How CFOs can take a holistic view to transform the finance function

Indeed, cost is something that comes up time and again in EY surveys of finance functions. According to CFOs and SFEs in the EY TFO Survey, 85% of companies are changing their finance operating model, central to which is cost reduction — 88% of companies plan to reduce their finance budget over the next 24 months, with an average planned reduction of 4.8%.

The reality, however, is that cost reduction is a given for the finance function, which has to lead the way in doing more with less. “If finance can’t demonstrate cost-reduction leadership, the rest of the business won't follow,” says Liam Keys, Partner, Finance Operations at The European Tax Council with Ernst & Young LLC. “Some questions the CFO should be asking include; If my finance function costs $100 today, how do I get it down to $95 tomorrow and $90 the year after? How do I translate that across all functions outside finance? How do I better deploy the resulting financial and intellectual capital to add more value?

It's a concept that Sergio Garrido Villalba, EY Global Accounting Compliance and Reporting Leader, flips on its head. “There are many ways you can cut costs, such as rethinking your processes and optimizing the way you do things. But if businesses are growing, they often expect finance functions to achieve more, but with the same resources. Either way, it’s a huge challenge.”

However, there are only so many levers that can be pulled to manage costs, and many finance functions have been implementing them for years. So where are CFOs and SFEs focusing their attention to increase efficiency?

According to the EY TFO survey, 58% of CFOs and SFEs report that providing greater centralization through in-house shared service centers is a priority for their finance operating model. At first glance, this may seem surprising as many organizations have for years been outsourcing specific functions to external shared services centers — typically high-volume, low-value work.

However, Philippe Verhoeven, EY EMEIA Accounting, Compliance & Reporting Leader and Partner at Ernst & Young LLC in Belgium, believes that the pandemic has made many CFOs rethink how best to optimize shared service centers. “With people around the world working remotely, businesses have realized that they don’t have to have everyone in the same physical space — they can shift to what is effectively a virtual shared service center with people fulfilling the same role but in different countries.”

This approach can also get around some of the language and talent challenges that arise when locating service centers in low-cost countries. “It's very complicated to find people in India, for instance, that you can train in languages such as Norwegian, Polish and Turkish ­— so native speakers would have to be relocated to the service centers,” says Garrido. “That wasn’t always attractive from a talent perspective. People working remotely can help overcome this challenge.”

This current shift, however, may become something else altogether in the years ahead as automation becomes more prevalent for those high-volume, low-value tasks. “Companies are now considering how their Global Business Services organization should be functioning,” says Lapinskiene. “Whether they should be the old center of scale, doing the very efficient high-volume transaction processing, or if they should become a center of excellence, where they own the processes end-to-end, and own the continuous improvement of how they run those processes, integrate with the business and provide insights to the business?” 

This rethinking of the use of shared service centers is just one way in which CFOs and finance leaders are considering the best use of external service providers. Indeed, outsourcing and co-sourcing are rapidly moving beyond simple cost savings as businesses take a smarter, more holistic approach.

According to the EY TFO Survey, 62% of CFOs and SFEs plan to increase co-sourcing select finance and tax activities, with 77% more likely than not to co-source select activities in the next 24 months. The critical word in both these instances is “select” as finance leaders look to optimize operations in the most effective way.

Of course, what this looks like for each individual finance function will be determined by the size of the organization, the sector it operates in, its global footprint and, ultimately, its broader business goals. Typically, there will be processes that a finance function would always want to keep in-house, but beyond that, everything is effectively open to a sourcing discussion.

Garrido believes that decisions around which finance processes to outsource, or co-source often come down to a choice of scale or skills. “Imagine something like travel expenses and accounts payable — as long as you have the right controls in place, these can easily be outsourced at scale. On the other hand, if you are moving into a new territory and you need a super-skilled person on the ground, can you afford that person as well as having someone supervise them, or is it better to work with a partner?”

For high-growth companies, it may be that the business is growing faster than the back-office function, which may struggle to support long-term success. “If you're the CFO in one of these high-growth organizations, you really need to be the right-hand man to the CEO, source and manage capital and prioritize investments to support strategy,” says Keys. “But if you're a CFO who's stuck navel gazing internally, trying to reconcile accounts or hire the next accounts-payable clerk, then you won’t achieve this. This is where working with a partner can be critical.”

Central to the role that external providers can play in supporting the finance function is the use of rapidly evolving technology, which can reduce costs and risk, while adding value. But what is inescapable is that many finance functions are behind the curve when it comes to making the most of tech.

According to the EY DNA of the CFO survey, 47% of CFOs say their current finance function does not have the right mix of capabilities to meet the demands of future strategic priorities. Investing in technology now is seen as a way to future-proof that function.

CFOs and SFEs report the lack of a sustainable plan for data and technology is the biggest barrier to delivering on their finance function’s purpose and vision. This is very clearly disconnected with the fact that digitalization will underpin the vast majority of finance’s operations.

“The diversity of technology platforms and tools available in the market and the speed of new tools and new functional capabilities being introduced is amazing,” says Lapinskiene. “But it’s impossible for many businesses to keep up with everything that is going on and work out what is most relevant to them. And that is where we see clients need to make choices and prioritize things. What are the tools and the processes that they want to focus on in-house when they go through the digitalization process and which parts of process and technology can better be managed by the partners?”

The challenge for many is that the organization at large — with a finite technology budget — may well choose to focus on client-facing technology, dashboards and apps, leaving the finance function much further down the list. On one hand, CFOs and SFEs are flagging investment in technology as a priority — yet the average planned investment over the next three years is only US $3.1m, according to the TFO survey.

Regarding which technology to focus on, while there may be excitement about artificial intelligence, machine learning and robotics — with finance leaders saying the top priority over the next three years is advanced and predictive analytics (according to the CFO Imperative survey) — finance functions need to get the basics, such as ERPs and data, right.

“Before you end up with Blockchain and AI, you need structured data,” says Verhoeven. “And if you look at how data is still being presented today, it's not structured — it’s hard to do anything with it. So even if you are shouting out for new technologies, it will be almost impossible if you don’t have that structured data.”

Decisions around technology typically come down to “build” or “buy.” Considering the cost of building a solution, implementing it and constantly updating it, there are only so many businesses that have the scale to achieve this.

Others are turning to outsourcing because it gives them access to technology, people and infrastructure far quicker than trying to build their own. It typically also gives them a scalable model that can grow with their needs. 

While all the above presents a challenging picture for CFOs and the finance function, it is evident that the direction of travel for the time being will be even further complexity. The imminent implementation of the base erosion and profit shifting (BEPS) project will be a significant development, as will the expected increase in ESG reporting.

Denardo believes that when it comes to transforming the finance function, what's most important is how it can add value internally. “I think that defines what you keep and what you look for in an alternative model,” she says. “If I were a CFO these days, I’d be looking at my roadmap — what do I want to invest in versus what I may need an alliance partner or somebody else to invest in for me.”

This concept of the roadmap is key, especially with so much coming down the line as well as any possible unexpected developments, such as global pandemics. Where do CFOs want their finance function to be in the future and what do they need to do now to make that a reality?

Critically, this can’t be seen in isolation but must be viewed in the context of the broader business. “We have conversations with CEOs and CFOs where we look at the organization’s strategic plan alongside the finance function,” says Garrido. “If in five years a business will have grown by 50% and moved into new countries, then the finance function will need to look a particular way to deliver on this, in terms of work involved, the number of people required and all the associated costs.”

Once that has been identified, CFOs can then start to plan how best to resource it, be it through automation, co-sourcing, shared service centers and so on. Critically, technology and automation aren’t magic bullets and must be paired with a talent strategy and process improvement.

As Lapinskiene concludes: “I think it’s essential that the finance function of the future builds an ecosystem of partners and alliances. They will face labor challenges and the speed of technology change will be very challenging for many to handle. So, building the ecosystem around yourself and having trusted strategic partners who can help you handle things in the rapidly changing world has become very important.”