July 15, 2024

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How to digitally transform the finance function

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In this episode of the Inside the Strategy Room podcast, two experts on digital transformation of the finance function, Liz Fasciana and Bjørnar Jensen, discuss the necessity of digitization and its effect on CFOs. They spoke with communications director Sean Brown at McKinsey’s CFO Forum in London in June. This is an edited transcript of their discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.

Sean Brown: The finance function has become increasingly digital since the days of manual spreadsheets, but we still have a way to go. Why is digital transformation of the finance function still needed, and what does it mean for CFOs?

Bjørnar Jensen: The nature of the finance function is changing. Instead of reporting on the past, the finance function needs to look toward the future and be able to steer the organization through uncertainty and volatility. It needs to create a higher sense of order and clarity around choices. You can’t do that if you’re spending 80 percent of your time reporting, or even worse, doing manual transactions with a high quality-control need. Instead, CFOs should be spending their time advising the business, being a partner to the business. It’s about using technology in its different forms to improve quality and reduce manual work. Today, that’s happening at a scale that allows us to fundamentally change the role of finance.

Sean Brown: What percentage of companies have actually digitized their finance function? Have a lot of them reached their potential for digitizing the function?

Bjørnar Jensen: That depends on which metric you’re looking at. I’d say 100 percent of finance partners are using various forms of digital tools that reduce a lot of the manual labor, improve quality, and consolidate analysis. Have we reached the potential for digital transformation of the finance function? No, we have not. If you look just at automation rate, the ambition should be that 95 percent of these repetitive tasks go away because they’re taken care of by the system. In reality, it’s probably about half that, maybe a bit less. So there’s still a long way to go.

Liz Fasciana: The good news is that the tools are getting better. Some of the technologies that really help you do the kind of predictive, future-looking analytics are much easier to use now. This is also an area where you’re going to see a lot more investment, so the improvement will continue.

Sean Brown: What are some of the barriers to reaching the potential for digitizing? Is there a particular window of opportunity now?

Liz Fasciana: The barrier is setting up the right program with the right ambition and having the alignment around where you’re trying to go. I always start with ambition. You want to have a plan that articulates where the value is that you’re trying to achieve, and really drive a focused program around achieving it and being able to measure progress. These are people-based programs, so while there is a lot of technology underneath, you have to bring your teams and your leadership along on the journey.

Bjørnar Jensen: We’re in a phase right now where there’s a huge wave of investment going into digitizing the enterprise backbone. We talk a lot about enterprise resource planning [ERP] systems being modernized. Because these are the transactional backbones, they all touch on the finance function. Does everybody make full use of that opportunity to modernize the finance function too? I’d say the potential is not being fully realized. A third to half of companies really take this opportunity to fully rethink the role of finance. There’s still a fair amount of, “Let’s just modernize, and simplify, and standardize a little bit what we’re already doing and continue doing that.” That is a missed opportunity.

Sean Brown: What is the CFO’s role in this? Who typically drives this level of digitization? And is there a risk of falling behind?

Liz Fasciana: I would say both in finance and more broadly in enterprise transformation the CFO almost always plays a very big role. It’s a great opportunity for CFOs especially to lead and show that this is a journey that we need to commit to, alongside an enterprise transformation or finance leader working with the CFO to really guide and drive the program day to day and make sure you really get the benefits you’re looking for.

Bjørnar Jensen: I think there’s a sense that this all needs to happen now if you’re going to get the most out of the investment. The CFO holds the purse strings, so it’s fair for the CFO to hold themselves and their organizations to the same high standard they hold everybody else to. They should be role models in digitizing the enterprise. It’s worth noting that this kind of big enterprise transformation is ultimately very expensive. For ERP alone, investments for the top 5,000 companies in the world are at about $300 billion so far this decade. Doing digital transformation of the finance function at the same time as upgrading ERP systems is a rare opportunity worth trying to seize. If you miss that window you can come back to it later, but it will be more difficult because a number of assumptions about the role of finance and ways of working will have been baked in for at least the next decade.

Sean Brown: What are the key factors that CFOs need to think about if they’re embarking on this digital transformation of the finance function, or if they haven’t taken their transformation journey far enough yet?

Liz Fasciana: I think we start with outside-in examples—what has made others successful? We often bring clients to go-and-sees where we introduce them to other CFOs and CIOs. They often find they can tap into some of that expertise that others have within their own organization, maybe with their own people who have come from other companies where they’ve gone through the journey before.

Bjørnar Jensen: And that helps stimulate a dialogue that goes beyond the functional boundaries. CEOs will have an agenda, boards will have an agenda, but the CFO has a different role to fill. It’s a different partnership from the typical more functional, transactional role of the past. Bringing CFOs to learn from others helps them unlock how to work better together in the future.

Sean Brown: What kind of architectures or technologies do CFOs typically need to bring in to help facilitate that transition to a more digitized finance function?

Liz Fasciana: There are three primary layers. The first is the core technologies of your main ERP. That transactional system is the source for a lot of the data you use in finance. The second is the reporting layers that sit in the middle. And the third is the analytics tools like third-party software-as-a-service solutions. The CFO is really thinking about all of those at once, but also determining where to start by asking what the pain points are and where the most value lies, and thinking beyond the purely functional perspective of finance. For example, in the insurance industry, you would need to think about how to bring together finance, risk, actuarial, and tax—what common data sourcing is involved and how can you make sure those functions are not operating independently? What nonvalue-added activities around reconciliations and similar work can be automated or eliminated? It’s super important to really broaden the view from the beginning, to help you set a broader ambition. This is a huge opportunity.

Bjørnar Jensen: It’s also about the capabilities and ways of working. For example, I do a lot of work in the chemical industry in Europe, and we saw last year with the supply chain disruption and economic volatility just how the manual methods don’t work. I mentioned data set version control earlier—that’s not a joke. The ways of working could not keep up, so people improvised, and everyone inevitably used a slightly different version of the data. When people really needed to have everything at their fingertips, they didn’t, and so their analysis was distorted, or the data a bit time-lagged. It cost precious days and weeks to get the clarity of view they needed, in particular forward-looking scenarios. So while it’s absolutely essential to have a single source of data as part of your target state, you also need to work with that data in a consistent way in an analytics environment where people can reuse one another’s solutions and connect various pieces of analysis to show a truly holistic and forward-looking view, rather than a backward-looking view.

Sean Brown: Talk about some of the benefits, tangible or otherwise, that a company might see in its finance function after a two-year transformation journey to digitize.

Liz Fasciana: You’d definitely want to see an improvement in the normal finance KPIs, such as how many days to close your books, and credit risk management KPIs such as number of days outstanding for accounts payable and receivable.

Bjørnar Jensen: Also reduction of resource use, particularly the peaky use of resources, and the use of shared service centers, for instance, to reduce transactional cost. That may not be the biggest benefit in most cases, but it may be very helpful, and may self-fund a large part of the transformation. The less tangible benefits include better finance insight, better advice, and just more of the grease that keeps the wheels just running better, a better, more holistic view of the business. That allows you to do a lot. It affects your pricing power, for instance, your ability to work better with your suppliers and customers. The benefits of a finance transformation are not all easily measured directly in a one-to-one relationship, but you can see at least the shadows of those indirect benefits if you’re being diligent about where you think there is inefficiency in the current system and casting light on that with KPIs, and then reducing the friction you find. When you do this you are indeed inspiring and directly enabling better performance.

Liz Fasciana: I would also add that risk and compliance are super important to the finance function, and so sometimes you really do need to think about cost avoidance, because those can be major issues for finance.

Sean Brown: Bjørnar, you mentioned supply chain disruptions earlier. Can digitizing the finance function help companies respond to such disruption?

Bjørnar Jensen: This is one of those areas where the functions really have to work together, so if it’s only the finance function that’s working cleanly, it won’t be enough. But it will help immensely to have that better view of future scenarios to help create better organizational agility and enable better contingent decisions, rather than resorting to short-term bets. You have a clearer view of the path ahead and which scenarios to bias toward. We saw that with the supply chain crisis. Having a consistent set of scenarios allowed some actors to be much more resilient.

Sean Brown: We talk often about the importance of resource allocation, and the fact that many companies base next year’s budget on what last year’s was. Can a digitized finance function help companies be more thoughtful about where they make their bold bets?

Liz Fasciana: You would look at that more broadly than just from a finance perspective, but having the visibility and transparency, the HR information, the ability to do analysis around that and think about how you’re doing relative to high-performing benchmarks all plays into the role CFOs can play. This is becoming more important as CFOs increasingly become CEO candidates. I think CFOs playing a broader role around enterprise transformation is really important. It’s probably the best way to truly understand how the organization gets work done—run one of these programs and you see the importance of the linkages between the functions. We always say the opportunities lie in the gaps between the functions, which is also why we tend to look at things from an end-to-end process point of view to really try to understand where the value is that we want to target.

Bjørnar Jensen: When you have faster, more consistent tools, you can be a more effective challenger. For example, we have talked a lot about zero-based budgeting in the last decade. As an exercise you do every five years, it’s useful. But if you have a zero-based mindset of always challenging, you can help increase performance across the enterprise buy asking questions such as, “Do we need that? What does it take to succeed here? Can we release funding? Can we measure ourselves in tranches and be more modularized?”

Sean Brown: If I’m a CFO looking to start my digital transformation, where do I start? Are there specific times or situations that are more advantageous for starting?

Liz Fasciana: It’s super important to start with asking, “What is your ambition? What does the organization need? What are some of the barriers to achieving the strategy that the company has as a whole?” So, really linking your ambition to the overall objectives of the company, and then thinking about how to structure the digital transformation for your company’s needs.

Bjørnar Jensen: Sometimes you are blessed or cursed with catalytic events. Big M&A situations are an opportunity to rethink. Any situation that causes rethinking the overall enterprise or business model are also good opportunities. Those are the catalytic situations that allow you to move faster but also force you to do the thinking required. If you miss the window of opportunity, it may be a few years before you have another chance to have the impact you want and to do it in a way that doesn’t exhaust the organization. Any enterprise transformation is a major endurance endeavor for the organization, and finance touches everybody, so transforming that function can be particularly stressful and demand a lot of energy. Doing it in conjunction with other significant changes to your business can be an advantage, but also a challenge. Certainly linking it clearly to outcomes that you aspire to deliver as an executive team and as a board, not just as an individual, will motivate your team and the rest of the organization to work together to really rethink how you can add value.

Sean Brown: You both work on this type of transformation a lot. What excites you about this rapid change for CFOs and the finance function?

Liz Fasciana: My hope is that we can help clients shape this from the beginning. You hear about all these failed programs, but that is not my experience. If you start from the beginning with the right principles and setup, you are going to have a much higher probability of success, and you will bring others along.

Bjørnar Jensen: The point that Liz mentioned about the increasing number of CFOs who become CEOs is exciting. This is also happening with CIOs. I find that nexus between the CFO and the CIO to be one of the most active, creative, and engaging areas that I like to operate in these days. Seeing a number of CIOs and CFOs make it to the next step and bring a different perspective on leading and the whole enterprise is truly inspiring to me.


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