October 12, 2018
- Gartner client? Log in for personalized search results.
Reduce the Staggering Costs of Poor Operational Decisions
Contributor: Jackie Wiles
Decisions governing everyday operations often lack financial rigor and can cumulatively cost organizations 3% of profits or more. Finance decision experts can help.
How many operational decisions does your organization make every year? 100? 300? 3,000? Not the strategic business decisions made by senior management, but the decisions with financial implications made every day by mid-level managers.
These decisions affect every aspect of the organization: How much to discount prices? Which IT vendors to use? How much and which inventory to hold? How long to run equipment overtime? What types of marketing campaigns to use? As digitalization pushes the business to grow and change, everyday operational decision making becomes more distributed and more complicated — and often fails to take proper account of broader financial implications.
“ Poor operational decision making compromises upward of 3% of profits”
If you said your organization made 3,000 such decisions every year, you could be underestimating. And the cumulative cost of making those decisions poorly could be costing you billions of dollars every year. For finance teams to stem this tide, they must refocus their business partnering activities to ensure the business can make better, more financially sound decisions.
“At most companies, poor operational decision making compromises upward of 3% of profits,” says Gartner VP, Team Manager, Randeep Rathindran. “The good news is that a simple change to the finance business partnering (FBP) approach can yield the tremendous business benefits companies seek.”
Realign the focus on FBPs
Seventy-seven percent of FBPs are currently aligned by stakeholder. Although this alignment provides them business acumen, it rarely gives FBPs the expertise to effectively support a wide range of decisions. This stakeholder model is fast becoming untenable as operational decisions increase in speed, volume and complexity.
For finance teams to maximize their ability to drive financially sound operational decisions, they need to improve the financial aptitude of operational decision makers and instill more finance information and analysis into those outcomes. This will take better account in decision making of key factors like the impact beyond just profit & loss (e.g., balance sheet), the relationship between various available levers (e.g., pricing vs. market share) and the opportunity cost of foregone alternatives.
“ The decision expert model is 2.5 times more effective than the business generalist model at driving financially sound operational decisions”
To do this, progressive CFOs are redefining the focus for FBPs, positioning them instead to specialize in a specific category of operational decisions. These “decision experts” support many different business managers across a defined set of operational decisions and develop expertise in a decision type (pricing, inventory, renewals analysis, etc.), rather than focusing on general knowledge of a particular business.
Gartner research shows the decision expert model is 2.5 times more effective than the business generalist model at driving financially sound operational decisions. It also thrives no matter how strong or weak the underlying relationship is between finance and the business.
What is a decision expert?
Decision experts are mid-level business finance staff who specialize in supporting a particular operational decision type. Here’s what they do:
- Focus on one operational decision category (they don’t support multiple decision types)
- Remain independent of any one stakeholder
- Institutionalize learning from past decisions to proactively develop new tools for operational decision making
- Provide proactive analysis before the business realizes a decision needs to be made
- Are accountable for improving decision outcomes; they don’t have traditional financial planning and reporting responsibilities.
Learn more: Transform Your Finance Function
You don’t need to reorganize — again
Notably, this shift in focus is more a redefinition of the FBP role than a radical reorganization of the finance function. It doesn’t mean the finance team has to have a dedicated resource for a particular decision type — or be at the table for every decision in their area of expertise.
Finance leaders with experience in the new approach report there are no overall changes in the number of embedded finance FTEs, and decision experts actually play a more significant role in the operational decision making in their new capacity than they did as embedded FBPs.
Reinventing the traditional FBP model into a decision expert approach enables finance to support more of the right decisions and provide differentiated support — ahead of the decision. It is also a responsive, effective, scalable and widely applicable approach that can deliver a financially sound decision without delay.
For CFOs to pilot the decision expert model, they will need to start by reinventing the goals and expectations for FBPs — realigning them to individual decision types — and demonstrate value by improving decision outcomes.
Gartner CFO & Finance Executive Conference
Join the most important gathering for CFOs to explore potential finance tech providers and get actionable insights for how you can prioritize technology investments.
Recommended resources for Gartner clients*:
Business Partnering Through a Decision Expert Model
*Note that some documents may not be available to all Gartner clients.