MANAGEMENT

Case Study: IBM's Journey Up the Value Chain

When a consulting company or a software vendor, say, tells a CFO that its services and products can transform financial management at the CFO’s organization, the first response should be: Show me the money. How has this worked in your own firm?

 
At IBM, the global business solutions multinational, CFO for ASEAN Clive Lim is ready to show anyone. He was in the middle of the action in the 1990s when IBM started to transform finance in Southeast Asia from pure data and bookkeeping into the value-added function that it is now.
 
“Today, we have various processes that we incorporate into forward-looking finance services that help in business decisions,” says Lim. “We look at trends and data points at the back-end to help our country and brand leaders with their forecasting and planning. Is that forecast logical and reasonable? Are we down the path of managing a huge risk towards our sales performance for any given quarter or period?”
 
It’s the same transformational process that other finance units at IBM is undergoing across the world, and one that can be said to contribute to the company’s bottom line. The market recently cheered as IBM reported stellar first quarter 2011 net income of US$2.9 billion, up 10% from first quarter 2010, on revenue of US$24.6 billion, up 5% from a year ago.
 
That earnings growth is outpacing sales growth suggests that improvements in efficiency and productivity in finance and other areas are making a difference.
 
Beyond bookkeeping
Research by the IBM Institute for Business Value, in fact, indicates that companies with a finance function similar to IBM’s (that is, where the CFO and finance team focus not only on compliance and reporting but also on value-added functions), tend to perform much more strongly financially than companies where finance has a more limited role.
 
Last year, the institute examined the financial statements of almost 2,000 firms across the world and calculated their compound annual growth rate from 2004 to 2008. The researchers found that companies with value-added finance increased EBITDA by 17.4% compared with 11.4% for the rest of the sample. They also saw revenues grow 24% (versus 13.8% for the rest of the sample) and return on investment expand 13.1% (versus negative -2.7% for the rest of the sample).
 
More research needs to be done to conclusively draw a direct cause-and-effect relationship between the scope of the finance function and the financial performance of the enterprise. But the studies so far show that there is a statistically significant correlation between these two elements.
 
CFO Innovation has just completed its own research, which is sponsored by IBM and builds on its research arm’s 2010 findings. In The ASEAN CFO: Becoming a Value Integrator, one key finding is that 47% of large companies in Southeast Asia (defined as enterprises with at least 500 employees) appear to be following the IBM model.
 
The executives surveyed say their finance function is focused not only on transactions and compliance, but also on analytics, predictive insights, risk management, business decision-making and optimized performance. However, seven out of ten respondents say finance spends 40% of more of its time on transactional work. This suggests that while many firms in ASEAN are expanding the scope of finance, the CFO and finance team do not really have the luxury of time to extend value-added services.
 
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