Some European companies have managed to shrink their finance department costs so they now match the best in the world, according to the latest biennial research* from Hackett Best Practices, which is part of Nasdaq-quoted Answerthink, writes Andrew Sawers.
Over the past two years, the best European companies have reduced finance function costs from 0.51% of turnover to 0.43%, matching the best performance worldwide, which has deteriorated from 0.33% in 2000.
Even laggard companies in Europe have improved, with finance department costs running at 3.44% of turnover – matching the laggard performance worldwide – down from 4.79% a couple of years ago.
However, the superior performance of the majority of US companies means most European companies are only now achieving the sort of cost ratios that were being achieved worldwide two years ago: so while second-quartile performance in Europe (ie, that recorded by the 50th of 100 companies, say) has fallen from 1.67% to 1.42%, it only just beats the 1.48% achieved by second-quartile companies world-wide two years ago (1.48%); which, in turn, have reduced costs to just 1.24%.
What lies behind these headline figures is even more enlightening than the “fishbone charts” which have almost become a Hackett trademark. For starters, European companies typically use less outsourcing and less technology – particularly at average companies – than the worldwide average. This contributes directly to higher finance function costs. And European companies use a greater number of different finance applications, increasing both cost and reporting times.
European finance department staffing levels are also higher, averaging 146 full-time-equivalent employees per $1bn revenue, compared with 103 worldwide. But average European wages are lower and there is a greater proportion of lower-skilled clerical staff amongst European companies than in the worldwide sample.
When it comes to budgeting, the Hackett findings seem particularly scathing of management. While 77% of businesses are sticking with annual budgets rather than rolling forecasts, most tie managerial rewards to achievement of the annual plan – hence “managerial self-interest” is preventing companies from adopting a planning and control technique that results in a 24% reduction in budget preparation time and, it is said, improves forecasting accuracy.
Hackett believes decentralisation, by which companies try to increase the responsiveness of business units by pushing finance function resource out to the front line has resulted in duplicated effort and costly, paper-based support.
The report also finds that, for all the talk of risk management, companies are severely underestimating its importance. Only 32% of companies use sophisticated simulation models to prepare for non-financial events such as business discontinuity or sudden market reverses.
* 2002 Book of Numbers: Finance www.hackettbestpractices.com