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Summary
During the 1990s, many large corporations made substantial strides in improving the efficiency of their finance functions. Indeed, the average cost of operating a finance department relative to a company’s revenues fell by nearly half during this period. Applied to just the Fortune 500, this amounts to annual savings of US$60 billion. Since then, reductions have been limited. Ventana Research thinks that several factors explain why. Companies used the IT innovations of the 1990s (including financial and reporting applications) to good effect, but many have largely exhausted the potential for further savings through increased automation. In the United States, public companies have had to deal with the Sarbanes-Oxley Act and other regulatory issues. We advise corporations that already have achieved above-average efficiency to turn their focus to achieving greater effectiveness and making the finance organization a more strategic contributor. Those that continue to trail the pack should determine to what degree they can address the efficiency issue through better use of IT.

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Between 1992 and 2000, the average cost of operating a finance organization in a North American company, measured as a percentage of total revenue, was cut nearly in half, according to a prominent benchmarking consultancy. We assert that most of this improvement was the result of implementing information technology capabilities such as enterprise resource planning (ERP), business intelligence (BI) and reporting software. However, since the start of this decade, further efficiency gains have been slight. Part of the reason was the impact of Sarbanes-Oxley and other regulatory burdens in the United States and possibly the slow economic growth in Europe. Yet it is also clear that most of the straightforward improvements from employing IT have been achieved. It is rarely the case that software is like an energy-saving light bulb – just install it and instantly begin to count the savings. Gaining lasting value from information technology also requires changes to business processes and the ways people work. Some of these process and people issues must be addressed before implementing new software, while some should be done after that. We find that a significant share of larger companies, especially those with more than $US 1 billion in annual revenue, have IT infrastructures that make it difficult to implement these changes.

So what should a CFO do now, especially since for many finance executives there is still pressure to match or exceed the median results? From our perspective, where you go depends on where you stand. Above-average performers should shift their focus from efficiency to effectiveness. Companies that are below average in efficiency should deal with the root causes of their subpar performance.

For companies that meet or exceed median benchmarks, merely attaining greater efficiency is not enough. Our research shows information technology can deliver much more strategic value than most companies ask of it. Finance organizations in particular can and should be using existing systems to support more effective operations than they are today, both within their own department and throughout their entire organization. Rather than being content with having achieved good efficiency metrics, they need to augment that gain by become more effective. They simply must play a larger role in driving the success of the corporation. Finance departments can achieve greater effectiveness in at least two dimensions: internal finance operations and the performance of the rest of the company.

For many routine finance operations such as processing invoices, efficiency is pretty much all that matters because outcomes are largely binary (the invoices either were entered accurately or were not). However, other finance activities are not that simple because the desired result is more qualitative. To take a prime example, budgeting and planning is an area where efficiency and effectiveness collide. The traditional metrics by which companies assess their budgeting effort aim to limit the time spent on the process without considering the outcome. These measures implicitly assume budgeting is a purely administrative function with limited value and therefore companies ought to minimize the time and resources spent on it. Yet this assumption misses the point. Companies spend too much time on budgeting and not enough time on planning. Transforming the annual budgeting ritual to a value-adding planning activity means redefining the process. Proper planning is a structured dialog that ensures closer alignment of resources across the company. It forms the basis for objective measures of employees’ or business units’ contributions to the organization’s objectives. It facilitates benchmarking performance relative to external or internal objectives, optimizing resources by analyzing plans to uncover unnecessary or misdirected spending. Planning well increases accountability and buy-in from managers and employees. It also promotes operational efficiencies. Simply measuring the efficiency of a budgeting process does not promote effective planning. 

Finance departments can promote organizational effectiveness by enacting performance management, which is a natural extension of their traditional measurement and control functions. Performance management is an approach that sets objectives for individuals and business units based on a corporation’s strategy. This involves identifying the things that will have the greatest impact on the success of a company and determining the best ways to measure them. Periodically, organizations measure results and assess how well they are doing. Almost all midsize and large companies do this today; however, we find most of them could be doing a much better job. The problem is not that they are failing miserably (those that fail usually go out of business or undergo a management change). Rather, they are falling short of what they could be doing – often because they have not questioned what they are doing and why. For example, finance organizations can add value by defining and distributing leading indicators to business units (such as monitoring order patters to detect potential customer losses). Similarly, senior finance executives should ensure that customers (as well as partners and suppliers) find it easy to do business with the company. For example, those that interact with multiple divisions or business units should encounter the same processes each time, rather than having to jump through different hoops every time. (This sort of process commonality also can make finance operations more efficient.) Our research has shown that companies do a good job of collecting information about high-level financial performance and general operational metrics, but most fail to provide individuals with information about how well they are performing or to give the organization consistent, reliable information about the world outside the company, such as its competitors and customers. 

As for companies that underperform according to efficiency benchmarks, in addition to examining the people and process issues, we advise them to investigate whether they have information technology issues that are either the root cause or a major contributor to the situation. Companies with poorly structured and/or overly complex systems, for example, often develop work-arounds and other compensations that result in inefficient processes and therefore inefficient operations. Senior finance executives often can address this condition with only limited investment in new IT resources but a lot of eliminating and streamlining of old systems.

Assessment
Finance organizations traditionally have played a largely administrative role in most corporations. While executing this function efficiently remains a core part of its mission, our research shows that a majority of people believe finance should take more of a leadership role in their company. Senior finance executives who have achieved above-average efficiency should focus on ways to broaden the mission of their organization. Performance management, especially efforts that incorporate operational as well as financial aspects of an organization’s performance, is a natural extension of finance’s traditional role. It can benefit the entire company and enhance Finance’s standing as well.