The Future of CFO’s Business Partnering

Publié le par hanswillertbleuazurconsultingeu

BP² – the next generation of Business Partner

The role of business partner has become almost ubiquitous in organizations today. According to respondents of this survey, 88% of senior finance professionals already consider themselves to be business partners. This key finding suggests that the silo mentality is breaking down and, at last, departments and functions are joining forces to teach and learn from each other to deliver better performance. But the scope of the role, how it is defined, and how senior finance executives characterize their own business partnering are all open to interpretation. And many of the ideas are still hamstrung by traditional finance behaviors and aspirations, so that the next generation of business partners as agents of change and innovation languish at the bottom of the priority list.

The scope of business partnering

According to the survey, most CFOs see business partnering as a blend of traditional finance and commercial support, while innovation and change are more likely to be seen as outside the scope of business partnering. 57% of senior finance executives strongly agree that a business partner should challenge budgets, plans and forecasts. Being involved in strategy and development followed closely behind with 56% strongly agreeing that it forms part of the scope of business partnering, while influencing commercial decisions was a close third.

The pattern that emerges from the survey is that traditional and commercial elements are given more weight within the scope of business partnering than being a catalyst for change and innovation. This more radical change agenda is only shared by around 36% of respondents, indicating that finance professionals still largely see their role in traditional or commercial terms. They have yet to recognize the finance function’s role in the next generation of business partnering, which can be

  • the catalyst for innovation in business models,
  • for process improvements
  • and for organizational change.

Traditional and commercial business partners aren’t necessarily less important than change agents, but the latter has the potential to add the most value in the longer term, and should at least be in the purview of progressive CFOs who want to drive change and encourage growth.

Unfortunately, this is not an easy thing to change. Finding time for any business partnering can be a struggle, but CFOs spend disproportionately less time on activities that bring about change than on traditional business partnering roles. Without investing time and effort into it, CFOs will struggle to fulfill their role as the next generation of business partner.

Overall 45% of CFOs struggle to make time for any business partnering, so it won’t come as a surprise that, ultimately, only 57% of CFOs believe their finance team efforts as business partners are well regarded by the operational functions.

The four personas of business partnering

Ask a room full of CFOs what business partnering means and you’ll get a room full of answers, each one influenced by their personal journey through the changing business landscape. By its very variability, this important business process is being enacted in many ways. FSN, the survey authors, did not seek to define business partnering. Instead, the survey asked respondents to define business partnering in their own words, and the 366 detailed answers were all different. But underlying the diversity were patterns of emphasis that defined four ‘personas’ or styles of business partnering, each exerting its own influence on the growth of the business over time.

A detailed analysis of the definitions and the frequency of occurrence of key phrases and expressions allowed us to plot these personas, their relative weight, together with their likely impact on growth over time.

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The size of the bubbles denotes the frequency (number) of times an attribute of business partnering was referenced in the definitions and these were plotted in terms of their likely contribution to growth in the short to long term.

The greatest number of comments by far coalesced around the bottom left-hand quadrant denoting a finance-centric focus on short to medium term outcomes, i.e., the traditional finance business partner. But there was an encouraging drift upwards and rightwards towards the quadrant denoting what we call the next generation of business partner, “BP²” (BP Squared), a super-charged business partner using his or her wide experience, purview and remit to help bring about change in the organization, for example, new business models, new processes and innovative methods of organizational deployment.

Relatively few of the 383 business partners offering definitions of a business partner, concerned themselves with top line growth i.e. with involvement in commercial sales negotiations or the sales pipeline – a critical part of influencing growth.

Finally, surprisingly few finance business partners immersed themselves in strategy development or saw their role as helping to ensure strategic alignment. It suggests that the ongoing transition of the CFO’s role from financial steward to strategic advisor is not as advanced as some would suggest.

Financial Performance Drivers

Most CFOs and senior finance executives define the role of the business partner in traditional financial terms. They are there to explain and illuminate the financial operations, be a trusted, safe pair of hands that manages business risk, and provide s ome operational support. The focus for these CFOs is on communicating a clear understanding of the financial imperative in order to steer the performance of the business prudently.

This ideal reflects the status quo and perpetuates the traditional view of finance, and the role of the CFO. It’s one where the finance function remains a static force, opening up only so far as to allow the rest of the business to see how it functions and make them more accountable to it. While it is obviously necessary for other functions to understand and support a financial strategy, the drawback of this approach is the shortcomings for the business as a whole. Finance-centric business partnering provides some short-term outcomes but does little to promote more than pedestrian growth. It’s better than nothing, but it’s far from the best.

Top-Line Drivers

In the upper quadrant, top line drivers focus on driving growth and sales with a collaborative approach to commercial decision-making. This style of business partnering can have a positive effect on earnings, as improvements in commercial operations and the management of the sales pipeline are translated into revenue.

But while top line drivers are linked to higher growth than financial-focused business partners, the outcome tends to be only short term. The key issue for CFOs is that very few of them even allude to commercial partnerships when defining the scope of business partnering. They ignore the potential for the finance function to help improve the commercial outcomes, like sales or the collection of debt or even a change in business models.

Strategic Aligners

Those CFOs who focus on strategic alignment in their business partnering approach tend to see longer term results. They use analysis and strategy to drive decisionmaking, bringing business goals into focus through partnerships and collaborative working. This business benefit helps to strengthen the foundation of the business in the long term, but it isn’t the most effective in driving substantial growth. And again, there is a paucity of CFOs and senior finance executives who cited strategy development and analysis in their definition of business partnering.

Catalysts for change

The CFOs who were the most progressive and visionary in their definition of business partnering use the role as a catalyst for change. They challenge their colleagues, influence the strategic direction of the business, and generate momentum through change and innovation from the very heart of the finance function. These finance executives get involved in decision-making, and understand the need to influence, advise and challenge in order to promote change. This definition is the one that translates into sustained high growth.

The four personas are not mutually exclusive. Some CFOs view business partnering as a combination of some or all of these attributes. But the preponderance of opinion is clustered around the traditional view of finance, while very little is to do with being a catalyst for change.

How do CFOs characterize their finance function?

However CFOs choose to define the role of business partnering, each function has its own character and style. According to the survey, 17% have a finance-centric approach to business partnering, limiting the relationship to financial stewardship and performance. A further 18% have to settle for a light-touch approach where they are occasionally invited to become involved in commercial decision-making. This means 35% of senior finance executives are barely involved in any commercial decision-making at all.

More positively, the survey showed that 46% are considered to be trusted advisors, and are sought out by operational business teams for opinions before they make big commercial or financial decisions.

But at the apex of the business partnering journey are the change agents, who make up a paltry 19% of the senior finance executives surveyed. These forward thinkers are frequently catalysts for change, suggesting new business processes and areas where the company can benefit from innovation. This is the next stage in the evolution of both the role of the modern CFO and the role of the finance function at the heart of business innovation. We call CFOs in this category BP² (BP Squared) to denote the huge distance between these forward-thinking individuals and the rest of the pack.

Measuring up

Business partnering can be a subtle yet effective process, but it’s not easy to measure. 57% of organizations have no agreed way of measuring the success of business partnering, and 34% don’t think it’s possible to separate and quantify the value added through this collaboration.

Yet CFOs believe there is a strong correlation between business partnering and profitability – with 91% of respondents saying their business partnering efforts significantly add to profitability. While it’s true that some of the outcomes of business partnering are intangible, it is still important to be able to make a direct connection between it and improved performance, otherwise those efforts may be ineffective but are allowed to continue.

One solution is to use 360 degree appraisals, drawing in a wider gamut of feedback including business partners and internal customers to ascertain the effectiveness of the process. Finance business partnering can also be quantified if there are business model changes, like the move from product sales to services, which require a generous underpinning of financial input to be carried out effectively.

Business partnering offers companies a way to inexpensively

  • pool all their best resources to generate ideas,
  • spark innovation
  • and positively add value to the business.

First CFOs need to recognize the importance of business partnering, widen their idea of how it can add value, and then actually set aside the enough time to become agents of change and growth.

Data unlocks business partnering

Data is the most valuable organizational currency in today’s competitive business environment. Most companies are still in the process of working out the best method to collect, collate and use the tsunami of data available to them in order to generate insight. Some organizations are just at the start of their data journey, others are more advanced, and our research confirms that their data profile will make a significant difference to how well their business partnering works.

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The survey asked how well respondents’ data supported the role of business partnering, and the responses showed that 18% were data overloaded. This meant business partners have too many conflicting data sources and poor data governance, leaving them with little actual usable data to support the partnering process.

26% were data constrained, meaning they cannot get hold of the data they need to drive insight and decision making.

And a further 34% were technology constrained, muddling through without the tech savvy resources or tools to fully exploit the data they already have. These senior finance executives may know the data is there, sitting in an ERP or CRM system, but can’t exploit it because they lack the right technology tools.

The final 22% have achieved data mastery, where they actively manage their data as a corporate asset, and have the tools and resources to exploit it in order to give their company a competitive edge.

This means 78% overall are hampered by data constraints and are failing to use data effectively to get the best out of their business partnering. While the good intentions are there, it is a weak partnership because there is little of substance to work with.

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The diagram above is the Business Partnering Maturity Model as it relates to data. It illustrates that there is a huge gap in performance between how effective data masters and data laggards are at business partnering.

The percentage of business partners falling into each category of data management (‘data overloaded’, ‘data constrained,’ etc) has been plotted together with how well these finance functions feel that business partnering is regarded by the operational units as well as their perceived influence on change.

The analysis reveals that “Data masters” are in a league of their own. They are significantly more likely to be well regarded by the operations and are more likely to act as change agents in their business partnering role.

We know from FSN’s 2018 Innovation in Financial Reporting survey that data masters, who similarly made up around one fifth of senior finance executives surveyed, are also more innovative. That research showed they were more likely to have worked on innovative projects in the last three years, and were less likely to be troubled by obstacles to reporting and innovation.

Data masters also have a more sophisticated approach to business partnering. They’re more likely to be change agents, are more often seen as a trusted advisor and they’re more involved in decision making. Interestingly, two-thirds of data masters have a formal or agreed way to measure the success of business partnering, compared to less than 41% of data constrained CFOs, and 36% of technology constrained and data overloaded finance executives. They’re also more inclined to perform 360 degree appraisals with their internal customers to assess the success of their business partnering. This means they can monitor and measure their success, which allows them to adapt and improve their processes.

The remainder, i.e. those that have not mastered their data, are clustered around a similar position on the Business Partnering Maturity Model, i.e., there is little to separate them around how well they are regarded by operational business units or whether they are in a position to influence change.

The key message from this survey is that data masters are the stars of the modern finance function, and it is a sentiment echoed through many of FSN’s surveys over the last few years.

The Innovation in Financial Reporting survey also found that data masters outperformed their less able competitors in three key performance measures that are indicative of financial health and efficiency: 

  • they close their books faster,
  • reforecast quicker and generate more accurate forecasts,
  • and crucially they have the time to add value to the organization.

People, processes and technology

So, if data is the key to driving business partnerships, where do the people, processes and technology come in? Business partnering doesn’t necessarily come naturally to everyone. Where there is no experience of it in previous positions, or if the culture is normally quite insular, sometimes CFOs and senior finance executives need focused guidance. But according to the survey, 77% of organizations expect employees to pick up business partnering on the job. And only just over half offer specialized training courses to support them.

Each company and department or function will be different, but businesses need to support their partnerships, either with formal structures or at the very least with guidance from experienced executives to maximize the outcome. Meanwhile processes can be a hindrance to business partnering in organizations where there is a lack of standardization and automation. The survey found that 71% of respondents agreed or strongly agreed that a lack of automation hinders the process of business partnering.

This was followed closely by a lack of standardization, and a lack of unification, or integration in corporate systems. Surprisingly the constraints of too many or too complex spreadsheets only hindered 61% of CFOs, the lowest of all obstacles but still a substantial stumbling block to effective partnerships. The hindrances reflect the need for better technology to manage the data that will unlock real inter-departmental insight, and 83% of CFOs said that better software to support data analytics is their most pressing need when supporting effective business partnerships.

Meanwhile 81% are looking to future technology to assist in data visualization to make improvements to their business partnering.

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This echoes the findings of FSN’s The Future of Planning, Budgeting and Forecasting survey which identified users of cutting edge visualization tools as the most effective forecasters. Being able to visually demonstrate financial data and ideas in an engaging and accessible way is particularly important in business partnering, when the counterparty doesn’t work in finance and may have only rudimentary knowledge of complex financial concepts.

Data is a clear differentiator. Business partners who can access, analyze and explain organizational data are more likely to

  • generate real insight,
  • engage their business partners
  • and become a positive agent of change and growth.

Click here to access Workiva’s and FSN’s Survey²

How the Distinct Roles of Internal Audit and the Finance Function Drive Good Governance

Publié le par hanswillertbleuazurconsultingeu

How the Distinct Roles of Internal Audit and the Finance Function Drive Good Governance

Effective governance involves many individuals and departments throughout an organization, including the Board of Directors, executive management, finance, and internal audit, among others. Yet each of these groups has a different set of skills and responsibilities. To successfully identify and manage risk, they must come together to create and maintain a sound system of corporate governance.

The insights shared here by 11 governance experts offer important perspective as to how finance and internal audit collaborate to support corporate governance, despite their distinct and separate missions.

Interviewees provided perceptions and experiences and shared best practices, as well as challenges, that they have encountered on their quest to achieve effective governance. These contributors come from organizations around the world that differ in size, industry, and management configurations. Several experienced governance from within both the finance function and internal audit.

A few shared perceptions include:

  • The Board of Directors is responsible for setting the proper tone for the organization;
  • It is critical to purposefully develop a consistent culture throughout the organization, driven by the CEO and senior management; and
  • Communication and coordination across complementary functions is vital.

Keys To Achieving Good Governance

There are many different definitions of governance. According to The Institute of Internal Auditors (hereafter The IIA), governance is “the combination of processes and structures implemented by the board in order to inform, direct, manage and monitor the activities of the organization toward the achievement of its objectives.”

The International Federation of Accountants (hereafter IFAC) uses a slightly different definition which focuses more on the creation of strategic objectives and stakeholder value, “Governance is to create and optimize sustainable organizational success and stakeholder value, balancing the interests of the various stakeholders. It comprises arrangements put in place to ensure that organizations define and achieve intended outcomes.”

Both definitions suggest that good governance and the achievement of organizational success are not the responsibility of the Board alone, but rather the outcome of a mosaic of organizational policies, processes, and cross-functional interactions.

When asked to provide the key objectives of governance, interviewees shared a number of different perspectives. Most frequently, good governance was defined as representing the interests of stakeholders by setting appropriate objectives and driving a culture that supports them.

Three LoD

Click here to acces IFAC and IIA’s detailed article

The Future of Planning Budgeting and Forecasting

Publié le par hanswillertbleuazurconsultingeu

The world of planning, budgeting and forecasting is changing rapidly as new technologies emerge, but the actual pace of change within the finance departments of most organizations is rather more sluggish. The progress companies have made in the year since The Future of Planning, Budgeting and Forecasting 2016 has been incremental, with a little accuracy gained but very little change to the reliance on insight-limiting technologies like spreadsheets.

That said, CFOs and senior finance executives are beginning to recognize the factors that contribute to forecasting excellence, and there is a groundswell of support for change. They’ll even make time to do it, and we all know how precious a CFOs time can be, especially when basic improvements like automation and standardization haven’t yet been implemented.

The survey shows that most PBF functions are still using relatively basic tools, but it also highlights the positive difference more advanced technology like visualization techniques and charting can make to forecasting outcomes. For the early adopters of even more experimental technologies like machine learning and artificial intelligence, there is some benefit to being at the forefront of technological change. But the survey suggests that there is still some way to go before machines take over the planning, budgeting and forecasting function.

In the meantime, senior finance executives who are already delivering a respected, inclusive and strategic PBF service need to focus on becoming more insightful, which means using smart technologies in concert with non-financial data to deliver accurate, timely, long term forecasts that add real value to the business.

Making headway

CFOs are making incremental headway in improving their planning, budgeting and forecasting processes, reforecasting more frequently to improve accuracy. But spreadsheet use remains a substantial drag on process improvements, despite organizations increasingly looking towards new technologies to progress the PBF landscape.

That said, respondents seem open to change, recognizing the importance of financial planning and analysis as a separate discipline, which will help channel resources in that direction. At the moment, a slow and steady approach is enough to remain competitive, but as more companies make increasingly substantial changes to their PBF processes to generate better insight, those that fail to speed up will find they fall behind.

Leading the debate

FSN’s insights gleaned from across the finance function shed light on the changes happening within the planning, budgeting and forecasting function, and identify the processes that make a real difference to outcomes. Senior finance executives are taking heed of these insights and making changes within the finance function. The most important one is the increasing inclusion of non-financial data into forecasting and planning processes. The Future of The Finance Function 2016 identified this as a game-changer, for the finance function as a whole, and for PBF in particular. It is starting to happen now. Companies are looking towards data from functions outside of finance, like customer relationship management systems and other non-financial data sources.

Senior executives are also finally recognizing the importance of automation and standardization as the key to building a strong PBF foundation. Last year it languished near the bottom of CFO’s priority lists, but now it is at the top. With the right foundation, PBF can start to take advantage of the new technology that will improve forecasting outcomes, particularly in the cloud.

There is increasing maturity in the recognition of cloud solution benefits, beyond just cost, towards agility and scalability. With recognition comes implementation, and it is hoped that uptake of these technologies will follow with greater momentum.

Man vs machine

Cloud computing has enabled the growth of machine learning and artificial intelligence solutions, and we see these being embedded into our daily lives, in our cars, personal digital assistants and home appliances. In the workplace, machine learning tools are being used for

  • predictive maintenance,
  • fraud detection,
  • customer personalization
  • and automating finance processes.

In the planning, budgeting and forecasting function, machine learning tools can take data over time, apply parameters to the analysis, and then learn from the outcomes to improve forecasts.

On the face of it, machine learning appears to be a game changer, adding unbiased logic and immeasurable processing power to the forecasting process, but the survey doesn’t show a substantial improvement in forecasting outcomes for organizations that use experimental technologies like these. And the CFOs and senior finance executives who responded to the survey believe there are substantial limitations to the effective of machine forecasts. As the technology matures, and finance functions become more integrated, machine learning will proliferate, but right now it remains the domain of early adopters.

Analytic tools

Many of the cloud solutions for planning, budgeting and forecasting involve advanced analytic tools, from visualization techniques to machine learning. Yet the majority of respondents still use basic spreadsheets, pivot tables and business intelligence tools to mine their data for forecasting insight. But they need to be upgrading their toolbox.

The survey identifies users of cutting edge visualization tools as the most effective forecasters. They are more likely to utilize specialist PBF systems, and have an arsenal of PBF technology they have prioritized for implementation in the next three years to improve their forecasts.

Even experimental organizations that aren’t yet able to harness the full power of machine learning and AI, are still generating better forecasts than the analytic novices.

The survey results are clear, advanced analytics must become the new baseline technology, it is no longer enough on rely on simple spreadsheets and pivot tables when your competitors are several steps ahead.

Insight – the top trump

But technology can’t operate in isolation. Cutting edge tools alone won’t provide the in-depth insight that is needed to properly compete against nimble start-ups. CFOs must ensure their PBF processes are inclusive, drawing input from outside the financial bubble to build a rounded view of the organization. This will engender respect for the PBF outcomes and align them with the strategic direction of the business.

Most importantly though, organizations need to promote an insightful planning, budgeting and forecasting function, by using advanced analytic techniques and tools, coupled with a broad data pool, to reveal unexpected insights and pathways that lead to better business performance.

As FSN stated, today’s finance organizations are looking to:

  • provide in-depth insights;
  • anticipate change and;
  • verify business opportunities before they become apparent to competitors.

But AI and machine learning technologies are still too immature. And spreadsheet-based processes don’t have the necessary functions to fill these advanced needs. While some might argue that spreadsheet-based processes could work for small businesses, they become unmanageable as companies grow.

PBF

Click here to access Wolters Kluwers FSN detailed survey report

The IFRS 9 Impairment Model and its Interaction with the Basel Framework

Publié le par hanswillertbleuazurconsultingeu

In the wake of the 2008 financial crisis, the International Accounting Standards Board (IASB) in cooperation with the Financial Accounting Standards Board (FASB) launched a project to address the weaknesses of both International Accounting Standard (IAS) 39 and the US generally accepted accounting principles (GAAP), which had been the international standards for determining financial assets and liabilities accounting in financial statements since 2001.

By July 2014, the IASB finalized and published its new International Financial Reporting Standard (IFRS) 9 methodology, to be implemented by January 1, 2018 (with the standard available for early adoption). IFRS 9 will cover financial organizations across Europe, the Middle East, Asia, Africa, Oceana, and the Americas (excluding the US). For financial assets that fall within the scope of the IFRS 9 impairment approach, the impairment accounting expresses a financial asset’s expected credit loss as the projected present value of the estimated cash shortfalls over the expected life of the asset. Expected losses may be considered on either a 12-month or lifetime basis, depending on the level of credit risk associated with the asset, and should be reassessed at each reporting date. The projected value is then recognized in the profit and loss (P&L) statement.

Most banks subject to IFRS 9 are also subject to Basel III Accord capital requirements and, to calculate credit risk-weighted assets, use either standardized or internal ratings-based approaches. The new IFRS 9 provisions will impact the P&L that in turn needs to be reflected in the calculation for impairment provisions for regulatory capital. The infrastructure to calculate and report on expected loss drivers of capital adequacy is already in place. The data, models, and processes used today in the Basel framework can in some instances be used for IFRS 9 provision modeling, albeit with significant adjustments. Not surprisingly, a Moody’s Analytics survey conducted with 28 banks found that more than 40% of respondents planned to integrate IFRS 9 requirements into their Basel infrastructure.

Arguably the biggest change brought by IFRS 9 is incorporation of credit risk data into an accounting and therefore financial reporting process. Essentially, a new kind of interaction between finance and risk functions at the organization level is needed, and these functions will in turn impact data management processes. The implementation of the IFRS 9 impairment model challenges the way risk and finance data analytics are defined, used, and governed throughout an institution. IFRS 9 is not the only driver of this change.

Basel Committee recommendations, European Banking Authority (EBA) guidelines and consultation papers, and specific supervisory exercises, such as stress testing and Internal Capital Adequacy Assessment Process (ICAAP), are forcing firms to consider a more data-driven and forward-looking approach in risk management and financial reporting.

Accounting and Risk Management: An Organization and Cultural Perspective

The implementation of IFRS 9 processes that touch on both finance and risk functions creates the need to take into account differences in culture, as well as often different understandings of the concept of loss in the two functions.

  • The finance function is focused on product (i.e., internal reporting based on internal data) and is driven by accounting standards.
  • The risk function, however, is focused on the counterparty (i.e., probability of default) and is driven by a different set of regulations and guidelines.

This difference in focus leads the two functions to adopt these differing approaches when dealing with impairment:

  • The risk function uses a stochastic approach to model losses, and a database to store data and run the calculations.
  • Finance uses arithmetical operations to report the expected/ incurred losses on the P&L, and uses decentralized data to populate reporting templates.

In other words, finance is driven by economics, and risk by statistical analysis. Thus, the concept of loss differs between teams or groups: A finance team views it as part of a process and analyzes loss in isolation from other variables, while the risk team sees loss as absolute and objectively observable with an aggregated view.

IFRS 9 requires a cross-functional approach, highlighting the need to reconcile risk and finance methodologies.

The data from finance in combination with the credit risk models from risk should drive the process.

  • The risk function runs the impairment calculation, whilst providing objective, independent, and challenger views (risk has no P&L or bonus-driven incentive) to the business assumptions.
  • Finance supports the process by providing data and qualitative overlay.

Credit Risk Modeling and IFRS 9 Impairment Model

Considering concurrent requirements across a range of regulatory guidelines, such as stress testing, and reporting requirements, such as common reporting (COREP) and financial reporting (FINREP), the challenge around the IFRS 9 impairment model is two-fold:

  • Models: How to harness the current Basel-prescribed credit risk models to make them compliant with the IFRS 9 impairment model.
  • Data: How (and whether) the data captured for Basel capital calculation can be used to model expected credit losses under IFRS 9.

IFRS9 Basel3

Click here to access Moody’s detailed report