Technology: The sure thing?

When interest rates go up, the pressure on finance always bears down against a backdrop of unyielding high inflation, and the challenge becomes even greater.

To make ends meet, many top-performing finance functions we work with are looking hard for ways to cut costs in finance, procurement, and other business services areas, while at the same time improving their effectiveness. Often, technology plays a key role.

They are not wrong – the latest research from The Hackett Group suggests that companies that have achieved ‘Digital World Class^’ status in at least one business services function (in our comprehensive benchmarks) dramatically outperform their peers on a variety of metrics.

Looking at a five-year average, these companies outpace their peers with 80% higher net margin; 24% higher earnings before interest, taxes, depreciation, and amortisation (EBITDA); 89% higher return on equity; and 44% greater shareholder return.

For companies with ‘Digital World Class’ finance functions, the efficiency that technology has helped give them has also given them a huge advantage. Their finance operating costs as a percentage of revenue, for example, are now a little more than one-half of ordinary companies.

These champions deliver greater operational excellence as well, generating 54% fewer customer billing errors and 75% fewer accounts payable transactions requiring corrections. They are also able to collect 96% of their receivables on agreed customer terms.

Perhaps, most importantly, CFOs running such functions are finding that their departments are transformed.

Even as most finance functions saw their operational costs increase by 7.5% in 2023, companies with ‘Digital World Class’ finance departments were able to reduce their costs by 1.3% – partly because they needed only half the finance staff of a peer company and partly because they were able to trim their cost just slightly in one year alone.

In all, ‘Digital World Class’ finance teams manage with 63% fewer employees in transactional roles, 33% fewer in financial planning and analysis, and 32% fewer in specialist finance roles.

All these gains translate into a $48 million annual cost advantage for a $10 billion enterprise.

Best of all, companies that have achieved ‘Digital World Class’ finance performance find that as they spend less time and effort on transactional work, they can become a much greater source of value for their company.

They deliver a wide array of business benefits, including 28% greater forecast reliability.

As a result they are 44% more likely to be viewed as a valued business partner by their internal stakeholders, 33% more likely to be perceived as agile in response to business challenges, and 2.1x more likely to have their finance staff’s performance goals linked to the company’s strategic plans.

But achieving that level of performance is not easy. In fact, a lot can go wrong.

All you need to do is choose the wrong technology, implement it without integrating process improvements, or fail to develop staff with the right skill set to take advantage of your new capabilities, and you will not reach that top quartile.

Getting digital right

 How do you make sure you get the benefit of the technology without stumbling?

1. Start with your goals. Think first about your needs ­– not the technology. Decide which efficiency gains you want to achieve. One area that should be of particular concern to you now is your environmental, social and corporate governance (ESG) agenda, because the finance function of every company in Europe and beyond is busy trying to stay ahead of growing investor and regulator demands for reliable and auditable ESG numbers.
2. Take your time with your due diligence. Make sure you understand the capabilities and limitations of the technology you are adopting. We have heard horror stories of companies that make a commitment to install a new enterprise resource planning system without understanding the outcome they were looking for or the scale of the investment that would be needed to complete the transformation.
3. Compare and contrast. Look at other companies that have already gone through a transformation. Pharmaceuticals, automotive companies, and fast-moving consumer goods companies are leading the charge right now, and their experience is well worth studying.
4. Call your recruiter. Once your new systems start extracting even larger quantities of data, you’re going to need more people to analyze it. Digital World Class finance organizations spend 2.2X more staff hours focused on digital business analysis than ordinary companies. Be aware that finance hiring will be more challenging now for two reasons. First, because demand for people with high-level analytical skills is growing, and second, because Brexit has made it more difficult to bring in talent from the European Union.
5. Watch the dial. It’s easy to lose track of your progress, and then lose momentum as commitment flags. To keep the company focused, make sure your plan is paying off incrementally, whether in terms of savings or effectiveness.

As challenging as some of this might sound, it is worth the effort. Because ‘Digital World Class’ companies are more resilient than ordinary companies, they can identify and respond more quickly to both challenges and opportunities in their business environment.

No wonder most CFOs running Digital World Class finance functions tell us they are confident that their team still has a lot of room to grow.

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