Fine tuned

There’s been a lot of talk about finance stepping up and getting more involved in the overall strategy of the business for some time, but it’s happened with only limited success. One thing is for sure ­ finance can’t become a real business partner without a solid and well-orchestrated business plan.

It sets the tone for everything that finance does, including its aims and how it will meet them. It is the business plan that takes the FD’s goals and priorities and translates them into a form that the other members of the finance team can understand and act upon.

As Ian McMillan, partner and financial management leader at IBM says, its “common sense” for the finance function to have its own business plan ­ even though it doesn’t always happen.

Being clear about the role that finance should play has to be the starting point for the business plan. FDs need to discuss the options with their CEO and other members of the top management team. “Typically, there are three agendas finance can follow,” McMillan says. These relate to managing risk, managing performance and supporting growth and innovation. Determining which agenda should be the priority will depend in part on where the business is in its development cycle, and, to some extent, the industry it belongs to. “It’s naïve to think that everyone can do everything,” McMillan says. “People have to make choices.” In the financial services sector, for example, the priority will often be on managing risk. In consumer products, the focus may be more on providing costing and profitability data to support performance management.

What is certain is that the finance function’s strategy and planning must be guided by the needs and wants of the business. “Finance strategy needs to be linked with the business strategy,” says Joel Roques, European research leader for The Hackett Group, which specialises in best practice research. “It’s there to support the business, so the business should be driving it.” The finance t eam’s strategy and the business strategy need to go in the same direction “and at the same speed”, Roques says. According to Hackett’s research, world class finance organisations emphasise the linkage of financial and strategic planning to day-to-day business operations.

Business players

Finance organisations have improved their strategic thinking, Roques believes. “FDs or CFOs have moved dramatically over the past ten years from being somebody who just keeps score, to someone who is a real business player,” he says. “The CFO has become the right-hand man of the CEO and is being involved in the business decisions. That means the finance organisation has had to evolve to be able to fulfil that role.” Finance teams are no longer focused simply on saving money or delivering financial reports. “They are more aligned with strategy at a business level,” Roques says. “It’s more about delivering full finance services so as to better serve the strategy of the company.”

Once the FD has discussed with senior colleagues the desired role for finance, the next step is to clarify that vision and capture it in some form of mission statement. Sometimes FDs have a vision for the role they want finance to play, but they haven’t articulated it, according to David Royle, finance transformation service line lead at Capgemini Consulting. If FDs are asked “what is your vision for finance?” the result is usually “a lot of shuffling of feet,” Royle says. “These are senior executives with good strategic4 heads. They have an idea, but they haven’t articulated it or communicated it to people in a way they can understand.”

Royle works with FDs and finance functions to help them establish their vision for finance and communicate it internally. “One FD was talking about moving towards becoming like a Formula One racing team,” Royle says. “But that means nothing to an accounts payable clerk.” The FD wanted to make sure that finance was more visionary and forward looking. Once he had expressed this idea, it needed to be translated into the nuts and bolts of what it meant for finance operations. People in the team needed to be able to understand what was expected of them.

Market trends

Sometimes FDs struggle to develop their own clear vision for their finance function. In such situations they tend to look to the competition to see what market trends are developing. “There’s a lot of ‘followship’ in finance,” says Royle. “What’s everyone else doing? What should we be doing?” Whatever the trigger ­ internal vision or market trends ­ Royle encourages FDs to make sure that their business plan addresses three core components: people, processes and technology. “You need to think about what it [finance strategy] means for people and for organisational design,” Royle says. “Are your processes fit for purpose and have you got the right technology? We’re talking about business transformation in a finance context.”

In terms of market trends, IBM’s McMillan senses a renewed interest in making finance a real partner to the business. This isn’t a new concept, but is returning to FDs’ agendas now that immediate Sarbanes-Oxley compliance issues have been addressed. A business plan is essential if FDs are to realise this business partnering ambition, McMillan believes. “There is a demand for finance to partner with the business, but to do that it must have clear roles and priorities and they must be agreed with the leadership team of the business,” he says. These priorities need to be translated into a business plan to establish how they are to be executed. “It’s common sense, but very few organisations do think about finance in that way,” McMillan says.

If finance is to partner the business effectively, its organisational structure may need adjusting. There may be a case for outsourcing some activities, and/or perhaps moving them offshore. “There are also questions about how you manage the retained organisation that’s left behind in the UK,” McMillan says. All these issues need to be covered in the detail of the finance function’s business plan.
Regular reviews of the business plan are important for keeping it updated in step with the aims of the business. “You need a plan that doesn’t sit on the shelf for three to five years, but ideally is reviewed annually,” McMillan says. “There is growing flexibility in the way that organisations operate and the impact on finance is significant, so it needs to be agile. CFOs need to have a plan and they need to reconfirm the focus of that plan on an annual basis to make sure it is aligned with where the business is going.”

Alongside the business plan, performance measures for finance need to be established. These will reflect the finance function’s goals. “There are lots of potential performance measures,” Royle says. “The challenge is to sort the wheat from the chaff.” Operational measures can be used to indicate volumes and accuracy of transactions processed. Simple measures such as the ratio of finance personnel to the rest of the organisation and total cost of finance are instructive. Generally, a finance function should cost around 1% of an organisation’s revenue, Royle suggests.

Develping a business plan for finance can only enhance the function’s standing and credibility in the organisation. “It is then using a language the rest of the organisation is using,” Royle says. “The result is that finance can relate better to the rest of the organisation. The more finance can demonstrate that it operates as a business, the more influence it has.”

This also means that plans for restructuring or enhancing finance’s operations, which can cost significant sums, are treated more seriously. If supported by a well-developed business plan, the business case for finance reorganisation will be strengthened. “If you get your vision and your business plan right, you’re more likely to provide the right justification for going into shared services, for example,” Royle says. “It becomes much easier to convince others that what you want to do with finance makes sense.

“In today’s businesses, finance functions can be multi million-pound businesses in their own right. It seems strange to allow evolution to determine their future, rather than taking a structured approach to it.”