These strategies can help finance departments pave the way for fruitful results
The past decade has seen finance departments cut costs by an average of almost 30%. Over the next few years, many of these departments are aiming to achieve even higher levels of effectiveness. But the highly acclaimed Divisional and Group CFO Gary McGaghey explains that the most successful finance teams excel at value creation, lowering costs only where it will benefit the company and embracing value-added activities. Here, he offers two strategies to help finance teams work towards their efficiency goals.
How Costs and Effectiveness Have Shifted Over Recent Years
In 2020, the management consulting firm McKinsey analyzed the finance function of hundreds of businesses to examine how costs and effectiveness have shifted over the past decade. The research concluded that:
- On average, finance organizations have cut costs by 29%.
- The most efficient finance leaders achieved similar cost improvements to the level achieved by average performers, despite starting from a lower cost base.
- Finance leaders spent 19% more time on value-added activities than transaction-processing activities compared to the average finance department.
- Finance leaders made average gains of 26% (versus the 25% of average performers), despite their leaner starting points. These gains highlight the value of focusing on finance function efficiency regardless of previous gains.
Two Financial Essentials for the 2020s
Gary McGaghey emphasizes that top-performing finance leaders differentiate themselves by dedicating more of their time to value-added activities like strategic planning, operational risk management, financial planning and analysis (FP&A), treasury, and policy setting. This way, they can build deeper capabilities in value-additive areas.
He explains that the McKinsey research gives way to two essentials that CFOs can employ to enjoy similar success to leading finance leaders.
- First, they can seek efficiency opportunities to reach beyond the transactional activities that have been the primary focus of attention for so long.
- Second, they can boost the finance department’s role in data management, whether simplifying, consolidating, or controlling information flow throughout the company.
The CFOs who embrace these essentials have a much better chance of joining the finance function elite, improving data quality, and reducing audit costs by double-digit percentages.
Essential 1. Seek Efficiency Opportunities
Many top-performing companies have improved the efficiency of their transactional functions (like accounts receivable, accounts payable, and other key accounting areas) by at least 39% over the past decade. As the cost base for these activities shrinks, many organizations will find that their efficiency efforts have diminishing returns.
Meanwhile, the past decade has seen fewer efficiency improvements in strategic areas of finance like optimizing capital structures, controllership, financial risk management, FP&A, tax planning, and internal audit.
Gary McGaghey asserts that this is likely to change. He explains that applying the latest machine learning and artificial intelligence (AI) to complex tasks can help us improve our automation of transactional processes. For example, one technology-driven manufacturer used machine learning algorithms and analytics to track financial and business continuity risks. The latest technologies have enabled this company to minimize the staff time required to complete each audit and complete audits that focus on the units that pose the biggest risks. Therefore, the manufacturer reduced the total cost of internal audits by 15-20%.
Similarly, a global consumer package goods company used natural language generation (NGL) technology to produce a draft of a management discussion and analysis for a monthly operational review. NGL technology converts structured data into financial prose that summarizes key insights. By automating sections of the reports, the company’s staff were able to spend their time on other areas.
The rise of data has seen a surge in demand for workers who have analytics skills, like machine learning engineers and data scientists. Although the supply of these workers isn’t meeting demand, the pool of talent continues to grow because of private sector training investments, higher salaries, increased availability of free online AI resources, and upgraded university computer science programs.
When a company combines advanced technologies with a skilled workforce, it can unlock a new level of efficiency in the value-adding areas of finance. Gary McGaghey has compiled the following tips to help CFOs achieve this.
1. Move Your Focus From Low- to High-End Automation
Rather than focusing purely on first-wave automation approaches like RPA, companies can embrace machine learning and other second-wave, advanced technologies to benefit their financial planning, capital allocation, and audits. These technologies are complex, though, so CFOs should pilot them to determine the right use cases and prepare to switch direction if their initial experiments don’t work out.
2. Dedicate Time to Value-Added Activities
Each member of the finance team’s time is valuable, and they could spend this time on activities that drive business performance. Finance leaders can support their teams by making sure that requests for more information are grounded in agreed-upon drivers of business financial performance. They can also set guidelines to help their teams split their time effectively. So, instead of performing a reactive analysis of historical data that reflects on past performance, staff may use data to prescribe new courses of action.
3. Align With the Wider Enterprise on Machine Learning and AI Technologies
While some platforms have grown in popularity over recent years, others have lost users. An enterprise-wide strategy that involves an array of technologies allows companies to adopt focused investments and enjoy further collaboration between the finance department and other functions.
4. Provide Staff Who Work in Critical Roles with the Experiences and Authority They Need to Lead Effectively
Pursuing cost efficiency may be a constant imperative, but staff need the skills and mindset to thrive as advisors and counterweights to senior executives who steer the company’s financial trajectory. Skill development is especially important for those who work in finance business partnering and senior FP&A roles.
Essential 2. Boost the Finance Department’s Role in Data Management
We can expect the world’s data to reach 175 zettabytes, or 175 billion terabytes, by 2025. This would mark an annual growth rate of around 66% since 2018. Gary McGaghey explains that, as part of this data growth, we can expect to see finance departments use more data to secure competitive advantage and comply with legislation. However, this data growth also means that finance teams must distil ever-growing data sets into actionable information for the wider company.
Gary McGaghey explains that a clearly defined master data management strategy can help companies collect, store, and interrogate rising volumes of data so they can perform relevant analyses. When a finance team marshals high-quality data, they can support the company through nuanced financial scenario planning, offering informed guidance on where to deploy assets, and providing insights into how to manage liquidity.
To uphold the function’s responsibility of consolidating, simplifying, and controlling company-wide data, finance leaders can:
1. Prioritize Data Quality and Consistency
CFOs can set high standards on the structure, entry, aggregation, storage and protection of company-wide data and fuel enterprise-wide transformation. When finance leaders steer the development of data operating model decisions and data governance, they can reinforce change management practices, both in the finance department and in adjacent functions that produce data.
2. Lead Data-Standard Alignment Across Departments
Finance leaders can usually offer unique perspectives as major consumers and providers of information across a company. Therefore, finance leaders are often well-positioned to marshal resources across departments to address data standards and raise this up the corporate agenda. Finance can’t drive enterprise data efforts alone, but it can encourage collaboration amongst IT, customer-facing, digital, and operational functions.
3. Invest in a Tech-Enabled, Agile Data Backbone
Finance leaders can adopt a layered architecture with a common data layer that accommodates evolving business needs while preserving a single source of truth.
4. Assign Finance Staff Capacity for Data Cleaning
Allocating staff capacity to validate and clean data at the point of entry is much more efficient than working through data quality issues later on. Finance staff also usually need capabilities to understand the limitations of data and how to overcome these.
5. Deploy Technologies for Better-Quality Data
Cleaning data no longer has to involve time-consuming manual work. Instead, CFOs can adopt machine learning algorithms to cross-reference and validate data. This way, finance teams can minimize errors and the time needed to check data is correct.
How CFOs Can Enjoy Financial Success
Gary McGaghey explains that when CFOs adopt these key strategies, they can enjoy similar success to that of the finance leaders discussed in the McKinsey research. The companies who follow these steps have a much better chance of improving data quality, minimizing wasteful data-cleaning efforts, upskilling their finance teams, and generally improving decision-making.
About Gary McGaghey
CFOs and other finance professionals from around the world pick up insightful tips from Gary McGaghey, the Group CFO of the €1.3bn end-to-end marketing production and business services group Williams Lea Tag. Gary McGaghey is also the non-executive director of the children’s fitness analysis and testing provider Fitmedia UK. Before working with these companies, Gary McGaghey achieved impressive financial results for several private equity, privately owned, and listed companies.
Gary McGaghey holds a Bachelor of Commerce degree from the University of Natal, a postgraduate Bachelor of Commerce degree with honors from the University of South Africa, and a Financial Times’ Non-Director Executive Diploma. He is a chartered management accountant in the UK and a chartered accountant in South Africa.