For many years organisations have cut costs; many still find it a challenge to extract the best value from what they spend.
Nearly all organisations are operating in markets with increased competition, new channels to market and increasing customer expectations. Margins are under pressure and profitable growth is hard to find.
Cost is still an important focus for many businesses but in order to create a platform for growth it is not cost containment or cost cutting that is important but aligning your costs with your business strategy to ensure you are best positioned to grow. A focus on where costs are being incurred is critical in order that you optimize the split between “good”, strategically aligned, costs and “bad” costs thereby creating the capacity to invest and pursue growth opportunities.
The role of the finance function is central in aligning costs with business strategy and measuring business performance through a value lens. Finance teams must lead by example in reducing bad costs and aligning their own spend with where it delivers most business benefit.
Louise Fletcher, Fit for Growth lead
The CFO has a key role to play in strategic cost management, ensuring that money is spent in the right places on “good costs” that support business growth and eliminating “bad costs” that do not contribute to growth, or which could be reduced without impact on business delivery. These opportunities may be enterprise wide, or could be aligned to specific business unit programmes where the greatest return can be generated. Part of the role of finance is not only to challenge and report these costs but also to establish performance management frameworks that capture, evaluate, track and report the relationship between spend and value creation at all levels of the organisation.
By aligning cost structures more effectively, CFOs should also demonstrate cost leadership in their own finance organization, being clear on the finance processes and activities that contribute to helping create organizational value. Transformation of finance teams, opportunities for technology implementation and automation, and realignment of finance structures to better serve the needs of the business should all be on-going priorities for finance leaders.
Finance should not only manage and govern “business as usual” operating costs to maximise the benefit of the spend. The CFO and the team are also ideally placed to preside over the future course of the business by their involvement in all investment decisions. This involvement stretches across the investment lifecycle from selection through business case to performance monitoring and post implementation reviews in order to ensure that all investments deliver the desired business value.
The role of finance is not to cut investment across the organisation but rather to make sure that appropriate investments areas are selected and that the limited funds available are channelled into the right areas.Tracking and review of spend is also a discipline that finance can bring to the organisation in order to reduce the risk around investments which don’t deliver.
Predictive and business aligned analytics which drive decision making are a source of competitive advantage for any organisation. A study conducted by Strategy&, part of the PwC network of firms, in collaboration with INSEAD found that, on average, companies that are leaders in data analytics capabilities are 38% more likely to be leaders in commercial performance, winning the battle for growth.
PwC’s Data and Analytics Survey 2016 of 2,100 executives found only 33% said that their next big decision would be supported by data and analytics; and only 24% used predictive analytics. In contrast 59% said that they used data and analytics to look backwards.This gap offers huge potential and CFOs should be looking to analytics to drive better decisions around costs and investments.
Finance is the logical place to develop this capability and combining structured, unstructured, internal and external data together with smarter cloud based tools, powerful real time data management and predictive data analysis around cost and value is available at little incremental cost.
Success is dependent on strong data governance and access to the right technologies but the CFO also needs to lead on building the capabilities into the team to deliver the insights required.
Decision making around costs and investments is driven partly by the culture and behaviours within the organisation. The organisations that are willing to experiment, explore opportunities and search out new ways of delivering value will be the most successful not those who slavishly manage cost and cut investment spend. Driving these behaviours is difficult and aligning your metrics is crucial to encouraging more strategic thinking.
A strategic focus on cost management typically exposes flaws in traditional cost and profit centre reporting because these do not necessarily give enough visibility on which business activities create the most return, and where cost and investment initiatives should be targeted. Reporting on cost and revenue performance by other dimensions such as markets, channels or customers, or combinations of these is essential if the finance team are to support better decision-making.
Many organisations are finding that the traditional key performance indicator reports that have been produced for many years are no longer relevant because they are not aligned to strategic goals, and give little insight into investment priorities.
A refresh of reporting enables finance to improve decision making around key value processes across the organisation, providing more forward looking insights that are vital to optimising cost management strategies.
Strategic cost management requires finance professionals who understand and can work with complex data sets, new, innovative tools and a broad range of individuals across the organisation. The accessibility of different types of data across the enterprise and opportunity for the business to increasingly “self-serve”, means finance needs to challenge itself to bring added value by driving insights that truly enrich decision making.
There is a key role for finance to play in enabling the organisation to understand the risks and opportunities related to particular decisions, as well as independently challenging the business on its own thinking and assumptions. It will require the finance team to bring new skills in areas such as scenario planning and modelling as well as contextualised industry expertise to bring the information to life. As highlighted by ACCA’s recent research Professional Accountant – the future they will need to demonstrate a wide range of professional skills and behaviours to ensure they have the appropriate impact and influence on the business.
Now is the time to invest in the people in finance and the tools they have at their disposal. PwC’s Finance Effectiveness Benchmarking Report 2017 showed that finance teams across the leading organisations have been doing this for years,but the poorer performers still have some way to go.