By Steven Ehrenhalt, Peter Koudal, Atanu Chaudhuri and Aditi Rao (Finance Masters series)
From distant mining in South Africa and commodity production in Asia to sales and service networks in North America, the business operations of some of the world’s largest and most sophisticated industrial enter-prises are experiencing a quiet revolution. It is being led by Finance.
Over the last ﬁve years, Deloitte ServicesLP has benchmarked the global strategies,ﬁnancial and operational capabilities, and business performance of more than 1,100companies around the globe. We discovered that many companies are struggling despite large-scale investments in performance improvement.
These barriers are pervasive and the cumulative impact can be troublesome, typically resulting in business performance that is mediocre at best. For example, our analysis of the 100 largest manufacturers list-ed on United States stock exchanges showed that 32 percent had a negative average economic margin over a ﬁve-year period.
What is common to these barriers is the potential for Finance to change the game – indeed Finance emerges in our analysis as something of a common denominator for companies that have overcome these impediments. In most of the companies studied, there is a notable lack of the ﬁnancial management competencies necessary to overcome these barriers and drive business performance. Given the realities of modern multinational businesses, this is not surprising: with their complex networks of production facilities and distribution centres, customer and suppliers, and resulting ﬂows of products, services, ﬁnance and information, global companies have a hard enough time just tracking ﬁnancial performance. To most, mastering ﬁnance may seem like a pipedream, but change is afoot in many of the world’s forward-thinking companies where Finance, while ubiquitous as a corporate function, has taken on a far greater role. In some of the companies we studied, ﬁnancial management is evolving from an uninspiring, albeit necessary, function of doing business to one of the most promising levers of business transformation. In fact, without support from the Finance function in improving strategy and operations, companies face an uphill and often losing battle in transforming their business. Findings from our re-search underscore the importance of Finance. Among the companies analysed to date, the group we call “ﬁnance masters”—companies with the strongest ﬁnance capabilities in place to support business transformation—are leading the pack with superior business performance. The research not only links the transformation of the Finance function and the business to performance, it also shows how ﬁnance masters differentiate themselves from the competition.
If luxury automaker Porsche AG has enjoyed ﬁnancial success, its adept use of ﬁnancial management demonstrates why. For example, the company centralized treasury functions for its many country operations, allowing Porsche’s corporate ﬁnance function to manage and reduce currency risk exposure for the global company. It used currency hedging to guard against declines in the U.S. dollar versus the euro. Similarly, Porsche used ﬁnancial instruments in its recent purchase of stock in Volkswagen AG to reduce the risk of share price increases. More than 50 percent of Porsche’s pre-tax earnings of 5.9 billion in the latest ﬁscal year came from returns on ﬁnancial hedging and ﬁnancial investments.
The many faces of finances
At the heart of this news, expanded role of Finance is the concept of ﬁnance transformation, an umbrella concept that focuses on improving performance, stewardship and control of the company by enabling chief ﬁnancial ofﬁcers and their Finance organizations to have greater impact on strategy formulation and execution across the enterprise.
Finance transformation is rarely a panacea, but it does have the potential to provide the underpinnings of effective enterprise transformation and help put the company on the path to sustainable, proﬁtable growth. However, to be truly worthy of the term, ﬁnance transformation must extend well beyond the walls of the Finance function. Indeed, our research shows that it is the combination of core ﬁnance capabilities and business capabilities that drives performance.
Finance capabilities: In this category, we include the role of Finance as a steward: ensuring companywide compliance with ﬁnancial reporting and control requirements, managing risk, and providing high-quality business and operational information across the enterprise. We also include the role of Finance as an operator: deﬁning and adapting the operating model to balance efﬁciency and service levels in ﬁnancial processes, and ensuring the availability of high-skill ﬁnancial management talent.
Business capabilities: Here we include the roles of Finance as a strategist: supporting business strategy development through robust decision-making processes and performance management, and the role of Finance as a catalyst: partnering with business executives to change organizational behaviour and drive disciplined execution of strategic choices across the enterprise, including marketing, sales, service, supply chain and innovation. We analysed and rated the companies participating in the research along different dimensions of ﬁnance capability maturity (see “Global Survey” sidebar on page 42). Our research suggests that Finance needs to go beyond the core finance capabilities of steward and operator to leverage business capabilities as strategist and catalyst. In fact, the only strong link between ﬁnance capabilities and business performance in our analysis is through the role of Finance as a strategist and catalyst. Many of the companies we studied ﬁnd the Finance steward and operator roles challenging.
Others have shown great strides in building core ﬁnance capabilities around stewardship because these are mandated by governments and ﬁnancial markets – regulatory reporting (GAAP, IFRS, Sarbanes-Oxley), environmental reporting, tax compliance and credit management. However, the vast majority of studied companies struggle in using ﬁnance capabilities to develop and execute business strategy. Indeed, the business capabilities of Finance as a strategist and catalyst are among the weakest areas of ﬁnancial management today. Financial planning and analysis remain underdeveloped capabilities; even in more operational areas, such as leveraging investments in plant and equipment assets, a signiﬁcant number of companies struggle to build ﬁnance capabilities. And while companies’ valuations increasingly consist of in-tangibles like brand, goodwill and intellectual property, few companies excel in evaluating and leveraging those assets.