Research into how the heart of a business beats has highlighted a frequent lack of clarity over the real role and strategic requirements of the finance department in the corporation. By Sozen Leimon, Maxxim Consulting
Without being able to focus on its core role it can fall foul of the belief among many employees, for example, that without its constant interference, individual business units would be free to run their own affairs and more successfully.
For the finance function, this is generally not good news. It usually forms the heart of the corporate centre indeed, it is the only aspect of the corporate centre (other than the governance and reporting obligations for a quoted company) which cannot be disputed or dispensed with. Unfortunately rather than concentrating on strategic activities which will add value to the business, it gets dragged into the day-to-day, non-strategic grind of checking numbers and reporting. In turn this reinforces the perception that finance is there simply to interfere in the affairs of the business units.
Its indispensable status within the corporate centre is both a blessing and a curse. Precisely because finance enjoys a unique status, setting it apart from its sister functions strategy, IT, HR, legal and so on it is often the area of the corporate centre that is least scrutinised. In the medium to long-term, this is not a desirable situation, either for the department or the wider business itself. Over time a finance department which is not regularly assessed will become flabby and bureaucratic.
One way to assess its true role in the company is through a benchmarking study, which we run to analyse the corporate centres of FTSE-listed and major private companies. Given the importance of the finance function it is often the focus of a review but it is the area where consultants have had to tread most carefully especially when it comes to talking about staffing numbers.
This comes as no surprise since in our experience we found the most common complaint is not being able to keep pace with the workload. In our view there is some truth in this assertion. Producing the interim and end-of-year results in themselves is usually a full-on activity. On top of this we also found that 68% of our benchmark group were either involved in acquisitions or disposals and were doing this alongside their regular reporting activities.
What did come as a surprise was the absence of the usual suspects a lack of common finance systems, insufficient automation and unclear processes. Instead their downfall was much more to do with rigid structures and the wrong type of behaviours.
The overarching theme of our research is that there is often a lack of clarity over the real role, purpose and strategic requirements of the corporate centre and this inevitably affects finance and its own role and purpose.
Firstly, let us look at how this affects structure.
In our research not a single company had put a more dynamic approach in place to deal with acquisitions, disposals and joint ventures an unpredictable and variable workload. Indeed, more than 90% of corporate finance is still structured in the traditional silos, with up to six layers between the group FD and financial analysts/assistants. This is not a structure which easily lends itself to the ever-changing, strategic demands of merger and acquisition.
Finance teams operate in narrow roles, but there is a need for higher calibre resources to work in units and take on a broader range of activities and projects. These could be separated from the core activities required of a finance function.
Secondly, the team is being dragged away from strategic, value-adding tasks into the nitty-gritty day-to-day work. The finance team tends to become the bag lady of the corporate centre, which results in a number of undesirable outcomes.
There is often too much focus on irrelevant detail checking and double-checking and this sends a message to the business divisions that we do not trust you. The most common complaint operating divisions had of central finance were their ad hoc requests for information and an insistence of providing the data in formats that were only found in finance departments.
An abundance of finance reports and forecasts which do not provide the answers to key management questions, not to mention the endless tinkering with and consolidation of reports, creates its own problem. We call it scope creep with finance staff often taking over activities/roles that should be done within the business divisions because they are unclear about where to draw the boundaries.
What we are seeing is far too much focus on the day-to-day activities rather than on the value-added/strategic finance tasks. One of the key aspects we look at when we do a benchmark is the split between strategic activities and non-strategic activities. We call these the '3 Cs'. As I have said, finance functions tend to spend a lot of time on the first two 'Cs' complying and consolidating. They spend less time on the third, crucial aspect creating value, which is the strategic element of the finance role.
Our analysis of one major company showed that the financial director and controller were spending on average 60% of their time on day-to-day activities. In the ideal world, we believe their combined target should be closer to 20%.
This lack of rationalisation means that it tends to focus on analysing data rather than performance. This then drives the behaviour of the companys leadership team, meaning that they too get caught up in the detail and past performance, rather than trying to plan for and meet the challenges ahead of them. This is generally not good for business.
The key message is that finance teams need to appreciate that their behaviour has a much greater impact on business outcomes than they think.
Finally there is also a lifecycle issue that governs both the role of the centre and that of the finance function within the centre. The most commonly noticed staging points are at adolescence the teenage tantrum and at maturity the mid-life crisis.
Unless the corporate centre takes stock and has at least a spring clean at these staging points, you end up with blurred boundaries and duplication between roles, not only between the centre and the operating units but at the executive level within the centre.
For finance executives in the centre this often means clarification over who has responsibility for strategic planning and forecasting, setting and analysing financial targets and deciding on how the money in the bank should be spent.
The reality is that the finance function has everything to gain from a correctly adjusted corporate centre. Too often we see finance teams as beleaguered housewives, too ground down by the day-to-day work to focus on whether their kids are happy and healthy, or whether they are involved in the family unit in the right way. Not only will its overall workload be reduced, but a finance function which refocuses on the tasks which genuinely add real value to the corporate centre and the company.