able to interpret information and relate it in terms that make sense to the recipients in the business. 3. Move beyond exploration of digital tools to fuller adoption: Our data shows that the broad-based and limited adoption of technologies like RPA, cloud and advanced analytics is on the rise. We also see that these are the technologies most frequently piloted by finance functions. To catch up and achieve the service delivery and performance promise of digital transformation, finance organizations should move faster from piloting and limited adoption to broader-based implementations. Finance Executive Insight I The Hackett Group I 11

12 To get there, they need to build a robust business case informed by the results of their pilot projects, adopt the COE model for analytics services, and employ an agile deployment strategy (team-centric, using short bursts of modular implementation). Our findings from related research tell a compelling story: in our 2017 Digital Transformation Study, 42% of finance organizations that completed a digital pilot reported an 11%-25% ROI from the project. 4. Change finance s service delivery model to optimize the use of digital technology: New tools make it possible for finance to reorganize its activities and pull more of them into GBS centers and COEs. The function must reconsider where each of its activities takes place and whether it has optimized its organizational model so it can improve the service it delivers to its internal customers with maximum efficiency. About the Advisors Nilly Essaides Senior Research Director Ms. Essaides has over 25 years of experience researching, writing, and speaking about finance and treasury issues, with a focus on the way finance adds value to the enterprise through excellence in financial management and planning processes. Previously, she worked at the Association for Financial Professionals, where she led the FP&A (financial planning and analysis) practice. Ms. Essaides, a prolific blogger with thousands of LinkedIn followers, writes for external publications such as Digitalist Magazine. In addition, she co-authored a book about the internal transfer of best practices, If Only We Knew What We Know (Simon & Schuster, 1998). Tom Willman Associate Principal and Global Practice Leader, Finance Executive Advisory Program Mr. Willman has nearly 20 years of experience helping CFOs and other senior finance executives transform their organizations by deploying more efficient and effective processes, Service Delivery Models and enabling technologies. Areas of expertise include planning and forecasting, close and consolidations, management reporting and analysis, and the design and implementation of shared services organizations. Previously, he spent 10 years with IBM Global Business Services and PricewaterhouseCoopers, consulting in their Finance Transformation practices, and several years in the Audit and Assurance practice at Coopers & Lybrand. Jim O Connor North American Advisory Operations Leader Mr. O Connor has over 20 years of both industry and consulting experience focusing on finance transformation. He has particular expertise in strategy and organization design, business process design, strategic cost reduction, reporting, planning and performance management, BI and financial systems, shared services and outsourcing. In these roles, he has advised client executives in a wide range of industries including consumer products, financial services, higher education, manufacturing, retail, and utilities. Previously, he led the CFO Services practice at North Highland, a global consulting firm, and before that, focused on finance transformation and strategy at Archstone Consulting, now a part of The Hackett Group. Finance Executive Insight I The Hackett Group I 12

13 For more papers, perspectives and research, please visit: Or to learn more about The Hackett Group and how we can help your company sharply reduce costs while improving business effectiveness, please contact us at (U.S.) or (U.K.). The Hackett Group (NASDAQ: HCKT) is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices implementation firm to global companies, offering digital transformation and enterprise application approaches including robotic process automation and cloud computing. Services include business transformation, enterprise performance management, working capital management and global business services. The Hackett Group also provides dedicated expertise in business strategy, operations, finance, human capital management, strategic sourcing, procurement and information technology, including its award-winning Oracle EPM and SAP practices. The Hackett Group has completed more than 13,000 benchmarking studies with major corporations and government agencies, including 93% of the Dow Jones Industrials, 87% of the Fortune 100, 87% of the DAX 30 and 58% of the FTSE 100. These studies drive its Best Practice Intelligence Center which includes the firm s benchmarking metrics, best practices repository and best practice configuration guides and process flows, which enable The Hackett Group s clients and partners to achieve world-class performance. info@thehackettgroup.com Atlanta London Sydney Atlanta Chicago Frankfurt Hyderabad London Miami Montevideo New York Paris Philadelphia Portland San Francisco Seattle Sydney Vancouver This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice The Hackett 2018 The Group, Hackett Inc.; Group, All Rights Inc.; Reserved. All Rights Reserved. CR_ CR_ Finance Executive Insight I The Hackett Group I 13