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Trend Report – December 11, 2005
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The Evolution of the
Finance Function in European Companies and the Future Outlook
News categories: The
New Economy Economics, the new role of finance, Finance and Accounting,
Performance Management and Controlling, Investor and Stakeholder Relations
The role of chief financial
officer (CFO) in European companies has changed significantly over the past 10
years, experiencing a clear upward revaluation both internally and externally.
This is shown by the fact that the CFO is now a member of the executive board
in many companies – both in large enterprises and midmarket businesses. This
transformation of the role of the CFO and of the finance organization in
European companies has seen two evolutionary phases so far. The third and
current phase focuses on improving effectiveness, service quality, and the
changeover to a professionally managed
service and business partner function.
(This article has been published in German in the
Austrian controller magazine: ControllerNews, issue 06/2005, p. 207-209)
Growing shareholder value orientation in companies as a trigger for the
first change phase (1995-2000)
A key driver for the upward
revaluation of the finance function in European companies was the shareholder
value orientation in Europe, which started in the mid-1990s – a result of the
capital markets opening up globally. This marks the start of the first phase of
the finance function change.
Professional investors, who
began investing in large enterprises as funds managers or in midmarket growth
companies as venture capitalists, expected not an accountant, but a
professional finance executive as a counterpart – someone who could not merely
explain the most recent company figures to them, but also the business
strategy, and who could emit self-confidence, be persuasive, and thus secure
investors’ trust in the company, as well as in its strategy and management.
There were also additional
developments, such as:
-
The growing dynamic of the markets that forced
companies to realign the organization and processes ever more frequently (thus
running the risk of endangering the consistency of action and control, the
financial transparency and economic overview, and thereby the “good company
management”/corporate governance)
-
The need to harmonize financial and management
accounting, which has been created by the external shareholder value
orientation of the companies and which required now a consistent view on
financial targets and results - both for the external and internal
figures. Thus, top management required
appropriate new reporting and controlling concepts and tools that allow to translate
seamlessly external shareholder value targets into business unit targets and to
monitor progress.
-
New external financial reporting requirements and
accounting standards, primarily only for these European companies that were now
quoted at an US stock exchange and who were confronted with the challenge to
change their accounting systems to US-GAAP and to deal with parallel accounting
(prepare two versions of group financial statements).
-
Implementation of ERP standard software (that
required a new type of coordination and process integration beyond functions)
and of new consolidation, reporting, and planning tools.
All of this called for a
strong finance and business architect, in other words, an active CFO to hold
everything together internally, to make the necessary changes, and to ensure that
the company’s transaction, reporting, decision-supporting, and controlling
abilities are not merely guaranteed, but also significantly improved, in spite
of the changes.
Phase two: focus on improving efficiency and compliance (2000-2005)
When the Internet bubble
burst on the global stock exchanges in 2000, it marked the beginning of the
next evolutionary phase of the finance function. Many top managers awoke from
the new economy dream and realized that their companies could only survive
worldwide competition in the long term by working efficiently and possessing
the necessary cost structures to be able to make money, even in an economic
upturn phase. The terrorist attacks on September 11, 2001 and the mood of
crisis these triggered (including economically), as well as the falsifying of
balance sheets to a previously unknown extent (Enron, Worldcom, and Parmalat)
caused compliance and corporate governance (enforced through the Sarbanes Oxley
Act) to become a challenge, in addition to cost efficiency. And both topics are
part of the responsibility of the CFO, who is now playing a key role in
mastering these corporate challenges.
CFOs thus became the center
of attention of investors, supervisory boards, and CEOs practically overnight,
and were entrusted with the task of driving the required changes as part of an
extensive finance transformation. The aim of this was
to achieve considerable improvements in the finance discipline and financial
transparency throughout the entire organization, i.e. of global financial
control and of global risk management, and in addition in process efficiency.
The aim of improved process efficiency was not only to reduce processing time,
but especially to reduce the overall costs of the finance function – as well as
in the center and in all subsidiaries and operational units. This required
thinking out of the box, in other words, a clear break with tradition, and
ideas for completely different, better solutions regarding organization,
processes, and systems.
A European group from the
chemical industry can be taken as a typical example. The CFO initiated a
project in 2000 with the goal of saving more than 20% on finance and
administration costs by 2006 and thus reaching the first quartile in terms of
the Hackett benchmark figures. At the same time, the service quality was to be
increased. This was intended to be achieved on the basis of the following
initiatives:
-
A massive reduction in the number of finance and
administration units in the group from over 100 to just one F&A Shared Services
Center per region (Europe, America and Asia). A key goal was to manage the
Shares Service Center like a professional service business from then on.
-
Consolidation of the finance and HR systems from
around 100 worldwide to just one per region
-
Extensive reengineering (simplification and
automation) of the F&A processes and a worldwide standardization of master
data with the aim of reducing costs and improving governance in the F&A
area on the basis of uniform procedures, principles and data definitions
-
Changeover from a finance function organized by
country to a regional process organization (abolishment of the local CFO
position, installing of strong leadership personalities as regional and global
process managers)
-
By the end of 2003, the F&A costs had already
been significantly reduced. The number of different (sub) processes had been
reduced from 1,500 to 400 worldwide, and financial services had been
established as a professional service organization, at least in Europe.
Furthermore, an additional cost saving potential based on other improvements in
efficiency was identified, which was to result in a total of 35% cost reduction
in the F&A area by 2007.
Future outlook
Many CFOs have already made
great progress in improving the efficiency of their finance organization and in
the issues of compliance and improvement of corporate governance, as shown by
the example. This provides a key foundation for the next step, which is to trim
the finance function for increased effectiveness, value creation, and business
partnership.
Dr. Werner Brandt, CFO of
SAP AG:
“It is no longer enough to
be a wizard with the numbers. As an independent business partner, the CFO must
help the company and its businesses to develop their strategy by showing the
financial implications of various scenarios - and by driving the implementation
of the strategy with the heads of the divisions and managing directors of the
subsidiaries in the different countries. So the CFO drives the design of
structures, systems, and processes." [1]
This calls for an increased
focus of the CFOs’ tasks and the finance function on two core functions: the
role of governance, compliance and risk managers on the one side, and the role
of business partners in the area of decision-making support on the other side. This
will also have a greater impact on finance managers’ careers in the future.
David Kappler, ex-CFO of
consumer goods group Cadbury-Schweppes (retired since May 2004):
“There
are two fundamental demands for the CFO of the future. One is about reputation
of the business: it’s about risk management; it’s about open accounting
policies. It’s also about initiation, perhaps self-initiation in terms of
corporate governance. […] The other one is about decision-making support. I
think we will see purely transactional financial processes disappearing out of
the CFO task portfolio. The CFO career of the future is therefore most likely
based on experiences in the decision support and business analysis area and in
that broad reputation/limitation role.”[2]
Shared Services Center
concepts and modern Business Service Center concepts play a key role in the
finance transformation. These act as a catalyst during the changeover from a
traditional back office function to a real service provider that relieves
business partners from transactional processes and administrative tasks,
reduces costs, and also significantly improves process and service quality (see
figure).
Figure:
Shared Service Center and Center of Excellence as a basis for the business
partner services of the new finance organization
This can be seen, for
example, at the European Business Service Center of another consumer goods
group that is located in Budapest in Hungary. Since 2001, they have been
running the transactional processes order-to-cash, purchase-to-pay,
record-to-report, and master data maintenance for the European business units.
In a discussion with the managers of the Business Service Center, their new
self-understanding soon made itself felt: These managers were now acting as
entrepreneurs and no longer as administrators. This also means that they
constantly think about the future and the strategy of the Business Service
Center: Which processes are suitable for outsourcing to external service
providers, thanks to the standardization and improvement in efficiency (to
generate further cost reductions)? How can we work toward value-adding
activities without competing directly with low-cost outsourcing service
providers, such as those in India? What is our core competency?
The decision has already been made to roll in more higher-value processes to the European Business Service Center – in the area of enterprise planning and forecasting, for example. In return, the first outsourcing candidates have been identified. The European Business Service Center has established itself as the knowledge center in the group for finance & controlling knowledge – this is its core competency. This is clearly shown by the CFO’s recent decision to only allow those who have spent 1-2 years at the Business Service Center in Budapest to have a career in the group’s finance function.
1Juergen H. Daum is management adviser,
finance & enterprise management expert, and Chief Solution Architect of the
Business Solutions Architects Group EMEA at SAP in Walldorf, Germany. For CFOs
and controllers of numerous European companies he acts as a generator of ideas
and stimuli for the redesign and transformation of the finance organization and
enterprise management. Together with his colleagues, he has been running the
SAP Finance Best Practice Network since 2003. This serves as a platform for the
CFOs of European SAP customers and their finance architects to exchange
information about “finance best and next practice” and draw up together the
path toward the finance organization of the future. He regularly publishes
articles in journals, speaks at conferences, and is author of the books
“Intangible Assets and Value Creation” (English edition: John Wiley & Sons
2003, German: Galileo-Press
2002) and of “Beyond Budgeting (German edition:
Meidenbauer 2005). Before his time at SAP he was CFO of a German midsize
company. E-mail: jhd@juergendaum.com,
Web site: http://www.juergendaum.com/
[1] Quoted from “Supporting the Strategic Transformation at SAP”
– an interview with Werner Brandt, Chief Financial Officer (CFO) and member of
the Executive Board at SAP, in SAP INFO 130, September 2005, pg. 18
(see http://www.sap.info/public/INT/int/index/PrintEdition-1130043032206018bf-int/2005/articleContainer-17403430598808b440)
[2] Quoted from: Jürgen H. Daum, Werner Brandt, Thomas Buess, Lennart Francke, and David Kappler: “The Future of Enterprise Performance Management – From Best to Next Practice” – a discussion with the CFOs of four leading European companies, in: Controlling, issue 11, November 2005, pg. 51-56 (panel discussion at the European SAP CFO Roundtable on December 03, 2004 in Venice)
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Additional Resources:
J.D.’s Best Practice Channel – Finance
J.D.’s Beyond Budgeting Info Center
Juergen
H. Daums book on: Beyond
Budgeting, Meidenbauer 2005
(German edition)
Juergen H. Daum's book on: Intangible Assets and Value Creation, Wiley 2003
Interview
with Juergen H. Daum: Intangible Assets and the art to create value
Why a new Management System ? –article by Juergen H. Daum
Related Trend Reports:
CFO
Dialog: The Future of Enterprise
Performance
Management - From Best to Next Practice.
A discussion with the CFOs of four leading European companies
Finance
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of the Future
Beyond Budgeting: Ideas
for the Fundamental Redesign of the Management Control Model
Interview with Lennart Francke: Managing without
budgets at Svenska Handelsbanken
Intangible Assets: a central topic at the mySAP
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Asset - The U.S. versus the European way
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The book of the month (May / June): “The Value
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More about Enterprise Management Best Practice and related topics will be continued in Juergen Daum’ Trend Reports. To subscribe for Juergen Daum’s free-of-charge e-mail newsletter (a regular summary of the recent reports) click here.
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