From CGMA Magazine: Flexing the strategy muscles

Finance teams have long been tasked with gazing into the past. They were the ones with the answers about how the company has performed over time, how it did in the past month, and how it just did compared with how it used to do. But now finance professionals are being asked to turn the time machine around, using their skills to guide companies into the future.

It’s no wonder. During the past 10 years, two-thirds of incidents causing market-value drops of 50% or more occurred because of corporate strategy missteps, according to a Corporate Executive Board (CEB) report in which chief auditors listed contingency planning and strategy development and execution as top concerns.

Strategic planning also was the top priority for capability improvement identified by North American CFOs in a recent Deloitte survey. CFOs participating in that survey were asked to name the three capabilities they most want their finance teams to improve; strategic planning was the only capability named by more than half the respondents.

“They need to be the one that helps facilitate decision-making,” said Jim Morrison, CPA, CGMA, the CFO of Pawtucket, R.I., materials science company Teknor Apex. “And for them to be there, they need to be integrated within the organization. … The more our finance people think of themselves as a business analyst—and I mean every one of them up and down the line—the better we’ll be serving the business.”

Charting a course for the business isn’t enough. In the era of big data, finance executives are charged with determining whether the strategy is creating the proper results. CFOs have increasingly acknowledged that finance teams could be more effective in ensuring that initiatives achieve desired business outcomes, according to Deloitte.

Delivering information to support strategy to management plays a big role. But that critical responsibility for the finance function—the delivery of metrics and tools needed for sound business decisions—has consistently been identified as one of the top challenges for finance, according to Deloitte. Another challenge: influencing business strategy and operational priorities.

“Communication, in the presentation of data in a clear and understandable format as well as verbal communication, is extremely important,” said James R. Blake, CPA, CGMA, the CFO of Morey’s Piers & Beachfront Waterparks in Wildwood, N.J. He added that young people entering the profession need to be trained to deliver the numbers to management as effectively as they crunch the numbers.

In recent years, the most significant change in the role of finance has been its emergence on the operations side of businesses, Blake said. And Deloitte’s research indicates that the evolution is ongoing. Its CFO surveys indicate that finance teams are challenged by aligning budgets and capital expenditure decisions with priorities and strategies.

WHEN STRATEGY ITSELF IS A RISK

According to the CEB report, 2013 Audit Plan Hot Spots, 90% of chief auditors considered risks associated with strategy—both the planning and execution—to be significant. The report advises finance professionals to be on the lookout for:

• Uncertain growth assumptions. Eighty percent of companies rank growth acceleration as important or very important. But as companies face an ever-changing economic landscape, they “lack confidence in their current strategy assumptions to help identify and fund significant growth bets,” the report says.
• Senior management decision paralysis. As risk-averse companies spend more time and resources “bulletproofing” their decisions, delays can often cost the company. Executives estimate that the waiting costs a company up to 50% of its growth rate, the CEB’s report says.
• The strategy-execution gap. The CEB cites research from Robert Kaplan and David Norton, the creators of the Balanced Scorecard, stating that just 5% of employees understand their company’s strategy and how it affects their work. “This problem, while not new, is particularly acute today because companies now need to much more quickly mobilize their workforces to exploit new growth opportunities,” the report says.

Finance professionals should periodically test strategic assumptions as well as the processes a company has in place to adapt strategy in response to changing business conditions, the CEB says. And they should evaluate the communication processes to make sure strategic plans turn into strategic execution.

For more, see the following CGMA Magazine articles at cgmamagazine.org:

“CFOs: Finance Teams’ Strategic Capabilities Must Improve,” by Ken Tysiac

“Internal Auditors Must Focus More Attention on Strategy,” by Neil Amato

—Jack Hagel, editorial director
CGMA Magazine

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CGMA Magazine is published online at cgmamagazine.org in conjunction with the Chartered Global Management Accountant designation, which was created through a partnership between the AICPA and CIMA. The magazine offers news and feature articles focused on elevating and emphasizing management accounting issues.