Long gone are the days when finance just reported numbers. Finance increasingly provides operational or enterprisewide decision support in addition to meeting its critical responsibilities in governance and oversight. How do chief financial officers (CFOs) determine the optimal structure to fulfill the dual demands of judgment- and rule-based activities?
“Regardless of the size of the organization, CFOs should base decisions on finance function design on a few key principles,” says Craig Risberg, VP, Advisory, Gartner. “The first step is to settle the issue of centralization.”
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The ongoing standardization and automation of processes and transactions lends itself to centralization, but a range of options across the centralization spectrum serve different objectives. Gartner research found that on average, finance leaders place two-thirds of their staff at the corporate center and 10-15% in shared locations, though as companies grow in size, complexity, and finance functional maturity so does the location of finance activities.
Complexity is key to finance-function middle office design
As companies respond to changing business conditions, finance leaders must consider which service delivery model offers the greatest value. Some, for example, might choose to migrate to shared services or a center of excellence (CoE); others might sharply divide responsibilities between corporate and embedded finance teams.
Ultimately, the “best” model for a given organization is one that balances finance’s competing governance and guidance responsibilities given the available human and financial resources.
Consider the finance middle-office, which owns the bulk of core accounting work, Gartner research found that two activity attributes — impact and complexity — are key to identifying which location best balances risk and efficiency.
This framework helps finance leaders establish the base paradigm for activity location – middle office activities of low complexity should be moved into shared locations unless there is a well documented reason for exception; even those activities with medium complexity but broad impact should be considered for a shared location; activities with high complexity should be owned either by the corporate center, or addressed jointly by the center and regional or BU teams.
“While there isn’t a one-size-fits-all approach, this model provides a framework for considering where specific activities should fit within the finance department,” says Risberg.
New models can improve finance function’s front office impact
For front-office activities, Gartner finds organizations implementing a variety of new models to improve the quality and impact of finance analytics. One global telecommunications company adopted a “hub-and-spoke” model in which a centralized CoE (hub) owns some of its more strategic analytics and is linked to “spokes” embedded in the business. In this model, the hub executes multivariate tests recommended by the spokes to produce constructive insights such as profitable-growth targets, customer and produce profitability models, and strategic pricing information.
This model exemplifies how CFOs can create structures that meet their own company’s needs. In this case, the integrity of the pure data analysts is protected in the hub, while the needs of the business are leveraged through the spokes.
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After setting the degree of centralization, CFOs can go on to redesign other key aspects of the finance functional organization:
- Assess current finance structure. Understand the organization’s spend, staffing, structure, technology, productivity and performance now and anticipate future business needs.
- Determine an outsourcing strategy. Select activities to outsource and the location for outsourcing.
- Structure finance subfunctions. Make sure the structure is based on functional priorities, and clearly define each subfunction’s scope of activities to avoid duplication.
- Establish reporting relationships. Choose the right reporting structure for embedded finance teams and optimize the span of controls. Use role definitions, incentives and performance measures — instead of just redrawing reporting lines — to drive the desired behavior.
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This article has been updated from the original, published on March 19, 2018, to reflect new events, conditions or research.