Audit | Tax | Advisory

Finance Functions and Change

September 2012

Pesh Framjee Head of Not for Profits at Crowe Clark Whitehill Board Member of the Institute of Risk Management Special Advisor to the Charity Finance Group (CFG)

New times and new challenges

The status quo is not really a viable option

New pressures are demanding new responses

The charities that are succeeding are not the ones that are avoiding risk

Need to move on from traditional roles and competencies

5 questions

1. Where do we want to be? The core deliverables and competencies to deliver them.

2. Where are we now? The existing function supporting technology, resources, knowledge, skills and structures.

3. How do we get to where we want to be? The critical enablers and operating imperatives that get us to where we want to be.

4. What are the options? The strategic choices available considering the changing market conditions and new opportunities.

5. What might prevent us from getting there? The commitment to action of the leadership. The change management and resource / capacity implications.

Minimum requirements for the Finance function

1. Effective transaction processing

2. Regular and timely management reports and accounts, effective variance analysis and strong interpretation and narrative

3. Financial scenario planning

4. Yearend closure of the books should be like a more important month end with regular reconciliations and interpretive analysis of control accounts and other key reviews

5. Regular reliable rolling Cash flow forecasts

Minimum requirements for the Finance function (cont’d)

6. Producing other reports to meet internal and external reporting requirements and to provide the right information and knowledge for decision making

7. Treasury management

8. Manage and develop the budgeting process and programme management support

9. Interaction with other departments

10. Proper management oversight and control of the financial relationship, interaction and interface with other departments and “business partnering”

Six core disciplines

1. Transact, record and report effectively by improving

fundamental financial processes

2. Business partnering and the supporting of new initiatives

for other directorates

3. Decision support and the provision of knowledge for

decision making

4. Financial planning, treasury management and the

allocation of funds, people and other resources

5. Financial governance, control and catalyst for new

initiatives and change

6. Financial risk management and protection of assets

Finance is often still dominated by ‘low-value’ activity

Low-value activities are those that are optimal when they provide the highest level of accuracy at the lowest possible cost.

They typically do not add value no matter how well they are performed.

They have to be done right but do not earn any brownie points

Low level activities dominate

Effort available to support imperatives:

“Business Partnering”

About 15%

About 15%

About 60 - 70%

Must provide more value at lower overall cost

Understanding and Managing Business Risk

Supporting Business Growth Opportunities

Developing Performance Measurement Frameworks

Facilitating Change

“What Will We Do?”

Act as a trusted business advisor capable of identifying and recommending opportunities for allocating scarce resources, improving processes and reducing business risks to acceptable levels

“What Will We Do Well?”

Collect, analyse, process and disseminate business information for decision making to support the requirements of the organisation in a manner that is truly world class

“How Will We Do What We Do?”

Leverage information technology using skilled employees operating in an efficient organisational structure, and improve the processes that will position finance as a valued partner

Mission

Strategic Competencies

Shared Values

Finance function of the Future

Finance professionals must redirect their core competencies to areas which have positive strategic impact.

How might you start

1. Create a shared vision for finance

2. Drive down transaction processing and reporting costs

3. Provide leadership in the assessment and control of business risk

4. Partner with senior management and operations

5. Develop the skills to provide value-added information (knowledge)

1. Create a shared vision for finance

Start by assessing your business strategy in terms of

the information needed in the business

Start to envision how these concepts of business partner can be applied to your organisation

2. Drive down transaction processing and reporting costs

Benchmarking processes and implementing best practices

Reengineering end-to-end processes – focusing on the whole process rather than departmental silos - Avoiding duplication and sub systems

Leveraging technology – the right technology being used to best advantage

Leveraging technology

The impact of technology on business processes cannot be

over-stressed.

Efficiency becomes a given and there is the inevitable

pressure to use technology to streamline financial

processes.

This leads to shorter reaction times and opportunity

windows and finance is often tasked with ensuring that the

organisation has adequate systems to meet organisational

needs.

Is new technology needed?

When new technology is required the signs are usually obvious:

Hardware and/or software downtime and poor support

Business demands have outgrown current systems

Increased number of users/transactions

Need to support multiple sites

Foreign currency /language requirements

More complex business requirements

New lines of business

Increasing use of non-integrated spreadsheets to bridge gaps in systems; and

Reporting /information access is inadequate

3. Risk management

The finance role must be flexible to respond to evolving risks.

Problems can arise when:

Business risks are not clearly linked to impact on stakeholder

value

No common language or approach exists for risk assessment

Internal communications about risk assessment and control

are sporadic or reactionary

After-the-fact evaluations by auditors are too often seen as an

integral part of “the front line of defence”

Specialised skills for evaluating and controlling complex risks

are not used productively

4. Partner with senior management and operations to:

Align strategic and operating plans

Develop balanced performance measures

Continuously improve business performance

Align resource allocation process with the strategy

Link strategy to operations

“A visionary strategy that is not linked to excellent operational and governance processes cannot be implemented.

Conversely, operational excellence may lower costs, improve quality, and reduce process and lead times; but without a strategy’s vision and guidance, a company is not likely to enjoy sustainable success from its operational improvements alone”.

– Kaplan and Norton

Performance measures

should focus on measures aligned to the needs and expectations of stakeholders;

must be easy to use and simple to understand;

must be aligned to the organisation’s strategies and processes, and illustrate cause and effect relationships;

should satisfy all key information needs: financial, operational and strategic; and

should stimulate and direct change throughout the organisation

5. Managing knowledge

exactly what knowledge is required and how it adds value for decision making

who needs it and why

how it will be prepared and by whom

whether it can be obtained as a product of another process

whether the cost of having the knowledge is commensurate with the benefit

Knowledge is needed about

Performance - inputs, outputs, outcomes and impacts

Critical processes - cost, quality, time

Risks - significance and likelihood

Ants

What is the secret of the ants success?

A culture of knowledge management: This is based on a unified common objective, a shared goal that translates best as “the good of the colony”. They understand about stewardship.

Outstanding knowledge sharing processes:

Communicate really effectively and relevant knowledge is rapidly

passed around to whoever needs to know.

Information

Value

Data

Knowledge

Translation

Managing and understanding

Skilled application

Knowledge to value

Skilled Application of knowledge is

how organisations add value

Information

Value

Data

Knowledge

What Data needs to be captured

Who will transform the information, and how ?

What knowledge is needed?

Start with what is needed to add value

Ensure that data gathered is relevant and useful

CFO

Focus

Triangle

CFO

Focus

Triangle

Threshold

Performance

Finance

Function

Leading Edge

Provide financial leadership in determining strategic business direction and align financial strategies

Balance capabilities, costs and service levels to fulfill the Finance function’s responsibilities

Protect and preserve the assets of the organisation

Stimulate behaviors across the organisation to achieve strategic and financial objectives

The Four Faces of Finance

Source: Deloitte

4 Faces - 5 Actions

1. Understand the four distinct, but interrelated roles Finance plays

in the organisation and how finance resources are aligned.

2. Determine how Finance fulfills the four roles and dynamically

prioritise the personal focus.

3. Recognize the inherent conflicts these roles may cause in

organisation, leadership development models, incentives and

operating models

4. Identify the critical challenges to fulfilling each role individually

and the overall mission of finance collectively.

5. Recognise the value drivers and capabilities required of finance.

Determine which gaps in current vs required performance to

address first (and the pitfalls of getting the sequence wrong)

Developing organisation-wide performance measurement systems

Improving fundamental financial processes

Conducting value added business analysis

Managing business risks and opportunities

Sharing knowledge

The Strategic Finance Framework

Source: EIU/Andersen

Critical imperatives - Finance must:

improve its core business processes so that it can allocate additional resources to more strategic undertakings

undertake value-added interpretative analysis that will help operating managers understand the financial consequences of their strategies and decisions.

take the reins on organisation-wide management of financial and non-financial risks and balance them with non-traditional development opportunities.

develop organisation-wide performance measurement systems that help operating managers ensure that their day-today decisions reflect long-term strategic goals.

What can we learn internally?

Review workflows

Talk to employees

Identify bottlenecks

Areas for improvement

Learning internally

What they do?

Why they do it?

Who they do it for?

How long it takes?

How often it is done?

Should someone else be doing it?

Should it be done at all?

Can the task be improved?

Top 10 Challenges

Control Challenges

Efficiency Challenges

Performance Challenges

Execution Challenges

Change and Transition Challenges

1. How do I ensure the data the organisation relies on is accurate and provides the most useful information?

2. How do I reduce the burden of maintaining my control environment without compromising its integrity?

3. How should I organize Finance to serve the needs of the different stakeholders?

4. Given the heterogeneous nature of Finance roles, how do I attract, develop, and retain the talent required to fulfill Finance’s mission?

5. How do I create a common language that empowers management to see themselves the way stakeholders do?

6. How do I ensure our investments in innovation and growth yield the greatest returns?

7. How can I partner with other senior managers to drive strategy execution across the enterprise?

8. How do I reduce costs while continuing to add value?

9. How do we determine our key gaps?

10. Being “world class” in everything seems expensive and takes too long; where should we focus?

Skill

Dev

elo

pm

en

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•Relationship Building •Team Building •Strong Communication Skills •Change Management

•Broad Business Skills •Exemplary Leadership Behaviours •Facilitation and Negotiation Skills

Evolving competencies – reflected in the team

Analytical Foundation

Systems Thinking Awareness

Organisation Performance Mindset

Strategic Partnering Focus

Risk Management Transaction

Processing Problem Solving

Business Process Analysis

Technical Skills Customer Focus Technology

Awareness

Career Progression

Relationship Building Team Building Strong

Communication Skills Change Management

Broad Business Skills Exemplary

Leadership Behaviours

Facilitation and Negotiation Skills

The right people, with the right skills, doing the right jobs, in the right place, at the right time

The one constant is change

Consider both organisational and personal transitions

As a generality the primary obstacles to successful change in organisations include resistance to change and inadequate team skills

Neglecting the impact of personal transitions may very likely result in the failure of an organisation’s change effort.

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EIU survey – difficulties experienced

Organisations have taken a good hard look at the business and have recognised

real improvement opportunities to drive transformation

How the crisis has impacted change

Attitude to change

Despite cost implications organisations are driving through change

and launching new change initiatives

Charities and change – what you are saying

Not sure we have gone far enough”

“Long overdue”

“Governance structures create slow responses”

“Demand is increasing and resources are decreasing”

“Much more needs to be done”

“THIS IS THE MOST CHALLENGING TIME OF MY CAREER” – charity FD

Where do we want to be?

THE FUTURE

Skills

Roles in organisation

Resources

Processes

Systems

Integration / delegation

VISION OBSTACLES ENABLERS TACTICS/ STRATEGY

Responsibility for controls

What will we look

like in future?

Common Barriers to Change

• No vision • Conflicting

performance measures

• Functional/”Silo” structure

ORGANISATIONAL

• Loss of power • Fear • Comfort with status

quo • Skill deficiency

INDIVIDUAL • Old guard new

guard • Prior failures • Lack of innovative

spirit

CULTURAL

What successful transformations share

Assess the organisation's present situation rigorously

Identify the current state of capabilities as well as problems,

Explicitly identify the underlying mind-sets that must change for

the transformation to succeed

Strong leadership and maintaining energy for change among

employees are two principles of success that reinforce each other

when executed well.

Success

rate

Leaders ensure frontline staff feel a sense of ownership 70%

Frontline employees take the initiative to drive transformation 71%

Both principles are used 79%

Source: Mckinsey transformation survey 2010

Source: Mckinsey transformation survey 2010

Focus on strengths opportunities and problems

Source: Mckinsey transformation survey 2010

Three-quarters of the respondents whose organisations broke down their

change process into clearly defined smaller initiatives and whose

transformations were “extremely successful” say that staff members were

entirely or very able to participate in shaping those change initiatives

Staff contributions

Break down silos

Silo mentality to functions rather

than process

Consider end to end process

Horizontal linkages in process acknowledged

but silos dominate

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Budgeting & forecasting

Monitoring & evaluation

Income management

Successful process redesign requires a shift from Functional to Process view

Very few of us naturally embrace change

• We may want a

change because we

are in an

uncomfortable

position

• Does this lead to

lasting and

sustainable change?

People issues as important as organisational issues

Consider both organisational and personal transitions

As a generality the primary obstacles to successful change in organisations include resistance to change and inadequate team skills.

Neglecting the impact of personal transitions may very likely result in the failure of an organisation’s change effort.

46

Manage the present Create the future

Boxes - Boxes - Boxes

Selectively abandon the past

Lasting change

Need For

Change

Clear

Shared

Vision

Board &

Management

Commitment &

Behaviour

People

Involvement

Supporting

Systems &

Processes

Performance

Measures =

LASTING

CHANGE

X = No Action

X = No

Decisions

X = No Role

Models

X = No

Ownership

X = No

Systemic

Solutions

X = No Results

= LASTING

CHANGE

Uninformed

Optimism

Loss of momentum

and Denial

Confusion, Dismay, Anger

Bargaining

Despair

Pessimism Overriding aims

Hopeful Realism

Acceptance

Informed Optimism

Initiative Completion

Continuous

Improvement

There is a predictable drop-off in performance due to the implementation of change and new processes / systems and structures. This is often a natural reaction to major change. The aim is to proactively manage the change.

Making it work – the valley of despair

Pesh Framjee

Head of Not for Profits

Crowe Clark Whitehill

10 Salisbury Square

London EC4Y 8EH

pesh.framjee@crowecw.co.uk

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Further information

Acknowledgement: The Strategic Finance Framework is adapted from ‘The Evolving Role of Finance: charting a strategic course for the future’ produced by the Economic Intelligence Unit and Arthur Andersen. I am grateful to past colleagues, at Arthur Andersen and Deloitte, who have carried out research and produced invaluable material that I have used in this presentation.