Finance-Function Cost: The 0.6% Solution

How much is the cost of the finance function as a percentage of total revenues? “The average is around 1.4%,” says Charles Tilley, chief executive of the Chartered Institute of Management Accountants (CIMA). “That of well-run companies is somewhere between 0.6% and 0.7%.”

The CIMA-commissioned report, entitled Improving Decision-Making in Organisations: The Opportunity to Reinvent Finance Business Partners, argues that “leading companies can achieve superior returns if among other variables they have transformed their finance functions and manage enterprise performance rigorously, a discipline which requires effective finance business partners.”
 
Tilley spoke with CFO Innovation’s Cesar Bacani about the finance functions of world-class companies and other issues.
 
What did you find out about CFOs in Asia in the study CIMA commissioned?
CFOs are actually the same across the world. The split would not be Asia vs. the UK vs. the U.S. It would be well-run companies vs. the rest, if you like. The well-run may be multinationals, but they also may be the corner shop. This study is much more about those organisations that understand they need to use all of their skills to run [their business] successfully.
 
World-class companies have driven down costs; everybody else has to do the same. World class companies have business intelligence systems; everybody else needs to do the same.
 
When you refer to ‘well-run companies,’ what do you mean?
I get to talk to hundreds of companies a year. Two things about them: one is that they look like they have a sustainable future and they’re thinking long term. And secondly, their stock price goes up over time.
 
The other thing is about cost. The finance function of world-class organisations, their cost is typically about 50% of the cost of the average.
 
The basis to define that cost is the percentage of the cost of the finance function compared to the total revenues of the organisation. The average is around 1.4%; that of well-run companies is somewhere between 0.6% and 0.7%. A lot of that is because they also invested in the best technology, so a lot of the grunt work, if you like, is being undertaken by intelligent systems.
 
And also because revenues have shot up, making the proportion of spending vs. the revenues smaller?
Absolutely. In some companies, it’s still very much spreadsheet driven. In the best companies, this is all absolutely systemised and therefore cheaper. It’s also potentially outsourced or in shared service centres in cheaper locations.
 
What is also very interesting is that the shared-service centres, they started off doing things like payroll, and now they’re getting into some interesting areas. I’ve been involved with a couple of shared-service centres that do absolutely everything in terms of producing amounts of information, managing all the data, producing the finance accounts, doing the tax.
 
There is this particular organisation in Sri Lanka that works U.K. hours [as an in-house shared-services centre doing financial management]. The finance people are all that’s left in the business [in Sri Lanka], and they are helping management as part of an overall team. They’re thinking about key operation issues, pricing, all the things that need to be done to make the organisation a success. They’re absolutely at the forefront of decision-making. 
 
INFORMATION TECHNOLOGY
But getting from here to there can take years, wouldn’t it? I’ve heard of IT horror stories . . .
They’re horrendous, though most of those IT horror stories are in the public sector rather than in the private sector. In this particular company, it was more like an 18-month rather than a 10-year journey. Once you have done it, the cost tumbles out. Even in CIMA, we put in place a Siebel system about six or seven years ago, and our operating costs have gone down 10% ever since.
 
The upfront cost must be large, though …
The one-off cost was very significant, but the payback at 10% [reduction a year] would have been three years.
 
Do you think that if you did what you did at CIMA today, given all the advances in technology, given software-as-a-service offerings, cloud computing and so on, it would actually be cheaper upfront?
I don’t know, but it may be marginal. Most of the cost is actually about the organisation handling it, which is still people. In our case, if I remember rightly, the system was 20% at most [of the total cost].
 
HUMAN RESOURCES
I imagine the well-run company also has a CFO and finance function that are not mere bean-counters and compliance officers, but are active business partners.
To run a business successfully, you need a very good financial navigator to tell you exactly where you are, that you’re really on top of that positioning and what the risks are at any one time. If you’re at a boat and the wind changes and you hit a rock, that would be unfortunate. In a financial crisis, if the wind changes and the interbank market seizes up, you suddenly don’t have money to run your business successfully. It’s exactly the same thing.
 
But in the ship, the whole concept of a team is well understood. Everybody has to work together. In the case of business you do get your prima donnas. So the research would indicate that there’s a lot of opportunity to move to this area [of having a financial navigator and teamwork], but there are plenty of organisations that are not doing it.
 
I think it’s the same across organisations generally. One of the presentations I’ve been doing recently refers to research by McKinsey about the board. We’re talking about large organisation, where the board would like to spend more time on strategy. But a quarter of the non-executive directors who responded to the survey said that they really didn’t have a good grasp of the strategy. Half of them said they didn’t actually know where the organisation was headed five, 10 years out, or how it was going to get there.
 
Basically the organisation isn’t effectively mapping out where it’s going and I would suggest if you don’t know where you’re going, you’re not going to succeed. So that’s the message: good companies are doing it and the rest need to catch up.
 
Isn’t there a bit of a bait-and-switch here? Are you finding some resentment perhaps among accountants who expect to be working with numbers, but then find themselves having to be strategists in the corporate setting?
I have never met anybody who became an accountant because they wanted to become an accountant. I think the majority of people who become accountants know that accountancy is a language in business, and they’re very excited by business. Certainly in my case, that would be the case. I’m sure there are some people who just want to deal with data, but most look up to the business rock stars and say, ‘I’d like to do his job.’
 
This is a very interesting debate, and one which the finance practices of big companies are talking to me about. If this bit [the grunt work of transactional processes] is no longer here because there’s a shared-service centre or it’s somewhere else, how do their [finance] people get complete training? I think you’re going to have to second your people to here [shared services]. One of the interesting issues is more and more, you’re going to find that the people on top of these [large] organisations are going to be Asians or maybe Eastern European because most of the shared-services centres are in Asia and Eastern Europe. 
 

Accounting bodies like CIMA would seem to have a special responsibility here because you’re the ones training and testing accountants. Have your basic qualification training and the continuing education programme been transformed to respond to this kind of environment?

I’m very proud of the CIMA qualification. We’re the only international accounting body, first of all, that’s solely focused on business.
 
We have three pillars to our qualification. It’s obviously very important to understand financial accounting, so that’s one of the basics. We also need to understand management accounting, and that’s our core, if you like. But you also got to know business. You got to have a passion for business, and therefore the whole area of project management, business process reviewing, marketing, HR, etc, they’re all covered.
 
Our qualification is a business finance qualification. It’s teaching the language of business, and it’s teaching you to be, firstly, somebody who really adds value to the finance team, but secondly, has the ability to go on beyond.
 
What about governance? What about the environment and sustainability? Are these integrated into the curriculum?
The space that we think is ours is five areas. One is enterprise governance, which is the role of the board, governance and so forth. The board’s role is also driving forward the strategy. Then performance management -- what are the decisions being taken about how we use resources and how do we manage risks? And then the reporting, which is internal and external. To do those things, you actually need to have good management and leadership skills, good influencer skills, and so forth.
 
Finally, and this is where professional bodies are so important, and where I hope the world is going to embrace professional bodies generally and CIMA particularly, is the whole area of ethics. We are wrapped in professional standards. We want our people to do the right thing. It’s very difficult to train in ethics, but it’s absolutely a key element [in accounting and business].
 
AFTER THE CRISIS
I have heard a lot of business analysts speculating about the ‘new normal’ post-crisis, when an entirely new business world is supposed to emerge. What do you think the new normal will be in Asia, where the Great Recession appears to be nearly over?
We have been working with PricewaterhouseCoopers on board leadership issues. The new normal might be, and I hope it is, that company boards clearly remember that their job is [to ensure] performance, and that performance is not short term but the long term sustainability of the business.
 
What comes into that long term sustainability? Undoubtedly it’s the environment. Fifteen years ago the picture of an environmentalist was a guy with very long hair, scruffy and dirty. The new environmentalist is [represented by] Stuart Rose, chief executive of [British retail chain] Marks and Spencer. They have just put in a huge environment programme they call Project A. When asked what Project B was, he said there’s no Project B; we cannot afford to fail [with Project A].  
 
I think the environment is absolutely out there from a corporate perspective for two reasons. One is because if you get it right, in many instances you can make money. If you look at [British supermarket] Tesco in terms of how they’re running their fleets of trucks, the efficiency of the engines at the outset manages to reduce fuel costs massively. You see Wal-Mart now, for instance, having huge solar power panel on top of their shops. Their shops run off the sun and that’s cost-savings.
 
And their customers like it. You’ve got customers saying: we want environmentally friendly things, be they be shampoos, washing powders, cars. The environment is now real. I sit on the [supervisory board of the] Prince of Wales’s Accounting for Sustainability project. He’s done a fantastic job of raising the profile of how [a company’s sustainability performance] is reported. Last week I chaired a roundtable of property companies and what they’re doing on sustainability. It’s now very much the case that their clients are saying: we want sustainable buildings that are much cheaper to run and so forth. It’s no longer tree-hugging; it’s now a business imperative. 
 

And the finance function and CFO are responsible for measuring and reporting all this?

Absolutely. It’s the old adage – what gets measured gets done. In the session we had at Clarence House, fantastic work being done by accountants in terms of the measurement. Basically, the accountant is in a brilliant position. Instead of having this data being just financial, you want it to be the whole business, about everything that matters. He’s connecting the financials with the customer data, with production data and so forth. It’s what the best accountants have always done.
 
How is the process of developing and standardising non-financial measurement and benchmarking coming along?
There are some standards, but one size absolutely doesn’t fit all. It’s not like IFRS. I think what one sees is, over time, and this is what investors are pushing for, there will be industry standardisation. So if a retail analyst finds that the way [upscale department store] Lane Crawford presents [sustainability] information is completely different from [mid-market retailer] Dairy Farm, that’s disastrous as far as he is concerned. How does he do his comparisons? So it’s got to be consistent across business segments.  
 

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