WAY, WAY, BACK in 1999, Financial Director made a series of predictions about the world in which the FD would operate in. As Financial Director celebrates its 30th anniversary this year, former editor Andrew Sawers looks back at the predictions he made 15 years ago – some of which have shown the prescience of Nostradamus, while others haven’t materialised as expected.
Who is the FD?
The original predictions:
• One FD in five will be female, up from just over one in 20 in 1999
• The average age of a FTSE 100 FD will be 43, compared with 50 in 1998
• A master’s degree in psychology will be more valuable than most MBA qualifications
With eight women holding finance director roles in FTSE 100 companies, the glass ceiling seems barely to have cracked since 1999. In the FTSE 250, the figures are even worse: only seven of the 186 FDs in that index are women.
FTSE 100 FDs got steadily younger, averaging 47 in 2002, 2003 and 2004, but thereafter they started to age until returning to an average of 50 by 2008, where the average still stands. As of the last Financial Director survey, there was only one FTSE 100 FD in their 30s.
The relative lack of women represented in the FD post seems inexcusable; the preference for older, wiser, more experienced heads perhaps has more justification. While the energy and enthusiasm of youth have much to commend them, the responsibilities placed on a FTSE 100 FD are such that only the most experienced are in with a chance of securing such a role.
Certainly, the evidence doesn’t suggest that a psychology degree is more valued than an MBA – about ten FTSE 100 FDs had an MBA or other master’s degree at the last count – but the importance of investor and stakeholder communications, alongside the recent rise of behavioural economics thanks to Nobel laureate Daniel Kahneman and others, suggests that there is much to be gained from a solid understanding of how people behave in a business or financial environment.
Qualifications and careers
The original predictions:
• One of the five UK accountancy institutes will disappear. The Scots and the management accountants will remain independent
• ICAEW members will be the second-largest institute represented by FTSE 100 FDs. They will be overtaken by the Association of Corporate Treasurers.
• One finance executive in 15 will be an interim manager
Nearly. The 2005 super merger between the ICAEW, CIMA and CIPFA saw the management accountants prefer to wait for a two-stage merger, while the ICAEW members failed to support the merger in sufficient numbers, falling agonisingly short of the required 66.7% threshold. CIPFA wholeheartedly embraced the merger, with 87% voting in favour of it.
The ICAEW is still very much the largest institute, with 47 FTSE 100 FDs members at the last count. The treasury association’s switch from allowing membership through past experience to being a purely exam-based qualification has affected its representation among FTSE 100 FDs.
Interestingly, we completely underestimated the rise of, first, foreign accountancy qualifications (particularly American and South African) and, second, FDs with no professional accountancy qualifications at all. Taken together, 32 FTSE 100 FDs do not have a UK accountancy qualification.
Interim management has almost doubled as an industry over the last seven years and is now worth about £1.5bn a year. There are some 15,000 interim managers in the UK, according to the trade body IMA. Almost 60% of assignments are in financial services or local government, however, and only about one in five interim assignments are finance jobs, so it is not a pervasive financial workforce yet.
The finance function
The original predictions:
• There will be several times as many types of information for which finance will be responsible as businesses look for new measurements that bring them competitive advantage
• Outsourcing and shared service centres will become increasingly common
• The finance department will almost cease to exist as a physical entity. Financial executives and managers will be dispersed throughout the organisation to work alongside their other frontline colleagues in sales, marketing, manufacturing or distribution
• Information provision will be real-time. Budgets – as conventionally understood – will be as passé as flares
• Businesses will be paying very much more attention to the costs of their finance function, largely because of the growing availability of data for departmental benchmarking. Average finance function costs will shrink from 1.4% of turnover (1998) to half that figure. Leading edge businesses will shrink their costs from sub-1% to well below 0.5%
Our thinking in 1999 was that finance would move increasingly towards a kind of Formula 1 racing car telemetry in which a growing number of financial and non-financial KPIs would be tracked almost in real time. That’s probably not too far from the truth, but the consequence of the torrent of data is the phenomenon with the clunky name ‘big data’.
It’s clear that businesses have far more information than they know what to do with – whether it’s data about customers’ purchases or email traffic between company dealers and counterparties – and that they are trying to make sense out of it all, finding profit opportunities and undiscovered pockets of risk. While much of the responsibility may lie with chief information officers, FDs are never far away from these data-mining efforts.
The other phenomenon that has taken over is data about data – so-called meta-data – manifesting itself as XML (extensible mark-up language) and its business reporting cousin, XBRL, which is now used in regulatory and tax filings.
Outsourcing has expanded to encompass almost all operations that are regarded as non-core – payables, HR processes, procurement, even some basic budget processes. The outsourcing option has been a qualified success, however, and some organisations have brought outsourced processes back in-house. Many others have seen the benefit of creating their own shared service centres as ‘centres of excellence’ so as to retain the flexibility they believe they need.
Finance functions may not be as dispersed as we had anticipated, but there is no doubt that the function is very much closer to the business than it was in 1999. Budgeting processes are still often mired in ‘gaming’ the system to create targets that are achievable and will therefore trigger managers’ bonus payments. But there is much more effort going into rolling forecasts, with business managers increasingly being responsible for the accuracy of their forecasts.
Finance directors keep an even closer eye on their own function costs and increasingly look to technology solutions, process change and outsourcing to ensure that they remain competitive. Hackett Group, the source of our data in 1999, no longer publishes benchmark finance function costs but from the trend data that it does now make available, it is estimated that finance function costs have fallen by nearly 40% over the last 15 years.
If that doesn’t quite match the 50% or more fall in department running costs that we had expected, blame the costs associated with improving financial controls in the wake of the Enron scandal and the Sarbanes-Oxley legislation. The finance function costs associated with the financial crisis – especially in financial services – haven’t helped either.
The original predictions:
• Many transactions between businesses – even between businesses and consumers – will not only be automated, but automatic. The implications for management of the macro-economy are legion
• All computers will be voice-activated, capable of handling reasonably sophisticated database interrogation queries such as, “What is the shareholder value-added on our X-1 product in Germany?” FDs will spend a lot of time asking such questions
• The hand-held computer device will not only become commonplace; it will replace the laptop. All your personal computing needs will fit into a device the size of a wristwatch
• Microsoft will not be the largest company in the world. It won’t even be the largest information technology company
• A Liechtenstein bank that operates mostly in London will collapse as a result of a catastrophic computer failure, creating a new supervision crisis for the UK financial regulators
• The paperless office will remain a promise for the future
Human intervention is still very much part of the world of commerce in terms of initiating transactions, but there is no doubt that technology is taking us down the route where computers generate alerts that stock levels need to be replenished, for example, while taking care of all the subsequent logistics automatically. And using the internet, businesses can generate revenue without anyone having to even be aware that sales are taking place.
Our projection about hand-held computers replacing laptops was on course for being the best prediction we made 15 years ago – then we went and slightly spoiled it by saying the devices would be the size of a wristwatch. Voice-activation is still a 2001: A Space Odyssey dream, but touchscreens have certainly revolutionised the way people interact with computers.
While back in 1999 we expected to see a challenger to Microsoft’s seemingly unassailable position, we did not expect that challenger to be Apple. But then, that was before the advent of the iPod, iPad and iPhone. Today, Apple’s market capitalisation is $470bn (£287bn) and Microsoft’s is $312bn.
No Liechtenstein bank collapse, fortunately, though computer failure did bring the payments system at RBS (including NatWest and Ulster Bank) to a halt for several days in 2012, causing untold mayhem. That was not an issue for regulators as such, though they are dealing with the ramifications of a bank collapse following the inappropriate use of disastrous computer models that failed to factor in the possibility that everything might go down in value at once.
All business workflow processes are much more technology-based than in 1999. It’s a rare office indeed, though, that can claim to be paperless.
The original predictions:
• Stock exchange authorities will require companies to report quarterly, but best practice will call for key headline data at least eight times a year. The best companies will report monthly, within hours of period end
• Listed globally focused UK companies will abandon UK accounting standards in favour of international accounting standards or US GAAP in order to increase their investor base and to facilitate bond issues
• Most quoted companies will continue to print a limited number of “full version” annual reports but summary financial statements will be abandoned in favour of web publishing
• Traditional accounts will formally be the main statements presented by companies. But investor demand will ensure that value reporting, EVA-style, will be the prime metrics for performance measurement. Information of the “balanced scorecard” type will be demanded and provided. Businesses will largely abandon attempts to hide behind “commercial confidentiality” with regard to most detailed historic data
The promise of immediate financial information hasn’t quite materialised as we’d anticipated, though it is certainly true that companies can close their books more quickly than they could 15 years ago. It’s also possible for FDs to get key data almost in real time, often on their BlackBerries or iPhones, so the production of management information is, typically, a much more automated task than it used to be. The US Sarbanes-Oxley legislation, initiated in the wake of the 2001 Enron collapse, has done much to improve internal controls and reporting systems.
External reporting in the UK and the rest of Europe is still only required half-yearly, but some businesses do produce quarterly trading statements or updates after critical periods such as Christmas/New Year sales.
We foresaw large, global UK companies choosing to move to IFRS. As it happened, the European Commission mandated such a move in 2002, with a deadline for moving of 2005. The standards have been almost entirely overhauled since our prediction 15 years ago.
The web has helped kill off many companies’ summary financial statements, but there is much, much more information available now, such as sustainability reports, presentations to investors, transcripts of City conference calls, share price tools and, of course, remuneration reports that can be almost indecipherable.
Finally, EVA-style reporting has failed to take off, but every company now knows what its cost of capital is and there is far more disclosure of performance against a wide range of financial and non-financial KPIs. ?
This is an edited version of an article that originally appeared in the January 2014 issue of Finance & Management
The second part of this article will appear in our March issue