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They know the risk, but companies can’t cope

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Most companies have been faced with a major risk over the last few years – and almost half of them were unable to deal with it. 

This is one of the findings from a new study of more than 1 200 chief financial officers (CFOs) and senior finance executives from 79 countries worldwide, which found that, in the past three years, 62% of enterprises with over $5-billion (more than R35-billion) in revenue encountered a major risk event. When a major risk event did occur – such as strategic, operational or geopolitical – 42% of these enterprises were not well prepared for the event.
The Global CFO Study, titled “Balancing risk and performance with an Integrated Finance Organisation” was developed by IBM Global Business Services’ Financial Management practice and the IBM Institute for Business Value (IBV), with assistance from the Wharton School at the University of Pennsylvania and the Economist Intelligence Unit. Over half of the participating CFOs and senior finance executives participated in a face-to-face structured interview, designed to capture insights on the subject of risk management and finance transformation. The remaining balance responded to an online survey.
Another key component of the study is the emergence of Integrated Finance Organisations (IFOs) which are defined as entities that, at minimum, mandate standards enterprise wide with a standard chart of accounts, common data definitions and standard common processes.
The study concludes that enterprisewide common data definitions, a standard Chart of Accounts, common standard processes and globally mandated standards are the components of good governance and what the study calls the Integrated Finance Organisation (IFO). Fewer than one in seven enterprises govern and manage the integration of their Finance organisation by the combination of these four criteria.
The study also found that IFOs provide greater resiliency, better decision support and help to drive outperforming enterprises. Additionally, enterprises with IFOs are more likely to perform better financially than non-integrated finance organisations and are more likely to proactively managing risk.
CFOs are increasingly becoming “owners” of risk management within their enterprise and sharing ownership with the CEO. The study found 61% of CFOs are expected to lead risk management within their organisation, followed by CEOs (50%), chief technology officers (27%) and chief risk officers (19%).
The study lends credence to observations that globalisation opens up significant opportunities for companies but exposes more risks for the enterprise. The IBM Global CFO Study found that in the past three years enterprises encountered a range of risks including strategic (32%), geopolitical (17%), environmental/ health (17%), financial (13%), operational (13%) and legal and compliance (8%).
“Globalisation currently presents, at the same time, one of the largest challenges and one of the greatest opportunities for global enterprises,” says Alfons Meyer, managing partner at IBM Global Business Services. “Forward-thinking executives locate operations and functions anywhere in the world based on the right cost, the right skills and the right business environment.
"The world is shifting towards a new definition of globalisation, but a majority of companies are still maintaining the old worldview. Enterprises need to transform their financial management models. They need to integrate their finance operations to take advantage of this new perspective on globalisation. Integrated operations alleviate the threats they face and improve the operational performance of their organisations.”
While risks are prevalent, many companies do not have a formal risk management programme in place. At many organisations formal risk management is still fairly immature. By their own admission, only 52% acknowledge having any sort of formalised risk management programme. Moreover, only 42% of respondents do historic comparisons to avoid risk, just 32% set specific risk thresholds and only 29% create risk-adjusted forecasts and plans.
The study concludes that through greater discipline Integrated Finance Organisations (IFOs) are more flexible, dynamic and effective at executing finance activities and are much better situated to handling risk. While this is important, less than one in seven enterprises with over $1-billion (+R7-billion) in revenue have an Integrated Finance Organisation.
Overall, IFOs are part of enterprises that achieve higher revenue growth rates – a five-year 18% Compound Annual Growth Rate (CAGR) versus 10% for non-integrated finance organisations. Fifty percent of IFOs are in high growth markets. Integrated enterprises in high growth markets outperform industry peers in stock price and revenue over a five year CAGR period. Revenue jumped 24% for IFOs versus 14% for non-IFOs.
The study findings suggest CFOs at IFOs are more proactive at supporting and managing risk management than their counterparts in non-IFOs. Sixty percent of those surveyed in the study say they are more effective at managing risk versus only 43% at non-IFOs.
IFOs are also twice as likely to be prepared for major risk events. When IFO respondents were asked to measure their own risk preparedness, 62% of organisations over $5-billion in revenue that experienced a material risk event in the past three years stated that they were well prepared, versus only 29% of non-IFOs in the same situation.
executing effective risk management are 1.2 times more likely to have risk management reporting directly to them, that is 54% to 44%. The study finds that IFOs more proactively evaluate and address risk. They also formally conduct these activities enterprise-wide. Sixty-six percent of IFOs have a formally identify and manage risks versus 51% for non-IFOs. Sixty-three percent of IFOs conduct routine management monitoring versus 49% for non-IFOs. In addition, 51% of IFOs perform a historical comparison of their data versus 41% at non-integrated finance functions.
IFOs and influential CFOs are more effective at executing their agenda. CFOs with an IFO feel that they are very effective at measuring and monitoring business performance than their counterparts at non-IFOs, 81% versus 57%. The study also shows that 93% of CFOs with an IFO feel they are very effective at meeting fiduciary and statutory requirements versus only 79% for non-integrated finance functions.
An IFO improves performance and increases responsiveness. IFOs spend more time (10 points or 21%) on analytical activities (decision support and control activities); report on 20% more dimensions and are more likely to focus on customer, industrial and channel activities. They also access data more quickly and provide confidence in data veracity.
Many enterprises are currently non-integrated, but the future is evolving towards more globally integrated enterprises. More than two-thirds, or 69%, of finance executives believe greater integration is difficult to execute but an imperative.