INSIGHT: Finance function is warned - adapt or die

It’s official. Unless accountants find a new life for themselves as ‘value added’ business partners to the rest of their organisation, the onward march of technology is going to automate the finance function into second-rate obscurity. This is the thrust of a detailed and closely argued research report, Building and Developing the Finance Scorecard*, published by research firm Business Intelligence.

Drawing on its own research, case study material and business gurus such as Harvard Professor Robert Kaplan (the creator of balanced scorecard), the Business Intelligence report anticipates that by 2005 information technology will have eliminated much of the transaction-related work currently undertaken by the finance function.

According to the findings of Greg Hackett, chairman of US-based Hackett Benchmarking Solutions, this work currently accounts for some 60% of finance responsibilities, so automation may leave accountants with just 40%, at best, of their present job function. However, the report suggests that this change will be a good thing, since it will enable finance managers and FDs to add value in more creative ways.

The research confirms that for managers in other functions, ‘financial metrics are poor indicators of strategic or operational performance’. This, BI claims, ‘provides a significant challenge for finance professionals’. What other managers really want to know, as precisely as possible, is what non-financial indicators cause an upward or downward movement in the figures. Most of all, senior managers want to be presented with the crucial indicators of future financial performance so that they can decide what strategies are right for the organisation, and what has to be done to keep the company aligned with the market and its customers.

Budgets, which might seem the obvious way of providing this information, are out – they frequently bear little relationship to a company’s strategic aims. Instead, ‘knowledge-era systems that align financial and operating plans with strategic objectives’ are in. However, BI quotes Hackett’s 1999 finding (based on data collected on 1,400 companies) that senior accountants spend on average just 16% of their time on decision support activities, down from the 1996 figure of 18%.

The future for finance executives, BI suggests, can be summed up in the challenging question ‘What can you tell me about my business that I don’t already know?’ If they cannot come up with an answer to this, their relevance, their added value capability and their potential for becoming a ‘business partner’ to the line manager asking the question are all going to tend rapidly towards zero.

However, the report is optimistic. It suggests that accountants can indeed transform themselves from bean counters into business partners. The route to achieving this, BI suggests, is firstly for accountants to understand the concepts behind ‘knowledge-era systems’ that align financial and operating plans with strategic objectives. This boils down to accountants developing much greater familiarity with the balanced scorecard approach – and the report uses case study material fairly heavily here to provide insights and instances of what this can mean in practice. It then introduces the concept of the financial scorecard, which seeks to integrate financial and non-financial metrics as seen from the standpoint of the finance function.

BI claims that its research shows that ‘value adding finance’ comes down to five broad activities or strategies that the finance function needs to put into place. It must:

contribute to strategy implementation;

become a business partner;

leverage IT throughout the company;

deliver shareholder value;

deliver world-class financial processes.

If accountants grasp that the balanced scorecard approach helps them to lay out the cause and effect relationships within and between non-financial and financial performance dimensions, they will be well on their way to their new goal, BI suggests.

The research shows that of the 90 organisations surveyed, around 18% have already created a financial scorecard, while a further 31% have plans to do so. Despite its optimism, however, BI’s report concludes that even those companies which have already introduced a finance scorecard are struggling to come to terms with its implementation. Templates for finance scorecards are provided by the US-based Balanced Scorecard Cooperative, and by UK-based consultancy Garrey Melville.

What the report also demonstrates, via case studies such as the Royal Bank of Scotland, is that advanced finance functions are becoming increasingly ‘networked’ with other functions. The Royal Bank, for example, has placed analysts in its business units and has set up a shared financial services centre of excellence. Its head of accounting services, Dan McGonagle, says, ‘Finance’s organisational model is now one of decision support, strongly aided by shared services’.

* Building and Developing the Finance Scorecard will be available from 10 May, priced £695. Call Jane Mills on 020 8879 3355 or e-mail [email protected]

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