The cost of finance operations has resumed its 14-year downward trend at typical companies, after spiking dramatically in 2004/2005 due in part to Sarbanes-Oxley compliance efforts, according to 2006 Enterprise Book of Numbers research from The Hackett Group.
After the 18 percent increase in finance costs at typical companies in 2004/2005 - which came largely as a result of compliance-related activities - this year's cost reduction of 3 percent at typical companies should come as a massive relief. At the same time, 2006 saw world-class finance organizations extend their performance lead, as they have in each of the past 14 years of Hackett's analysis. World-class finance organizations cut costs by an impressive 8 percent in 2006, building on their 2004/2005 decrease of 5 percent.
World-class finance organizations now see the cost of finance at 0.67 percent of revenue, 45 percent lower than typical companies, where costs are now at 1.22 percent of revenue. World-class finance organizations also rely on 56 percent fewer finance staff ($46 billion of revenue versus $104 billion for typical companies).
Hackett's research identified an array of techniques that world-class finance organizations use to control compliance costs. Leading companies spend 55 percent less than their typical peers on finance controls, and report 53 percent lower compliance costs. One key strategy employed is complexity reduction. Leading companies have 40-60 percent fewer controls than typical companies in five key finance areas - general accounting, revenue cycle, cash disbursements, tax management and treasury.
"Our benchmark analysis shows that typical companies are just beginning to recover from the compliance efforts which consumed much of their attention over the past two years," said Hackett Chief Research Officer Richard T. Roth. "Most companies are now resuming their focus on improving other areas of finance operations. Meanwhile world-class finance organizations continue to improve at a more rapid pace. Their streamlined operations, with lower complexity, more standardization, better use of technology, and greater use of shared services have made compliance a comparatively painless process. They are able to literally 'have their cake and eat it too,' and have continued to make improvements in cash and cost while at the same time increasing service and reducing risk."
Complexity reduction was one of five major factors that Hackett detailed in the 2006 Enterprise Book of Numbers which empirically correspond to world-class performance across finance and other key SG&A areas. Other factors were: strategic alignment, technology enablement, sourcing, and cross-functional partnering. Key findings in each of these areas include:
Complexity Reduction - In addition to streamlined compliance processes, Hackett found that world-class finance organizations reduce complexity in other areas. They have 45 percent fewer legal entities and 33 percent fewer tax domains. In budgeting, they rely on 33 percent fewer line items, and shift the focus from "beating the budget" to "beating the competition."
Strategic Alignment - World-class finance organizations emphasize the linkage of financial and strategic planning to day-to-day business operations. According to Hackett, world-class finance organizations are more than twice as likely as typical companies to have fully integrated planning and budgeting processes, and have stronger overall alignment between strategic objectives and the budget.
Technology Enablement - World-class finance organizations rely more heavily on technology than typical companies, and use it to automate transactional activities and drive down costs and staffing levels, while also improving information access. For example, managers at world-class finance organizations are more than two times as likely to be able to access reports online.
Business Process Sourcing - According to Hackett, world-class finance organizations spend a smaller percentage of their finance function costs on outsourcing than typical companies, in part due to their bright-line focus on process automation, standardization, and centralization to reduce cost. But they do rely on selective outsourcing, and in some cases outsource major components like accounts payable, after clearly defining a services globalization strategy that is integrated with their business strategy.
Cross-Functional Partnering - World-class finance organizations are much more successful at driving a cross-functional approach in key areas such as planning and performance management. As a result, managers at world-class companies are 29 percent more likely to report that the budgeting process is easy and convenient.
"While many typical companies still view the finance function as a cost center responsible simply for measuring and monitoring the financial health of the company, world-class CFOs understand that finance can produce significant business value in its own right," said Hackett Senior Business Advisor John McMahan. "By focusing in these five key areas, world-class CFOs are able to support their companies in strategic ways that other finance organizations can't even imagine, providing greater business insight and guidance in addition to bottom line results such as lowering the cost of finance operations, planning and budgeting improvements that drive higher equity market returns, and improving cash flow through reductions in working capital."
More information on The Hackett Group is available: by phone at (770) 225-7300; by e-mail at email@example.com; or on the Web at www.thehackettgroup.com.
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