A High Performing Finance Function - P1

With a huge interest being generated in finance function outsourcing or offshoring it would be informative if there is content on what a high performing finance function is and the various methods through which an organisation can move to making its finance functions world class.

Through a series of posts, I will cover various aspects of a High Performance Finance Function. It will provide some insight into what a high performing finance function is and how does an organisation move towards creating a high performing finance function. The articles are split into key questions which will be answered, these questions are:

1. What is a finance function?

    

2. What are the areas where a finance function can be improved to make it world class?

    

3. What is a high performance finance function and what are its charecteristics and its impact?

In later articles I will lay out what needs to be done to move a finance function to a world class one. It will include information and content on what the quick wins can be leveraged, what the best practices are, what are the areas where standardisation can occur, what are the options for transformation, decisions on a shared service centre or chosing and outsource partner.

Read on..

The finance function consists of the people, technology, processes, and policies that dictate tasks and decisions related to financial resources of a company. Depending on the organization and the industry in which it operates, this function may be simple or complex. Some finance functions are overstaffed that is, they rely on individuals to perform both advanced and simple tasks while others are highly automated relying on people for decision making and policy setting exclusively.

Regardless of the ratio of people to technology, the goal of the finance function is to serve the organization’s financial/accounting needs while laying a platform for the future. This means (1) handling clerical tasks, (2) providing information to the organization, and (3) setting financial policies and strategies that will serve the company in the future. To succeed in these three broad areas, the small and emerging business must be prepared to develop a finance function that both suits its needs and can adapt to the growth and changes of the business. The first step is to develop an adequate finance function. To do this, it is important to understand the component parts.

COMPONENT PARTS
The finance function consists of two basic component types: (1) hard components and (2) soft components. Concrete components include all aspects of infrastructure including technology, software applications, and processes, as well as the people who manage them. Soft components include the standards, strategies, models, and vision that drive the finance/accounting aspect of the business. Each component stands on its own to an extent; however, ultimately all components must be woven together in a way that serves the overall organization objectives. It is not enough that all component parts exist; rather they must exist in harmony with one another, yielding synergies that serve the company’s needs today and provide for the future.

Concrete Components
The term infrastructure, in this context, refers to all relevant concrete components of the finance function. These components may already exist in the organization in some fashion, although they are not thought of as infrastructure. Regardless of how they were classified, these components were assessed for their usefulness and either purchased or developed. In order for certain tasks to be undertaken on a regular basis, tools and processes must be put in place to manage them. Items of infrastructure can be classified into three major categories: (1) finance organization, (2) information systems, and (3) processes.

The term finance organization refers to the people responsible for conceptualizing, implementing, and following through with all finance and accounting related tasks and initiatives, as well as the technological tools they employ. The finance function works best when people with the right qualifications are matched with the right tasks. When the proper technological tools are put in the mix, the finance organization will excel and serve the needs of the organization.

Staffing. Enlisting the right people for the job is a challenge in any business. When certain aspects of the finance organization (namely infrastructure) are lacking, it is easy for employers to lose sight of essential employee skill needs. For example, the position of Director of Budget and Forecasting may require Information Systems (IS) skills because no IS organization exists.

Finding a Director of Budget and Forecasting may be difficult enough, but finding one with advanced IS skills may be impossible. Finance personnel typically rely on technological tools to do their jobs; however, they may not be so knowledgeable at maintaining the technology. If substandard tools are provided to professionals, they may have to fend for themselves when it comes to managing the secondary demands of the job (making their computer work or administering software) rather than focus on their primary objective (managing the budget and forecasting process).

This human element of the finance organization can be a powerful resource for the organization if the right people are a part of the team and if they are allowed to generate and implement new ideas. Expecting people to not only perform their tasks but also to optimize the way their function fits in with the business will provide value to the organization and provide meaningful career development for employees. Personnel should be allowed to isolate all business needs and drivers, determine the impact of these on the organization, and be rewarded for the business strategy/planning that results.

Technology. Nothing is more important than providing people with the right tools for the job. This means appropriately configured computers, communication devices, and planning tools. Simply buying the best technology may not always be the answer. A mistake repeated every day by executives and business owners is falling prey to a vendor¡¯s claim that if the smartest or best machine is purchased, the users¡¯ objectives will be met. The nature of the tasks to be performed must be taken into account before staff are outfitted with technology. Will desktop computers suffice or will staff need laptops instead? Will finance staff need cell phones or other types of communication linkage? How about planning devices¡ªdo staff need personal digital assistants or other wireless devices to share documents and information remotely? Knowing whether staff will be performing tasks in one central location or performing tasks ¡°on the road¡± will drive decisions for technology.

The term information systems refers to the backbone technology¡ªservers, switches, operating systems, protocols, and software applications that will drive the finance function. Distinguished from technology defined earlier, information systems have a broader impact on the entire platform of the organization¡¯s technological capability. This term is used more on a macro-level as opposed to the term technology. Information systems give organizations the ability to gather data in the business environment and translate it to knowledge. They also provide the ability to communicate information and data within and outside the organization. Information systems provide a basis for evaluating customers while allowing them to provide feedback to the organization. This aspect of infrastructure also allows the organization to link with information systems of customers and companies in the same industry to achieve synergies in buying, forecasting, billing, and collectingcustomer payments.

Processes are the protocols and procedures that envelop information systems. They leverage the impact of information systems and bridge the gap between raw systems capability and company specific needs. Processes cannot be generic but must be customized and suited for a particular organization¡¯s needs. To develop processes, the business owner/manager must have an acute knowledge of the organization and what it is trying to accomplish. To succeed in process development, knowledge of employee capability, thresholds of technology, and limits of systems also must be firmly grasped.

Soft Components
Soft components of the finance function are the more advanced considerations of the function itself. Policies, standards, strategies, and analysis paradigms are examples of soft components. These components cannot be bought or replicated necessarily from an outside source; rather they are developed internally. It is management¡¯s responsibility to develop the soft components of the finance function and maintain them as the company grows and adapts to its environment. The existence and relevance of soft components are good litmus tests for the strength of management. Companies that are lacking in this area put the organization at risk and leave development of the finance area to chance. Allowing the finance function to evolve on its own without a vision driven by strategies and formed with standards could create more problems than it solves.

Developing finance strategies, standards, and policies may be a luxury for the small and emerging business owner when compared to the day-to-day necessities of keeping the organization running. It is important to note, however, that most soft components of the finance function are not developed overnight. In fact, rarely are they complete or relevant for very long. Soft components are always developing and changing as the business organization changes. Developing them should be embraced as an aspect of organizational culture. Although an organization may be able to enjoy success in its early years without attending to these components of the finance function, eventually issues in the business itself or business environment will demand them. For example, infrastructure may suit a small and emerging business in the short run, but increasing demands for information and new ways to serve customers may necessitate change in this area. Absent the vision for development or the strategy for addressing future data needs, the finance function always will be a step behind, which will result in perpetual short-term decision mode. This may be costly in the long run as managers purchase unscalable technology to solve an immediate need, only to find themselves repurchasing more technology a short time later to accommodate evolving needs.

Well-thought-out soft components will make development of all aspects of the finance function second nature. For example, developing financial analysis paradigms that are relevant to the organization¡¯s business fundamentals will drive IS needs. These paradigms will in turn drive the level of qualifications of personnel. Strategies then can be developed that implement relevant software applications, technological tools, communication devices, and so on. This ¡°web of impact¡± illustrates how all aspects of the finance function cascade off the soft components. Practically speaking, the small and emerging business owner may not be focused on the mid- and long-term time horizon. Therefore, codifying areas of vision, strategy, and policy in the finance area may not be practical. It is important to note, however, that being aware of developing soft components at the early stage of the organization will greatly benefit the business owner/manager as the business matures. The high rate of change in the business in its early years may render soft components irrelevant overnight. Laying a foundation of thought and intent to develop this aspect of the finance function will become that much easier as the business owner/manager matures with the business and becomes more savvy in developing strategy.