Insight: FDs must make the future function better

“Executives have their head in tomorrow, but their feet are firmly planted in the past.” So says Rick Roth, managing director of the highly-regarded US consultancy Hackett Benchmarking Solutions. The group, which specialises in finance and other back office processes, has recently conducted two surveys of UK and European businesses and found that, while the Internet and e-commerce are undoubtedly the ways of the future, old world habits die hard.

First, a quick look at the background which is provided by an OECD analysis suggesting that the value of business-to-business e-commerce will rise from $43bn in 1998 and $68bn in 1999 to $1 trillion by 2003 – a compound annual growth rate of 87%. Against this, one of the Hackett Group surveys reveals that European FDs intend to lift investment in e-business from 0.19% of turnover in 1999 to 0.29% in 2000 and 0.32% next year – a 68% increase over two years. The split between B2B and non-B2B investment is roughly 60-40 over this period.

As the chart on page 10 shows, companies are moving beyond “electronic brochures” and looking towards two-way interactive exchange or even fully-functional online transactions. One-in-five respondents are establishing a “vertical trading community” with their external partners. It will come as no surprise that 93% of businesses expect to change their business strategy as a result of e-business, while almost three-quarters say that the “external boundaries” of their organisation – how they interact with customers and suppliers – will change. As Roth explains, “Fundamentally that makes sense because you’re going to be more inter-connected with both customers and suppliers.”

Here’s the “but”: for one thing, only a minuscule proportion of total e-business investment is being spent on process transformation: 1.3% last year, peaking at 3.8% this year, falling to just 2.5% in 2001. The survey argues that companies still see e-business as a customer-focused “bolt on” and that they don’t fully understand “the implications of competition in e-time or the radical transformations required”. It adds that people view the benefits of e-business simply in cost and efficiency terms and that e-business has yet to materially affect the way many knowledge workers do their jobs.

Worse, 50% of companies review their e-business plans annually. Another 31% re-examine their plans every six months. “Six months is a lifetime in the e-world,” Roth says. “If you know your business is going to change because of e-business and you know your external boundaries are going to change, how can you possibly wait to do your strategy annually? That, to me, was a real eye-opener.” Hence his claim that FDs have their head in tomorrow, but their feet firmly planted in the past. “Companies realise that a lot of change is coming, they’re just not sure how to adjust.”

Hackett has also recently produced statistics on the performance of European finance functions. The survey sample includes some 200 companies, about two-thirds of which are medium- and large-sized British businesses, the rest being large continental European companies. The benchmark figures show that finance function costs as a percentage of revenue have fallen over the last two years, but are still not as efficient as comparable departments in “the world” (a concept of the world in which, like baseball’s World Series, the US dominates).

The rate of improvement is in Europe’s favour, however. For example, the best performing “world” finance functions’ costs are stagnant at around 0.33% of turnover (see chart this page), while the best European costs have fallen from 0.61% to 0.51%. Top quartile performance in Europe has improved from 1.50% to 1.17%, snapping hard on the heels of the top quartile “world” performance which has improved only slightly from 0.94% to 0.92%.

Roth is encouraged by these European findings: “What we’re seeing is a break-away: there are some leading edge companies in Europe that are really taking the bull by the horns and really making some substantive changes to address some of the issues and better position themselves in the marketplace,” he says.

Part of the reason behind the higher costs in Europe is that staffing levels are higher: first quartile businesses in Europe have 77 full-time-equivalent employees (FTEs) per billion dollars in turnover compared with 56 FTEs for the world’s first quartile.

Most distressingly, Roth adds: “Our highest-paid finance folks are still spending at least half of their time on transaction processing – which to me is mind-blowing. They spend roughly 20% of their time on the decision-support activities such as business pricing analysis, negotiations, M&A.” That makes European FDs a pretty expensive bunch of bought ledger clerks, we’d suggest. “Absolutely. So there are a lot of things that have to change to enable that finance person to really provide value to the organisation to their fullest capability.”

The Internet provides some solutions. Roth argues that, as companies get “more connected”, he expects “the billing function of one organisation that interacts with the payables unit of another company will actually get combined and the level of effort that both companies are putting in (will be) reduced. The Web is going to be the catalyst that drives that.” He adds that this integration of finance functions throughout the supply chain will actually reduce the need for a shared service centre: “As the actual transaction processing volume gets less, I think the requirement for shared services is also going to diminish. The paperwork is going to start to go away. The finance organisation needs to react quickly to changes in the business and not have their head focussed on where we were yesterday when we paid those bills.”

Shared services is an interesting topic because, Roth believes, those businesses that have not yet established such a unit may not have to in future – at least, not a real shared service centre. “The Web’s capabilities are going to allow you to have a virtual shared service centre as opposed to a physical one. By waiting, (companies) have more of an option, versus some of the other companies in the world that went to shared service centres to try to get that 10-15% (cost) layer out,” Roth says.

Perhaps reviewing your e-business strategy once a year isn’t such a bad idea after all.