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?"
Case Study: IBM's Journey Up the Value Chain
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.
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.
Let finance go free!
This is no longer the case at IBM ASEAN, says CFO Lim. That’s because the company was one of the first in Asia to centralize accounting and other finance functions in a shared service centre (SSC), which then freed finance from much of the transaction processing and accounting work that used to consume its time.
It was Lim himself who led the setting up of this SSC in Kuala Lumpur in the 1990s. “I was involved in the finance transformation from the start,” he recounts. “It was a long journey and it wasn’t easy.”
At that time finance in IBM ASEAN was done at the country level. The decision was made to move routine finance processes to one central location, primarily for cost reasons, but later also as a way to improve finance effectiveness and productivity. With business costs half of Singapore’s, good language skills and a stable workforce, neighbouring Malaysia was seen as the logical site for the SSC.
The first thing that Lim and his team did was to examine the accounting processes in use in the different ASEAN markets. They found multiple charts of accounts, different coding systems and other practices that made integration difficult. Lim and his team looked at which units had the best practices and then designed a standardized system around them.
The standardization process took six months to complete, with the actual conversion phased in over a year. Understandably, there was resistance. “Some people thought they were going to lose their jobs,” Lim recalls. “But when everybody saw the fruit as it was unpeeled, there was a moment when people said, ‘Yes!’ They saw it was beneficial, and then everybody said, what’s the next process we can standardize?”
There was attrition. Some people left IBM for one reason or another. Others agreed to move to the SSC. Many more found themselves “doing more analytical things rather than processing,” says Lim. “Some really love the practice of accounting and stayed there. Others moved on to other roles, into operations, sales and CFO roles across the organization. We do take into account what individuals want and then try to put them on the career path to where they want to go.”
Lim reckons that the SSC is working well for IBM. Monthly closing, for example, now takes “slightly more than a day” to complete. “Visibility is also there,” adds Lim. “What I see, somebody else above me can see, the same data going into the books. So they can check from Day 1 until we finally close off for individual countries. Everybody uses the same set of data.”
Indeed, the Kuala Lumpur SSC was deemed so successful that it has become the regional centre for the entire Asia Pacific. Its remit has also been expanded to include other finance management functions, not just accounting. And the SSC concept has been replicated for other non-finance processes, such as procurement (the global SSC is in China) and planning (the regional SSC is in Singapore, which also hosts a Treasury Centre, one of three at IBM, the others being in Ireland and the US).
What about the worries expressed by some CFOs that hiving off parts of the finance function and consolidating them in an SSC threatens to negatively affect talent development? The fear is that the fragmentation of functions will make it difficult for executives and staff to get a well-rounded grounding in all aspects of finance.
Lim says this is not a big concern at IBM. “I like to encourage cross-pollination among the teams,” he explains. “It gives people more freedom, more learning experiences. We do this for those in the SSCs as well as for analyst-types and first- and second-line finance managers and staff.”
“If we see someone has potential, we move them to [regional headquarters in] Singapore so we can groom them,” he adds. “One of those we moved now runs finance in our services business in Asia Pacific.” Another talent, a Malaysia-based regional accounting manager who used to run close to half of the accounting process in the Kuala Lumpur SSC, is now the Malaysia CFO.
With the SSCs meeting success, there is the temptation to think that finance has reached its objectives. In fact, it is only the beginning. Finance “needs to move up the value chain,” says Lim. “You need to put information in front of the business so they can make better decisions. That’s the ultimate goal.”
It’s a process of continuous improvement. “For me as CFO, the issue is how to enable our teams to get onto that journey [to move beyond bookkeeping],” says Lim.. “What information does the business need and want, and how do we in finance build those tools to support the business?”
Those are questions that other CFOs should be asking themselves and their teams – and making sure that they have the answers.
About the Author
Cesar Bacani is the Editor-in-Chief of CFO Innovation.