1. The future of Finance Driving business value through the performance of the Finance function T

2. Contents Introduction ............................................................................ 2Creating value and managing business performance ........................................................................... 4Delivering value through identifying value- creation opportunities.............................................................. 5Delivering value through operating efciently and effectively ......................................................................... 6Delivering value through managing business performance ............................................................ 10Summary .............................................................................. 11 3. IntroductionThe recent economy has placed unprecedented pressure on opportunities in order to reestablish growth. Consequently, Finance businesses. At the height of the crisis, as many as three-quartersis also being asked to help the business improve performance. The of all businesses were focusing on ways to simply survive.challenge for todays CFO is to drive the business forward for the Throughout these difcult times and beyond, CFOs have beenfuture, while at the same time continuing to monitor and secure its under increased pressure to evaluate the performance of their fortunes today. Finance function. With cost-cutting, headcount reductions and A recent nancial executive survey by CFO magazine helped declining sales occurring, and Finance playing a key role in identify the top external macroeconomic challenges facing resolving many of these issues, the function itself has been companies, as well as their top internal challenges. The challenges expected to lead by example and ensure that they are as efcient, faced reveal a number of weaknesses in Finance which are likely to effective and as value-creating as every other part of the business. reduce the organizations ability to meet them. However, each of Now, as the global economy shows signs of recovery, businessesthese weaknesses also represents a potential opportunity to are turning their attention once again to pursuing new market improve the Finance function.Figure 1Changing risk prole within the company* Counterparty risk Supply chain risk Intellectual property protection Data security Critical weaknesses revealed Lack of business transparency (internal and external) Rigid and nonintegrated systems and processes impact business Market and competitiveresponsiveness Internal operating pressures* Long lag times and data gaps in critical business information requests challenges* Consumer demand Focus on wrong business drivers and metrics Ability to forecast results Financial/banking system Ineffective or misaligned controls Working capital Credit market/interest rates Inability to segment Finance activities into variable costs to reducemanagement Currency volatility Finance function costs with declining business volume Maintaining morale Housing market fallout Inexible outsourcing arrangements during downturn Foreign competition Limited foresight and anticipation of business risks/opportunities Balance sheet weakness Lack of structured Finance training for professionals Attracting/retaining Lack of talent with right skillset to engage with the business inqualied employees challenging times Managing IT systems Regulatory and governmental pressures* Government policy Stability of local and central government *Source: Business Outlook Survey of 1,268 CFOs, Financial regulation CFO Europe magazine, May 2009. Trade policies and agreements2 The future of Finance: driving business value through the performance of the Finance function 4. In a survey of 262 nancial executives conducted in July 2009 by With this as a backdrop, we advocate the use of a robust framework the Economist Intelligence Unit on behalf of Ernst & Young, 98% of to identify Finance function weaknesses and potential improvements. respondents agreed that there are opportunities to improve their Among the questions such a framework might help answer are: Finance function. Further, these executives indicated they expect Have the opportunities for improvement and the resulting actions to make the changes to Finance as shown below in Figure 2. been reviewed against a cohesive, integrated framework? Both surveys demonstrate that todays nancial executive is very What does leading practice for such a framework look like? aware of the reasons driving change in the Finance function and What are the key objectives or drivers behind planned activities? has already identied necessary changes required. Will the planned actions go beyond delivering a short-term While there are individual elements of Finance which often comeproblem x, to drive value creation and help improve under close scrutiny, it is more effective to take a holistic view ofbusiness performance? the entire Finance operating model and its overall processes and Implementation of a successful framework can strengthen Finance structure. With a broader perspective, clarity can emerge aboutsignicantly, enabling it to be more effective, lower costs and help the various tasks and how they are performed. This can give thedeliver more value to the bottom line. This is where the future of CFO a clear view of how the function is performing and the extentFinance lies. to which it is or is not adding value to the business. Figure 281%Strengthen overall Finance capabilities 81%Improve use of IT systems to support the Finance function 80% Improve alignment of the Finance function efforts to overall business objectives 73% Improve planning, budgeting and forecasting71% Improve compliance and risk management71%Improve nancial metrics and performance measurementImprove and/or standardize nancial processes 67%(e.g., procurement to payables, close)63% Improve nancial and management reporting41%Change nancial organizational structure40% Increase involvement in enterprise cost reduction efforts 27%Increase use of Finance shared service centers 21%Increase stafng levels10% Decrease stafng levels Source: The future of Finance survey, 2% Economist Intelligence Unit, July 2009.We will not be making any changesThe future of Finance: driving business value through the performance of the Finance function3 5. Creating value and managing business performance One of the ways enterprises create value is by making effective use within the operation of the business. This perspective would be of information to enable the production of strategic and functional supported if Finance were founded on well-orchestrated plans. These are then delivered and evaluated in an ongoing cycle policies, procedures and processes. To be efcient and of improvement. CFOs seeking to identify how Finance can supporteffective, Finance requires the correct operating framework. Is this process need to ask themselves three questions:the function currently organized and located correctly within the business? Does it have the right people, technology and 1. Is Finance helping the business identify value-creation data? Are the correct policies and processes in place? Isopportunities? Finance able to measure and help manage performance?Understanding how the business creates value and using anempirical, fact-based approach are critical to delivering3. How can Finance enable faultless execution of strategy andperformance. Finance can best support the business by getting the day-to-day running of the business?the right information into the right hands at the right time, and Finance performs best when it acts as a business partner,being closely involved when conversations around focus andadvising and supporting at every level in the business, fromstrategy take place. Leading Finance organizations should bestrategic to the functional, in addition to carrying out routineactive rather than passive participants in this process. By Finance processes. Leading Finance organizations apply theirproviding robust nancial information and insight, combined core skills in fact-based analysis to create historical data, aswith nancial rigor and challenge, Finance can become anwell as supporting the greater role of ensuring accountabilityactive business partner and support the identication of valueand transparency around other aspects of managing acreating opportunities. successful business. Are the promises that are made during theforecasting process being implemented? Is performance being 2. Is Finance operating efciently and effectively?delivered as forecast? Can a business case for any necessaryFinance must have its own house in order before it can play anfunding be justied?expanded role in enabling value creation, and Finance peoplemust be viewed as leaders before they can play additional roles Figure 3 Enterprise value-creation cycleIs Finance helping the enterprise Identifyidentify value-creation opportunities?value-creationopportunities Operate Is Finance operating efcientlyefciently and and effectively?effectively Is Finance helping the enterpriseManage business performance deliver business value through faultless execution? 4The future of Finance: driving business value through the performance of the Finance function 6. Delivering value through identifying value-creation opportunities Finance has control of business data that the organization needs toresources. A Finance function that can articulate clearly what is operate effectively. In order to get the right information into theimportant, and eliminate the information that is not important, will hands of the right people at the right time, it is important tohelp the organization become more successful. Additionally, this evaluate the information required at each level within the will enable fact-based decision-making and appropriate actions that organization. This is especially so when an organization is trying todeliver value. The key information and key activities that help deliver focused decision-support information with scarce or limiteddeliver this value are illustrated in Figure 4 below.Figure 4 How leading Finance functions support:Level of organizationKey informationKey activities External capital market and economic drivers Engage the business in strategy development Corporate performance indicators aligned to Evaluate investment options with fact-based analysis strategic objectives Optimize capital efciency with a clear market focus Enterprise process performance Monitor and manage execution of strategic initiatives Exception and action-based commentary Value-based nancial managementBoard/CFO level Key initiative monitoring Establish consistent Key Performance Indicators CAPital EXpenditures (CAPEX) effectiveness (KPIs) Drive efciency by focusing on key drivers only,allowing the organization to lessen complexity andfocus on what is truly critical Business Unit (BU) performance Manage performance at consolidated BU level CAPEX effectiveness and efciency Review BU performance against strategic initiatives Segment protability and operational efciency Initiate activities to improve value creationExecutive/management level Exception and action-based reporting and (e.g., revenue, protability, cost, capital) commentary Manage improvement and remediation activities Segment protability and operational efciency including working capital Individual departmental performance against goals Manage individual department, initiative and Project performanceleaders performanceBusiness unit/functional level Process performance Execute improvement initiatives Unit costs Monitor process effectiveness and continuousimprovementThe future of Finance: driving business value through the performance of the Finance function 5 7. Delivering value through operating efciently and effectively Redesigning the operating model for Finance The Finance function will be designed through making a number of choices around the individual operating model components. As the Finance must balance priorities in delivering an effective support components are so interconnected, it is important to carry out this function to the organization. It must help to implement the design using a systematic approach. Failure to do this can lead to a business strategy by identifying value-creation opportunities. misaligned operating model, compromising Finances ability to At the same time it must protect the nancial assets of the improve efciency and effectiveness. organization. This must be delivered while also reducing the cost of Finance. To achieve these often conicting objectives, Finance needs to consider its global operating model. This model is made up of the seven key components as outlined in Figure 5. Figure 5 Deliver effective and efcient Finance processes in the right location Establish a global performance Execution Establish a global framework formeasurement framework layerFinance policies to support globalgovernance and risk management Deliver continuous improvement ofFinance service levelsPerformancePolicy Process measurement Organization Structure the organization to deliver value to the businesslayer Dene appropriate local, regional, Organizationglobal structures including shared services and outsourcing DataTechnologyPeople Resource Dene a set of consistent global layerdata standards and common chart Dene a Finance systemof accounts architecture and tools to enablevalue-adding Finance activities Implement single sources of data Build an organization of the rightresources with the right skills in theright locations Promote a global Finance communityThe seven components of the Finance operating model 6 The future of Finance: driving business value through the performance of the Finance function 8. Finance must focus on the Organization and Process components This approach enables the fundamental questions of How should initially to achieve an aligned model. This is essential to make sure we organize Finance globally?, What is the role of the Center that all of the operating model components t together. In our(Group Finance)? and What should our processes be? to be experience, this top down approach will improve the benets resolved at an early stage in the change journey. Starting this from a Finance change program.way also allows an information technology neutral approach to the design.Organization objectives: Process objectives:The focus on Process and Organization also helps with the principal challenge in redesigning the operating model: to invest resources in Deliver Finance teams in Deliver efcient and effective appropriate locations based processes in the right location delivering more value-adding process while maintaining or reducing on clearly dened criteriacovering: the overall cost of the Finance function. Figure 6 below illustrates a Decision Support change in the prole of Finance activities delivered. Deliver globally joined-up Finance teams Control Reporting Dene clear roles and Transaction processing responsibilities Design processes that are Ensure that reporting linesexible, scalable, and support a global Financesustainable community Link process design to Organize along processcurrent and future capabilities and process typeof technology Figure 6Decision support*Traditional cost ratio Perform planning, budgeting and forecasting Finance cost: turnover (revenue) Perform cost management and protability analysis Evaluate and manage nancial performance Manage capitalToday In the future?(1% - 2%)(