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September 14, 2007

Report calls for extended leadership

Report calls for extended leadership

Companies around the world must transform their finance function to improve decision making or risk jeopardising their competitive edge, according to a report from the Chartered Institute of Management Accountants. Carolyn Canham reports

The launch of the Chartered Institute of Management Accountants (CIMA) latest report, entitled Improving Decision Making in Organisations, could not have come at a better time.

“[Troubled UK bank] Northern Rock is an absolutely timely reminder that getting our decision making right is vitally important,” CIMA chief executive Charles Tilly explained at the report’s launch this month, adding that it would have been difficult to predict the capital markets would dry up. “The message for me is this is really challenging stuff. I think it’s a timely [occasion] to release this publication.”

The report warns that companies worldwide are putting their competitive position at risk if they do not transform their finance function to help improve decision making.

“High-performing companies usually have high-performing finance functions,” the report states. “Although the causality has not been proven with academic rigour, the correlation is clear.”

The report is based on the discussions of the CIMA Improving Decision Making in Organisations forum, which includes participants from motor companies Ford and Rolls-Royce, electronics company Fujitsu Siemens Computer, manufacturer Unilever, the UK’s Royal Mail and the UK Department for Work and Pensions.

The forum contends that high-performing finance and accounting (F&A) functions are vitally important. “These leading companies look to their F&A functions to not only operate efficiently and produce accurate financial accounts and useful management information, but also to work closely or to ‘partner’ with the business to help improve decision making and support value creation,” the report states.

The report suggests that finance/business partnering varies in form. “Credibility as a finance/business partner usually rests on the financial expertise and analytical rigour contributed to decision making rather than an ability to provide expertise or leadership in other business disciplines,” the report states.

It also notes that finance professionals can “already provide both quantitative and qualitative management information including accounts, analysis, balanced scorecards and narrative reporting. The challenge is to help apply financial and accounting expertise to decision making in the business.”

To bring F&A expertise to the business, the CIMA report suggests, finance/business partners must have sufficient business understanding to recognise the relevance and practical application of the information, be able to communicate their insights in the business’s terms, and help determine and manage actions through to achieving impact.

The report also suggests that accountants within business should develop their skills to “support the changing face of finance functions”. One of the skill sets highlighted is soft skills. The research paper outlines statistics from the PA Consulting Group, which show that of a sample of FTSE 100 financial directors, the vast majority have thinking processes that are logical, analytical, quantitative and fact-based.

“These are valuable qualities for them to contribute to decision making,” the report states. “However, their nature may make it difficult for them to develop empathy with more emotional or intuitive colleagues.”

The CIMA report suggests that finance professionals need to be trained “not just to furnish and assemble financial information but to draw insights and to communicate these effectively to support decision making. They will be expected to use their understanding of the numbers and metrics to evaluate opportunities and support decision making about investment opportunities and resource allocation.”

Roland Ginn, the finance director at Jobcentre Plus and the UK Department for Work and Pensions, told attendees at the report’s launch that “you do actually find that [finance] people want those soft skills”.

According to the research, management accountants are “keen to work with the business to improve decision making”. “They can provide the metrics and analysis to support evidence-based decision making,” the CIMA report argues, adding that management accountants’ invitation to participate in business decision making rests on their ability to provide timely and accurate management information efficiently and to work closely with the business to combine financial expertise with business understanding to inform decision making.

Significant contribution The report suggests that management accountants have a “significant contribution” to make at each stage of this decision-making process. It says: “However, the F&A function has challenges to overcome before it will be engaged to provide finance/business partnering; it must be transformed to better support decision making.” The challenges the report outlines are providing useful management information more efficiently and working closely with the business to improve decision making.

More efficient use of time is demonstrated in the report through statistics from IBM Business Consulting that show that in 2005, 27 percent of the F&A function’s time was spent on stewardship activities, with only 26 percent on decision support. IBM estimates that for F&A to be effective as a finance/business partner, the proportion of its time spent on decision support needs to increase to 40 percent at the expense of transaction processing. In 2005, transaction processing was still absorbing 47 percent of F&A’s time, on average.

The CIMA report suggests that leading companies may already be at the 40 percent level for decision support. CIMA technical specialist Peter Simons says: “This is not the future. It is the reality already in the top companies.” The report concludes with the suggestion the CEO and CFO must work together to develop a vision for the finance function.

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