Finance strategies to improve company-wide effectiveness.
The past 10 years have seen finance departments cut costs by nearly 30 percent. Over the next decade, we can now expect to see these departments shift their focus to achieve a higher level of effectiveness. But finance teams don’t need to choose between cost reduction and increased effectiveness – the companies that achieve the best results lower costs and implement value-added operations.
As we progress towards a decade of further finance efficiency, the highly sought-after Divisional and Group Chief Financial Officer (CFO) Gary McGaghey shares four moves that finance executives can make to deliver greater real time insights, accelerate workflows and decision-making processes, and reduce human error and biases.
Efficiency Gains Over the Past Decade
McKinsey & Company has found that finance companies have cut costs by 29 percent[CM1] over the past decade. Although the scale of cost efficiency has varied from sector to sector, ranging from 15 to 35 percent over the past 10 years, the cost of finance departments has consistently dropped across all sectors. These departments’ finance leaders have:
- Achieved similar levels of cost improvement to average performers, which is impressive given that finance leaders started from a lower cost base.
- Spent 19 percent more time on value-added activities, instead of transaction-processing activities, than the average financial department.
- Achieved slightly higher improvement rates despite their leaner starting points. This is representative of their focus on finance-function efficiency regardless of previous gains.
- Dedicated more of their time to value-added operations like strategic planning, operational risk management and business performance management. Such prioritisation has enabled these finance leaders to develop deep capabilities in value-additive areas.
Four Moves for the Finance Departments of the Future
Gary McGaghey explains that the McKinsey research points towards four moves that companies can make to achieve a higher level of effectiveness.
- Cast a wider net to seek new efficiency opportunities. These opportunities should span beyond transactional activities, which have long been the main focus of attention.
- Step up finance’s role in managing, controlling, consolidating, and/or simplifying data.
- Improve decision-making processes by employing advanced analytics, data visualisation, and debiasing techniques.
- Reimagine the finance operating model by nurturing new capabilities and skills.
Move 1: Look Beyond Transactional Functions
Over the past decade, many top-performing companies have improved efficiency in transactional functions by at least 39 percent across areas like accounts receivable, accounts payable, and other accounting areas. As the cost base for these activities shrinks, many companies will find that their efficiency efforts have diminishing returns despite the company’s room for improvement. Meanwhile, over the past 10 years, there have been fewer efficiency improvements in the strategic areas of finance, like tax planning, internal audit, controllership, optimising capital structures, financial risk management, and FP&A. Gary McGaghey expects that this will change over the next decade.
Developments in artificial intelligence (AI), machine learning, and computing power are now set to streamline complex financial processes. The rise of data has triggered demand for workers who have strong analytical skills, like machine learning engineers and data scientists. As demand is currently outpacing supply, the industry is offering higher-paid salaries, upgraded university computer science curricula, more private sector training, and free online AI resources to increase the talent pool.
As data processes advance and workforces upskill, Gary McGaghey advises CFOs to:
- Shift their focus from low-end to high-end automation. Rather than focusing on first-wave automation approaches like robotic process automation (RPA), CFOs can invest in second-wave automation technologies to streamline financial planning, audits, and capital allocation. However, many of these technologies are complex. Gary McGaghey recommends that CFOs overinvest in piloting second-wave technologies to find the right-use cases and switch direction where experiments don’t work.
- Evaluate and set guidelines on how much time staff spend on value-added activities. The finance team’s time is valuable and often best devoted to analyses that fuel business performance. Finance leaders can support their teams by making sure that requests for information are grounded in clear, agreed-upon business financial performance drivers.
- Align with the wider enterprise on machine learning and AI technologies. As technologies evolve, some platforms have grown in popularity, while others have lost users. Developing a company-wide strategy that embraces technologies can focus investments and improve collaboration between finance and other functions.
- Ensure that staff in critical roles have the experience, authority, and leadership mindset to influence the company. Staff need to improve their comunication and influencing skills and capabilities continuously to flourish as advisors and counterweights to senior executives and successfully steer the company’s financial trajectory. This is particularly important for those who have senior FP&A and finance business-partnering roles.
Move 2: Enable Finance to Take the Lead in Data Management
The size, complexity, and use of data are growing faster than ever. By 2025, the amount of data worldwide will likely reach 175 zettabytes (175 terabytes). This would be an annual growth rate of 66 percent over 2018 levels. Gary McGaghey notes that the data that finance departments use to secure a competitive advantage and ensure compliance with legislation is also growing. This growth means that finance teams must analyse increasingly complex data sets to come up with actionable information and insights.
As a result, finance departments need clearly defined data management strategies to collect, store, and interrogate data and perform relevant analytics successfully. The finance function should help define the company’s master data strategy. As part of the function’s responsibility to manage company-wide data, finance leaders can:
- Prioritise the quality and consistency of data entry, structure, aggregation, storage, and protection. CFOs can take a leading role in leading these efforts to reinforce change-management practices in both the finance department and adjacent functions that produce data.
- Lead the alignment of data standards across departments. While the chief data officer is often a key part of the IT function, the CFO has a unique point of view as both a provider of company-wide information and a major consumer. The CFO is often in an ideal position to marshal resources across departments and address data standards. The finance department shouldn’t drive enterprise data efforts alone, but it can be helpful for the finance department to collaborate with IT, digital, operational, and customer-facing functions.
- Invest in tech-enabled data. CFOs can advocate for building a layered architecture with a common data layer. This data layer should be flexible enough to cater for evolving business needs while preserving a single source of truth.
- Provide finance staff with the capacity to clean data. Validating and cleaning data at the point of entry is more efficient than addressing data quality issues after they’ve occurred. CFOs should keep in mind that some finance staff will need additional capabilities to understand data limitations and how to resolve these.
- Adopt technologies that enable better-quality data. Though data cleaning is important, it has – until recently – required time-consuming manual work. However, new machine learning algorithms can validate and cross-reference data, reducing human errors and the time needed to clean data manually.
Move 3: Improve Decision-Making Processes With Advanced Analytical Techniques
It’s becoming increasingly important that finance departments use advanced analytical techniques to solve business problems. Finance departments must also frame discussions on company performance and brainstorm actions to improve this performance.
To achieve this, Gary McGaghey explains that finance departments should be able to provide:
- Clearer insights. Finance staff should clearly communicate about performance, highlighting shortfalls against expected outcomes and identifying any factors and context that inform why gaps have occurred.
- Quicker insights. Providing insights quickly enables management to understand recent performance and make informed decisions to change trajectory where necessary.
- Richer insights based on robust data sets from a variety of sources. A range of data can provide wider perspectives than internal financial data can alone. For example, companies can use a broad range of data to contextualise their profit projections against the overall sector’s performance. Analysing both internal and external data allows companies to create realistic performance projections and minimise inaccurate projections when unexpected circumstances arise. Companies that foresee multiple scenarios are typically better equipped for crises.
Move 4: Enrich the Finance Operating Model With New Capabilities
Gary McGaghey emphasises that finance departments should use the new finance operating model, which allows staff to shift their focus to new pressing topics quickly and dynamically. The operating model starts from a leaner core to minimise the effort involved in operational tasks and integrates with several technologies. It also offers new data management practices, tighter data standards, and enhanced automation.
However, Gary McGaghey explains that implementing the model requires a few changes:
- Break traditional hierarchies into flat networks of teams. A network model helps finance business partners draw on a shared pool of analysts. These analysts are assigned to work items based on business priorities.
- Mobilise temporary teams to identify deeper insights into business challenges. This approach embraces agile working principles, like instituting sprints to identify, design, and implement financial analyses that uncover insights into business problems.
- Cultivate digital skills throughout the finance department. For example, finance staff may need to improve their skills in using analytics software, translating business data into actionable insights, or programming bot algorithms. Training provisions in data visualisation, analytical, and debiasing techniques can offer a major competitive advantage, but they also require commitment.
- Develop a team of savvy finance leaders. Strengthening job rotations within the finance team and between the finance team and the wider company can build a cadre of multi-skilled professionals. For example, a company may require executives to have worked in a minimum number of divisions, functions, and countries before they ascend to a senior role. Alternatively, executives may need to rotate through non-finance roles before they take on a senior role. Either way, finance leaders should build operational and leadership skills.
- Boost the finance team’s skills by crafting a transparent competency matrix. A detailed set of standards can ground finance talent discussions in objective criteria. This helps individuals choose from explicit capability-building actions to support career progression.
- Brainstorm incentives for skill development. Both informal and formal incentives can promote skill development. CFOs may link incentives to knowledge and capability development, set targets for internal promotions to finance leadership positions, and openly recognise the accomplishments of managers who coach their teams.
Overall, finance leaders must develop capabilities outside of their core financial skills. Their work guides a company’s overall functions, and they must take the steps that will allow the finance team to generate key insights, achieve high-level performance, and support dynamic decision-making processes.
When companies embrace these four moves, they can cut audit costs by double-digit percentages, upskill their finance teams, improve data quality and reduce wasteful data cleaning efforts, and improve decision-making processes on a company-wide scale.
About Gary McGaghey
Gary McGaghey is the CFO of the end-to-end marketing production services group Williams Lea Tag. He is responsible for monitoring and directing financial plans, expanding the value of the private equity company’s holdings, and leading investment decision-making processes. He is also the non-executive director of the award-winning creator of children’s fitness analysis and testing solutions Fitmedia UK. Gary McGaghey’s previous roles include various non-executive and statutory executive director roles for listed and privately owned companies.