Managing rising costs in corporate finance operations

John O’Mahony and Shawn Fitzgerald at The Hackett Group explain how Digital World Class finance organisations keep costs stable while levelling up performance

If your corporate finance operations costs as a percentage of revenue are going up, you’re not alone. At the average company, inflation and other major macroeconomic trends bumped finance costs by 7.5% this year. 

But there is one important exception: at companies with Digital World Class® finance functions, operational costs fell by 1.3%. 

Digital World Class finance organisations are those that have achieved peak levels of business value and operational excellence. And when it comes to finance, the digital world is a better world. Since 2016, finance costs in companies with a Digital World Class finance function have consistently spent about half what typical companies do in their operations. They also manage with about half the staff. 

The reasons for the cost gap are easy to understand. Digital World Class finance functions are much leaner. 

• They employ 63% fewer transactional finance professionals than a typical peer company. Since 2019, while their peers have reduced the number of employees per billion transactions by 10%, the Digital World Class have achieved a reduction of 23%.
• They also have 32% fewer finance specialists than ordinary companies, and 33% fewer professionals in planning, forecasting, and analysis.
• They also manage with fewer managers: they have a 51% lower head count in management than the typical finance department.

Overall, this translates into a 50% lower level of staffing and a 47% lower cost base, which for a $10 billion company (£7.864 billion) translates into a $48 million (£37.75 million) annual cost advantage.

Digital World Class finance organisations operate more efficiently while being smarter about their spend. The head count dividend means they can invest more in technology and value-adding labour, such as planners, analysts, and specialists.

In fact, Digital World Class finance organisations have 2.2 times more of their staff focused on business analysis than on gathering and compiling information.

This combination of more automation and more financial professionals looking for opportunities is one reason that the forecasts of the Digital World Class are 28% more reliable than those made by average finance functions. They can also close-to-report 41% more quickly and develop an annual budget 29% faster than ordinary companies.

Is it any wonder that the Digital World Class finance teams are 44% more likely to be viewed as a valued business partner by their company.

The road to Digital World Class

Interestingly, most companies have the potential to build a Digital World Class finance function. Regardless of their sector, they can begin their journey with six strategic moves that have helped give Digital World Class finance organisations such a remarkable edge:

1. Automate everything you can, including information delivery and analysis. Digital World Class finance organisations have automated 96% of journal entries versus 80% for their peers. They also receive 84% of supplier vendor invoices electronically versus 54% for their peers. And they automatically match and post 94% more customer payments at the account level.

In some cases, this leads to performance nearly an order of magnitude better. For example, 100% of Digital World Class finance organisations say they have a high percentage of credit applications completed online by customers or sales reps compared to 11% of peers.

2. Establish an enterprise data model, common key performance indicators (KPIs), and optimised business rules and analytics. Designing KPIs that focus management’s attention on what’s most important will help you achieve your strategic objectives in an efficient way.

With over twice as many staff focused on business analysis, the Digital World Class finance organisation can spend 55% more time on analysis than collecting and reporting data, and 65% more time on decision-making than on historical reporting.

3. Modernise your finance application architecture and migrate everything to the cloud. The Digital World Class have for the most part moved their infrastructure to the cloud. Being digital first makes it easier to swap out applications as improvements become available.

4. Survey your operating model. Technology is only one part of becoming Digital World Class. The other part is understanding how the human part of your business model interacts with the technology. Digital World Class finance functions are good at thinking about where work should be performed and who – or what – should do it.

5. Redesign your processes end to end. The Digital World Class finance function tends to have reimagined its processes from end to end, making the whole enterprise more streamlined, agile, and resilient.  

6. Manage your talent better. Digital World Class organisations have really focused on designing and implementing programs that not only identify and acquire the talent with the skill sets that are most important for them, but also make sure that once hired they continue to grow.

The missing ingredient 

The next question, of course, is how will you pay for this transformation? Between your tight budget and the inflation that is eating at your margins, it’s probably not a great year to ask for more.

Fortunately, the additional financial investment isn’t prohibitive. Although it demands a serious managerial commitment, a transformation doesn’t need to break the bank.

One of the most surprising differences between the best and the rest is that the Digital World Class spend only 10% more on their financial function technology than their peers.

John O’Mahony is Principal and Shawn Fitzgerald is Senior Research Director of The Hackett Group.

Main image courtesy of iStockPhoto.com