How to approach finance this year while addressing unknowns and going beyond best practice, toward innovation.
By Nilly Essaides
In 2021, finance organizations focused on building their companies’ capacity to withstand shocks and bounce back. They automated existing processes so they can be executed remotely and with fewer staff. They forecasted more frequently. They continued to pile up cash (see companion piece by NeuGroup founder and CEO Joseph Neu). They integrated planning activities and embraced scenario analysis to account for a lack of relevant data and the unprecedented rate of change in health, economic and financial conditions.
- At the start of this year, many finance and corporate leaders predicted that we would return to some semblance of normalcy by the middle of 2021. Remember the “new normal”? That term has since lost traction, as the pandemic is entering its third year. Now we hear about the “new new normal,” and who knows when or if we will find the right words to describe the continued level of economic uncertainty, market volatility and business model disruption.
How to address the unknowns. Preparing for the new year is not about having the newest crystal ball model. The velocity of change means we will face unforeseen events that will challenge the status quo in new ways. We hear a lot about finance resiliency as a critical success factor. However, being resilient no longer suffices.
- Resiliency is the capability to withstand shocks and return to pre-crisis operations. Today, there is no going back. The way to brace for a year of ongoing challenges is to become agile, i.e., emerge stronger and better each time. It’s difficult to create KPIs for agility, but it’s possible. For example, finance can measure the data-to-insight cycle time, or how quickly it can adjust to new capacity requirements.
- Joseph Neu’s story shares five key takeaways from 2021. No. 1 is the need to question everything. Just doing things the way they’ve always been done is not sustainable. Finance chiefs must leverage technology to reinvent their operating models and how they deliver scalable services to the rest of the enterprise.
- Tim Husnik, senior director of treasury at Medtronic, shared his new mantra. According to Mr. Husnik, fostering a culture of innovation has proved successful at boosting the finance function beyond proven best practice, which he considers the baseline. “Best practice is just like being average. You’re as awesome as the most average multinational corporation,” he said. “[This mindset] is not quite aligned to our company mission of being extraordinary and innovative.”
- Becoming a first adopter of technology, novel process design or emerging best practices can be scary, and finance has always been a cautious function, often for good reason. But the function cannot afford to lag other parts of the company. “Have courage,” urged a member of our financial planning and analysis group. “You can’t just get stuck on one model of doing things. Being open to change is a huge benefit. It’s something we’ve had to get better at, and something we’re going to keep doing.”
Five ways to approach finance in 2022:
1. Leverage lessons learned. Remember that we’re not starting from scratch; we’ve now had about two years of practice in dealing with the unexpected. Lessons learned can inform how we overcome new challenges. For example, finance organizations were forced to transition to remote work almost overnight. But research from The Hackett Group showed that in Q1 2020, 80% of accounting organizations closed the books on time by leveraging existing technologies, distributing laptops and increasing bandwidth. In fact, many companies were able to shorten their close time by getting rid of manual intervention.
2. Encourage and systematize innovation. Innovative thinking has not been a core finance skill. That’s got to change. A major way of triggering innovation in finance is adopting new technologies because they often bring fresh ideas on how to execute work. For example, AI can be layered onto an existing ERP to curate specific data to support different activities. Most ERPs now offer AI-enabled analytics modules; plus, there are stand-alone tools finance can test and deploy. It may sound counterintuitive, but successful innovation is exercised within a defined framework. And the top consideration is focusing on areas where there’s a significant opportunity to improve business performance.
3. Build a “composable” fintech architecture. A single system sitting atop a single data repository has been the holy grail for years. Many tried and most failed, not only because of massive and costly customization requirements. In a customer-centric, agile finance organization, different stakeholders have different needs. Finance must build a scalable platform that enables a bespoke UI in a cost-effective manner.
- Plus, a single solution, no matter how advanced, cannot compete with the plethora of best-of-breed automations. That means selecting the best tool for the job and connecting it to the ERP and other point solutions via intelligent APIs. These applets not only exchange information in real time but also leverage connectivity to orchestrate cross-process/cross departmental workflows. On the data side, new data management technologies permit process leaders to curate the information that’s relevant to them from the general ledger and other validated source systems.
4. Break down silos. Finance and treasury organizations must dismantle intra-functional barriers to end-to-end processes and data flow, as well as open their activities and systems to other SG&A functions and the business. For example, the line between financial planning and analysis and account-to-report is blurring, as the accounting organization can use AI-enabled analytics to extract valuable insights. Increasingly, finance is called upon to become the analytics engine of the company. Its mandate is to partner with other functions and front-line leadership to make critical decisions about capital and resource allocation.
- For example, finance is now helping HR in head count planning and advising management about the financial consequences of operational decisions. For instance, establishing a legal entity in an emerging market may lead to trapped cash. Or a business case for a new investment may not pass scrutiny when finance runs scenario analysis that reveals an ROI below hurdle rates.
5. Benchmark with other companies. Thriving in the “new new normal” while keeping costs in check requires thoughtful prioritization. Finance budgets are not expanding but demands are. The key is to choose where to invest, in the immediate and medium term. One of the most effective approaches to identifying improvement opportunities is benchmarking against other organizations. That exercise should go beyond collecting data on others’ performance. The data needs to be interpreted within the context of comparable functions. So, peer-to-peer exchanges, rich with practical examples and context narratives, are also crucial.
The surge in Covid cases may be temporary, but many states and countries are reporting record high cases. The current administration is pushing forward with impactful regulatory change and inflation may not be temporary. These and other risks mean finance executives will be challenged to continue to adapt their organizations to not only confront uncertainty but take advantage of disruption to become better, faster.