The finance function has always been a vital decision-making centre of any organisation, and after the recent global economic downturn the importance of an effective finance function has only been highlighted, writes Greg Bogiages, director, Cortell Corporate Performance Management.
The role of the chief financial officer (CFO) has also changed over the years, perhaps accelerated by the recession, as they have, through circumstance and opportunity, begun to take on more of a strategic decision-making role, rather than simply processing financial transactions and reporting on them.
The job of the CFO now revolves less around processing and is more about managing performance and acting as a visionary through forecasting and profitability modelling. This shift has been fuelled by the recent
volatility of the market, and the need to be able to make sound decisions quickly.
However, studies such as IBM's Global Chief Financial Officer Study have shown that CFOs are finding this role to be a challenging one, with more than 45% of the CFOs interviewed indicating that the finance function remains ineffective in areas such as strategy, information integration and risk management.
Because of the still challenging and volatile economic climate and the changing role of the CFO, it is becoming increasingly important for the finance organisation to have a broader understanding of the business as a whole, and for finance to be linked to business performance.
CFOs need to be able to make decisions in an agile fashion, and this is exacerbated by increased competition in the market as well as ever shortening decision-making cycles.
On top of this, because of social pressures, decision making can no longer be based solely on financial performance, as other aspects such as social responsibility and environmental consciousness have become key factors for stakeholders.
The sheer volume of data is still a problem, as the amount of information generated and the number of things that are measured continues to increase, but by far the more pressing problem currently is the velocity of data generation, which is becoming ever faster due to improvements in technology.
Add in increased regulatory pressures to measure and report on aspects of this, and the picture becomes quite a challenging one. Managing performance, and not simply financial performance as the role of the CFO is now so much broader, has become of paramount importance in the success of any enterprise.
The traditional spreadsheet tools are simply unable to cope with the changing nature of the finance function, as they do not allow for collaboration, and data integrity and continuity remain problems.
However this tool is still widely used because it is well understood, and ultimately the spreadsheet is not the problem, but rather it is the use to which it is put. The spreadsheet should be the front end of an enterprise-wide system that measures performance across various aspects, including finance, and is linked to a robust single data repository.
Disparate data sources and financial systems only add to the complexity of any performance management solution, because the more data that comes in from various sources, the more information must be balanced and reconciled, adding to the transactional component of the CFO's job, which should ideally be minimised in order to increase the performance management and strategic decision-making role.
If the CFO has to focus too much attention on transactional processing then he or she is not adding value to the organisation.
Performance management is crucial to the efficiency of any organisation, as if things are not measured then it is impossible to have a complete understanding of the effectiveness of processes.
Adequate performance management that is measuring the right things in line with the strategy of the business enables the CFO and others within the organisation to obtain better outcomes and a result of better decision-making, and better results, both financially and otherwise, as a result of these improved outcomes.
Performance management also enables an improved outlook on what may happen in the future, which enables the organisation to better adapt to and handle change.
Performance management measures also form part of regulatory compliance requirements, and being compliant lowers risk and enables risk to be better managed. And in today's world risk is not as simple as financial risk, as there are a whole host of other risks that come into play that can dramatically affect the bottom line.
A case in point is the tragic BP oil spill of 2010, which occurred as a result of bad management, and yet the risks and the impact of the crisis were further reaching than anybody could have predicted. Not only did the leaking oil cause financial loss to the company due to immediate lost revenue from resources that could not be harvested, it cost a fortune to clean up and plug the leak.
Aside from that, however, was the enormous impact on the brand, as negative opinions of the company spread by an increasingly connected and socially networked world.
This bad feeling caused the share price of BP to drop, the stakeholder confidence to drop as a result, and the negative publicity generated has had long lasting impact on the reputation and brand image of the company, which could affect their bottom line for years to come.
The difference at the end of the day between the transactional approach and the new, all-encompassing strategic decision-making approach of the CFO can be likened to driving a car. Focusing on transactions is like driving by looking in the rear view mirror, the view is very narrow and only tells people what has happened, it does not enable them to see obstacles in their path or what is coming in the future.
A strategic decision making approach based on performance management data is like driving by looking out of the windscreen – the view is much broader and allows people to see what is going to happen, adapt to change and avoid danger. Which one makes better business sense?