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When major economies are constrained, business leaders find their growth engines stuck in low gear. At times like these, financial leaders need to collaborate more closely with their operations counterparts and drive precision in performance management.
An exclusive survey and research report from Bloomberg Businessweek Research Services
FEBRUARY 2013
Table of Contents
Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Evolving Role of Finance in a Constrained Global Economy . . . . . . . . . . . . . . . . . . . . . . . 4 Setting Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Getting Granular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Sidebar: Tighten Focus on True Costs and Increase Profitability . . . . . . . . . . . . . . . . . . . . . . . 7 Becoming an Effective Business Partner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Growing Interest in User Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Managing Enterprise-Level RiskAnother Dimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Sponsors Statement: How CFOs and Their Teams Can Create Value . . . . . . . . . . . . . . . . . . 10
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Methodology
Methodology
Bloomberg Businessweek Research Services (BBRS) launched a survey and research program in summer 2012 to discover and analyze the views of C-level and line-of-business executives around the world on the drivers of operational performance and ways that decision support can be strengthened. The survey also sought to uncover what types of new information technology executives are deploying or actively considering to improve their financial and operational performance. The goals of this program included: Better understanding how midsize and large organizations view the state of their operational performance at the present time and their plans for the next few years. Examining the operational performance of five key corporate functions: sales, customer service, finance, operations/ production and supply chain. Better understanding the level of involvement of operational and C-level officials in various functions outside their primary function. Identifying the role of technology in supporting efforts to improve operational excellence.
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Respondents by Region
Europe: 29% North America: 37%
Asia: 34%
This research program included both quantitative and qualitative components: A global survey of director-level or above executives at midsize and large companies from around the world. A total of 318 director-, vice president- and C-level executives responded to the July 2012 survey. For more information about the demographics of the survey, refer to the Methodology charts, at right. In-depth telephone interviews with C-level and other senior executives at the following organizations: Bigelow Tea CBIZ FM Global Rush University Medical Center The Dow Chemical Company
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11%
Financial Services:
Retail/Wholesale:
16%
16%
Respondents by Title
*Total exceeds 100% due to rounding Director: 13% Manager: C-Level: 33%
26%
Telephone interviews were also conducted with: A former CFO who now teaches at Harvard Business School The Founder of The CFO Alliance A CFO who is on the board of The CFO Alliance
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BBRS and the author of this report, Mary Driscoll, a senior research fellow at APQC, a non-profit business research firm, are grateful to all the executives who provided their time and insights for this project. This research project was funded by a grant from SAP but was written independently of this sponsor. The editorial department of Bloomberg Businessweek magazine was not involved in this project.
15%
Finance: 21%
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Executive Summary
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Figure 1
Although a majority of financial executives surveyed expect the global economy will grow at a modest 3 percent per year or less, only 2 percent indicate a steep global economic decline is likely. Similarly, the majority of executives (54 percent) expect their own organizations will remain stuck in a low-growth pattern for all of 2013. While 57 percent indicate high unemployment to be the biggest factor hindering a significant pickup in global growth, 53 percent also cite the sovereign debt crisis as a major concern. A large majority of executives regard decision support as a strategic lever, with 72 percent citing increased investment in IT to reduce costs, increase productivity and uncover new revenue opportunities as important to them. Fifty-two percent of respondents are using dedicated analytical tools to enhance financial planning, forecasting and reporting, thereby improving the odds of achieving business goals. Meanwhile, 46 percent are involved in big data projects to utilize surging volumes of information. Looking ahead two years, 40 percent of executives expect to speed decision-making by using real-time reporting rather than batch-processing data. And 37 percent expect to be using predictive analytics.
26%
Moderate global economic growth (less than 3% per year)
52%
No global economic growth
11%
Moderate global economic decline (less than 3% per year)
7%
Steep global economic decline (3% or more per year)
2%
Uncertain
1%
Source: Bloomberg Businessweek Research Services, 2012
established ones and the emerging ones. Drawing on the findings of the BBRS survey, it is clear that executives do not expect to see a return of robust growth levels anytime soon. Key survey findings include: Most executives expect to be contending with low economic growth (3 percent or less) for all of 2013. The majority also expects their own organizations to remain stuck in a low-growth pattern for all of 2013.
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Introduction
The CFOs role today has evolved well beyond traditional accounting/compliance duties and tracking which units botched or exceeded their revenue targets, according to an exclusive summer 2012 survey by Bloomberg Businessweek Research Services (BBRS). CFOs are now expected to play a central role in crafting strategy and creating value for investors and other key stakeholders. CFOs, and the professionals under their supervision, do this by serving as strategic business partners. And that involves collaborating with operating leaders throughout the organization to identify, quantify and compare opportunities and risks. It is important to put this expanded role of finance in the context of the worlds important economies, both the well-
Despite the lackluster economy, well over half the executives surveyed report they are turning to advanced financial forecasting approaches to help them sort through the maze of challenges posed by the current business climate. Nearly as many expressed interest in acquiring new tools, such as real-time reporting software, to strengthen their positions. This research report provides insights, examples and recommendations on how finance professionals can collaborate effectively with operating managers to find the right strategic edge.
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growth in Chinacasting shadows over business forecasts globally (see Figure 1, Economic Growth GloballyJust OK, on page 4). In this climate, the strong planning and analytical skills typically found in the finance department are needed to bolster decision-making more than ever. But so, too, is the need to equip business-unit managers with the financial information and new technology they need to pursue growth strategies. There is simply no room for error when economic growth is not buoyant. What types of business pressures will CFOs have to contend with in the near term? Concern over how to manage corporate budgets with minimal revenue growth is high on most senior executive lists. The majority of these leaders anticipate that their organizations will experience growth of just 3 percent or less over the next 18 months (see Figure 2, Company Growth Stuck in Low Gear, below).
Figure 3
57%
Sovereign debt crisis
53%
Uncertain political landscape
49%
Reduction in the growth rate of emerging markets
40%
Increased competition for business in emerging markets
40%
Weak real estate market
Setting Strategy
The strategy of profit protection is the course many businesses have been on for a while. But now, with the most obvious opportunities for cost savings already taken, finance executives will have to hunt harder for profit boosters. They will have to work harder with operating managers and conduct detailed analyses of cost trends. In addition, they will need to look closely at which products or services are the most Figure 2
35%
Increased scarcity of natural resources
32%
Lack of talent, aging society
31%
Source: Bloomberg Businessweek Research Services, 2012
profitable and find ways to boost the return of those found wanting or possibly shut them down. This is not to say that targets for revenue expansion will be ignored. Working together, finance and business managers will have to devise sound plans for developing new revenue streams where opportunities exist and decide where best to invest in new technology. But this is where they will face the strongest headwinds. The dominant financial risk for the businesses represented in the survey is continued high unemployment in major world economies (Biggest Global RisksUnemployment and Sovereign Debt, above). Insufficient income levels, or worries about getting laid off, tend to depress consumer spending, which is a major driver of industrial growth. To aid in the search for new revenue streams, senior finance managers are reaching for new tools. Clearly, the message is getting through that an effective finance team does more than just hit the brakes on spending in times of uncertainty. This team partners with business decision-makers to develop realistic forecasts of where the business is heading relative to its goals.
31%
Moderate economic growth (less than 3% per year)
54%
No economic growth
8%
Moderate economic decline (less than 3% per year)
5%
Steep economic decline (3% or more per year)
1%
Uncertain
1%
Source: Bloomberg Businessweek Research Services, 2012
FEBRUARY 2013
Unsurprisingly, survey respondents show steady movement toward technology innovation that aims to strengthen performance management. The majority says they now use dedicated software applications to improve forecasting, analysis and reporting. Almost half say they are turning to new data management technologies to cope with so-called big data (see Figure 4, Half of Respondents Using Advanced Tech to Achieve Business Goals, at right). Looking ahead two years, the survey shows strong interest in sophisticated performance analysis and driver-based planningan approach that bases financial forecasts on operational performance indicators that are non-financial. However, many large, complex corporations will have to overcome the obstacles presented by management information systems that are not well integrated. For example, when operations planning systems do not feed data to financial forecasters in an automated fashion, it can be difficult to move up the maturity curve of driver-based planning. A lack of systems integration can also stymie predictive analytics. Expect to find movement toward additional investments in IT solutions that address the perennial systems integration challenge. Meanwhile, interest is growing in new IT tools that can deliver even more financial intelligence into the enterprise management ranks (see Figure 5, Which Techs Are They Betting on Next? on page 7). Topping the list of new tools that finance executives expect to deploy over the next two years are real-time reporting and expanding the analytical capabilities of existing finance systems. Giving employees access to financial information over mobile devices is also favored by 25 percent of respondents.
Figure 4
52%
New data management technologies to address the surging volume of information from multiple sources, or big data
46%
Standardized financial platform across the enterprise
43%
Adding analytics functions to existing financial systems Consolidate decentralized financial systems
42%
40%
Predictive analytics to anticipate outcomes rather than just better understanding past performance
40%
Preconfigured and standardized reports
39%
Access to financial information via employees mobile devices
39%
Real-time reporting rather than waiting for batch reports
38%
Ad hoc reporting capabilities delivered via self-service without needing IT intervention
33%
None of the above
3%
Source: Bloomberg Businessweek Research Services, 2012
Getting Granular
The ability to detect and analyze emerging trends in consumer demand is particularly essential to retail businesses. Take the food and beverage industry, which must please customers who are highly sensitive to both price and quality. In the tea sector, for example, Bigelow Tea CFO Don Janezic explains that tea drinkers are generally loyal to their favorite flavors and brands. But when consumers pare their grocery lists in times of economic worry, the pressure mounts for suppliers to manage opportunities and risks with maximum precision. This calls for tight alignment between operating managers and the finance team worldwide. We are fortunate in the sense that all function managers at Bigelow are very good at collaboration. Its very much a
part of our culture, says Janezic, adding that Bigelow is well practiced in the use of business analytics. We use analytics extensively, and we [in finance] have ongoing dialogue with operating managers about what incoming data means in terms of business performance. At Bigelow, the finance team speaks regularly with operating managers about productivity trends (such as the level of labor cost incurred to meet customer satisfaction goals) that may actually undermine financial performance targets. We have to be very cost-conscious if were going to compete on price, so we look at productivity on a lot of levels, Janezic says. Among other things, the tea maker looks at productivity by flavor or product and may decide to alter distribution plans to keep productivity trends in line. Putting a fine point on this, profit sharing at this company is tied to productivity, he notes.
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SIDEBAR
Profitability Planning
TDABC and related analytical approaches are crucial when the time comes to make decisions about the deployment of capitalfinancial, human and technological. The point is to develop reliable views of how various factors correlate in various ways to generate net operating profit after tax (NOPAT), a financial metric that lets business leaders and equity analysts make judgments about one companys operating efficiency compared to its industry peers. On a tactical level, here are a few examples of how business decision-makers use profitability modeling to get the highest possible return on each dollar of revenue generated:
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arketing managers want to compare the profitability of product lines or various distribution channels M so they can focus marketing budgets on the campaigns with the best yield. Sales executives want to know which customer segments deliver the highest margins so they can fine tune their customer retention drives. Supply chain managers who source from multiple regions like to analyze more than just what raw materials or components cost. They need to factor in transportation, labor and warehousing costs. Line-of-business managers will want a view of how variations in seasonal demand impact their plans for hiring contract labor and the associated costs. Hospital leaders who want to improve patient outcomes while reducing costs and providing better service.
Armed with granular details about the drivers of cost, a manager can think like the entrepreneur who doesnt have extra cash or easy access to capital and has to have all his or her assets work harder and deliver more, McGarvie says. Surely, in the current economic climate, that mindset can make all the difference.
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Figure 5
40%
Adding analytics functions to existing financial systems
39%
Predictive analytics to anticipate outcomes rather than just better understanding past performance
37%
Standardized financial platform across the enterprise
36%
Consolidate decentralized financial systems
36%
New data management techniques to address the surging volumes of information from multiple sources, or big data
36%
Ad hoc reporting capabilities delivered via self-service without needing IT intervention
35%
Upgrade financial planning, forecasting and reporting applications to enable performance management
32%
Preconfigured and standardized reports
31%
Access to financial information via employees mobile devices
25%
Source: Bloomberg Businessweek Research Services, 2012
suggestions for solving it. Critical thinking and problem solving are involved. Its not just presenting numbers. He stresses the importance of building analytical and communication skills within the finance group. The more we, as finance, can nurture and evolve these skills, the better business partners we will be.
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That message is apparently not lost on survey participants, the majority of whom indicate their organizations have invested in technologies that enable line managers to exercise strong discipline in both revenue generation and cost control (see Figure 6, Information Quality Is Crucial, at right). One company with a deep commitment to using IT wisely in the pursuit of business objectives is The Dow Chemical Company. According to Finance Manager Sandy HartmanHolbrook: Weve been giving our operating leaders performance dashboards to enhance their ability to make effective decisions quickly. The allure of information mobility is also a theme at Dow. Were looking now at ways our executives can use iPads and attractive graphics in meetings to communicate more effectively with peers, Hartman-Holbrook says. Moreover, Dow recently invested heavily in financial management process automation, which boosts the reliability of financial data because manual data entry is completely avoided.
Figure 6
72%
Investing in developing new products or services to take advantage of market opportunities
67%
Changing corporate revenue or net income targets
64%
Additional financial hedging to offset global risks
62%
Diversification, of either products or geographic markets
61%
Divesting underperforming unit(s)
61%
Changing business modelmore outsourcing, downsizing, shared services, divesting of poorly performing businesses, products or services
60%
Source: Bloomberg Businessweek Research Services, 2012
Summary
Several powerful forces are converging in a way that elevates the role of the CFO and the finance organization. There is intense pressure on business leaders to make calculated bets on new products, services and markets. But this is playing out at a time when growth does not come easily. It is clear that operating managers need finance professionals to help them analyze, quantify and compare opportunities and risks. At the same time, information management tools and techniques are maturing at a fast pace. So, it is not surprising that the BBRS survey finds the majority of executives keen to upgrade their enterprise performance management capabilities. In this environment, finance has a perfect opportunity to serve as a true business partnerone that uses advanced tools and techniques to anticipate potential outcomes, clarify the economic value of each and recommend the course of action that offers the best shot at success.
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SPONSORS STATEMENT
10
NOVEMBER 2012
SAPs portfolio of applications to support financial processes is deliverable via any or all of four channels on-premise, on-demand, on a mobile device or in-memory. Finally, dont forget that we are all partly responsible for the lack of consumer confidence and the depressed demand we see today. It is too easy to point the finger at bankers, overzealous real estate salespeople and derivatives traders, when all the time we were only too happy to reap the benefits of escalating property values that fuelled much of the consumer spending during the boom years. The good news, contained in the pages of this fascinating piece of research, is that CFOs are intent on restoring our economies to growth that will benefit a great many people beyond their companies stockholders. And with the help of solutions from SAP, they can. Three functional pillars describe the tasks and tools Finance should adopt to support their colleagues: 1. To ensure regulatory compliance and effective risk management, companies can embed risk management and access and process controls all the way through from transactional processing to financial reporting and disclosure. 2. To outperform financial objectives and create sustainable value, organizations design a 360-degree view of both financial and operational performance across their organizations so managers can take better decisions more quickly by breaking down traditionally siloed functions. 3. To deliver superior service at reduced cost, companies can streamline all financial functionsfrom transaction processing all the way through to financial reportingand leverage self-service analytics and builtin content. SAP offers a comprehensive portfolio of applications and end-to-end processes that support these pillars, including SAP solutions for enterprise performance management (EPM); SAP solutions for governance, risk and compliance (GRC); and the SAP ERP Financials solution. SAP can help you achieve financial excellence with strong cash flow and liquidity, compliant and accurate financial reporting, and maximized profitability while reducing the cost of finance, thereby freeing up time to partner with the organization to drive value creation. For More Information Learn how to achieve a 360-degree view of the enterprise and drive financial excellence at the CFO and Finance Leadership Center, featuring thought leadership, solution details, case studies and customer events. Visit the site at www.sapcfo.com.