With low levels of uncertainty, improved access to finance and greater confidence in the Bank of England's policies, Chief Financial Officers (CFOs) are gearing up for expansion, investment and hiring in 2014.
- Perceptions of economic uncertainty at a three-and-a-half year low and risk appetite among big corporates at a six-year high.
- Bank borrowing returns as most attractive source of finance – first time since financial crisis.
- 49% say policies of Mark Carney have contributed to rising confidence.
- However, 59% of CFOs expect interest rate rise by mid-2015; 23% expect rates to rise in 2014.
Deborah Kops, Managing Principal, Sourcing Change discusses the evolution of different shared services careers at the Deloitte 2013 Shared Services & BPO Conference.
View more insight videos from the Deloitte 2013 Shared Services & BPO Conference.
Simone Noordegraaf, Global head of finance operations, Philips explains how Philips have utilised their business process outsourcing relationship to move up the value chain at the Deloitte 2013 Shared Services & BPO Conference.
View more insight videos from the Deloitte 2013 Shared Services & BPO Conference
Michel de Zeeuw, CEO Global Shared Services, Siemens explains how Siemens transitioned to global business services at the Deloitte 2013 Shared Services & BPO Conference.
View more insight videos from the Deloitte 2013 Shared Services & BPO Conference
Kitti Dobi, HR Director GBS Europe at BP explains how to build a future proof organisation capability strategy at the Deloitte 2013 Shared Services & BPO Conference.
View more insight videos from the Deloitte 2013 Shared Services & BPO Conference
Technology decision-makers, notably CFOs and CIOs, are facing the reality that their organisation’s computing technology and data will likely be “in the cloud.” In fact, with the cloud market expected to grow from $40.7 billion in 2011 to $241 billion in 2020, businesses will likely soon grapple with the decision of what to move to cloud, when to move it, and how to transition from an on-premises computing technology environment to a cloud computing technology environment.
The decision on cloud computing is broader than the information technology department and requires a productive working relationship between the CIO and the CFO. With the CFO driving decisions he or she can embrace cloud to catalyse behaviours across the organisation and to execute strategic and financial objectives, while diligently creating a risk intelligent culture.
In this CFO Blog, we look at how to test out cloud computing in your organisation as well as how to find your cloud comfort level.
Separating theory from reality
The concept behind cloud computing has existed for a long time. The basic idea is that the business outsources the day-to-day management of a resource and only buys what it needs, the quantity it needs, and when it needs that resource, similar to buying some utilities, such as power and water. Also, and in contrast to on-premises technology, the cloud computing resource is delivered over the Internet.
As with any initiative with notable uncertainty, however, most organisations will pilot the use of cloud computing with either low-risk projects, or projects in which the on-premises computing resources would not normally be available.
How do you know when cloud is right for you?
When evaluating an approved use of the cloud, the relative costs, benefits, and risks should be examined. The benefit cited most often in interviews with CIOs and CFOs is the agility that the cloud provides; businesses are not saddled with technology infrastructure and can react more quickly to change technology. Also, cloud computing is an operating expense, paid for as it is consumed, and does not require a significant capital investment in computing resources. Still, CFOs and CIOs raise the following security concerns:
• How do I know that my data is safe?
• How do I know where my data is stored?
• Is my data backed up? Will my data be able to be audited?
• What guarantees should the cloud vendor provide?
Another concern relates to vendor dependency and potential “end game” scenarios. For example, what does an organisation do when and if it needs to move from one cloud technology provider to a different one?
On a positive note, CFOs and CIOs mentioned that cloud vendors are likely able to provide better security and guarantee higher levels of performance. This is the line of business for that vendor and as such, they hire employees who are experts in security and in their software. Those employees do not need to know how to operate multiple systems and software applications that are typically found in corporate environments. The vendor also has an economic stake in providing high-quality, secure, reliable services; if that cloud service fails, that vendor will quickly lose clients and revenue.
Finding your cloud comfort level
The basic message for companies is to become comfortable with cloud computing. Determine what type of applications are candidates for the cloud and which will not be moved until the distant future. Initially, choose applications that have low risk associated with them, or choose those that have a business need that cannot be fulfilled using traditional computing services.
One critical aspect is to ensure protection against various types of misfortunes, and to have contract service level and security agreements with the vendor and a contract for end-game scenarios. While these contractual agreements will not prevent problems, they may offer some type of recourse if problems do occur.
Taking a joint decision
CIOs’ and CFOs’ alignment through the cloud decision can help them decide where cloud is appropriate for their organisation. The approach to determining whether cloud is appropriate involves assessing technology in the context of business purpose and risks. One recommendation is to start small and sample technologies with less risk and related influences on the business.
Following the pilot approach and with greater comfort in the cloud, continue to shift the computing environment to cloud by using an appropriate assessment-based road map. For many organisations, technology does not keep up with the rate of change in business, which often results in an “ends justifies the means” culture. But with CFOs’ and CIOs’ evaluation of governance and how the availability of cloud technology can impact their organisation, they can at least help their companies drive with the fog lights on.
A new mood of confidence pervades the third quarter CFO Survey. Chief Financial Officers see fewer risks in the global economy and greater opportunities for expansion.
• CFOs' perceptions of external macro and financial risk have hit three-year lows.
• The financing environment for corporates has improved still further. Cost of credit is at its lowest and availability at its highest since the survey began in 2007.
• 54% of CFOs say now is a good time to take greater risk onto their balance sheet, a six-year high.
• Austerity is out and expansion is coming in. Cost control and cash conservation are moving out of favour. Expansion is, once again, the top priority for corporates.
About the Deloitte CFO Survey
The Deloitte CFO Survey, launched in 2007, is a quarterly survey of Chief Financial Officers and Group Finance Directors of major UK companies. Over 300 CFOs, mainly from FTSE 350 companies, have joined the CFO Survey panel. The Survey captures shifts in UK CFOs' opinions on valuations, risks and financing and has become a benchmark for gauging financial attitudes of major corporate users of capital.
The Deloitte CFO Survey has been widely quoted in the media and is firmly established with policymakers. The Bank of England has cited the CFO Survey several times in its publications such as the quarterly Inflation Report and the monthly Trends in Lending report. The findings have also been quoted in the minutes of the Bank's Monetary Policy Committee meetings.
A move to Global Business Services requires much more than simply asking shared services centres to cooperate. It represents a fundamental shift in how businesses think about and manage shared services and outsourcing. Those that get it right can achieve enormous improvements in performance, but making it work is easier said than done. Here are some practical tips for implementing Global Business Services:
1 - Decide how far to go
Any organisation with more than one shared services centre or outsourcing arrangement should at least be sharing information and best practices between operations. However, many organisations – especially those that are truly global in nature – could gain significant benefits by moving further up the integration continuum. Agreeing with global and functional executives how this integration can add value, the models to adopt and global capabilities to develop is an essential step.
2 - Establish sponsorship at the highest executive levels
By its nature, a Global Business Services model transcends an organisation’s traditional silos, be they functions, regions, or business units. Although a Global Business Services initiative might be rooted in a single silo, it requires enterprise-level sponsorship and alignment from the board, CEO, or COO.
3 - Define an effective leadership structure
Many GBS leaders report to someone in the C-suite, which is likely to ensure appropriate senior executive sponsorship. In some cases that person is not a functional leader (e.g. CEO or COO), which reduces the risk of any one function being perceived to be in overall control. In a recent Deloitte survey, 47% of the participating organisations said they have assigned a leader to manage shared services centres across their organisation. Of these leaders, 42% report to the CFO.
4 - Choose an organisation structure that promotes global integration
Organisations looking to drive enterprise-wide efficiencies and ownership tend to have more elements of their support services report through Global Business Services. However, the balance of reporting to each functional head is a key consideration which means approaches to integration can vary considerably. For example, some organisations report entirely to a Global Business Services or Corporate Services leader (including whole back office functions), some just report through Global Business Services for their ‘shared’ elements of responsibility, while others leave full reporting lines and authority to the function.
The first approach deploys Global Business Services in a fully integrated manner and is easier to drive end-to-end improvements and back office optimisation. The model deployed needs to take the advantages of shared deployment and strategic choices, whilst ensuring functional quality, controls and value are delivered.
5 - Establish on-going process leadership
Some of Global Business Services’ unique benefits stem from the ability to standardise processes across the organisation, across functions. To that end, a key enabler of Global Business Services effectiveness is having process owners who control how a process such as procure-to-pay is run throughout the organisation. To be effective, these roles need to be set up as cross-organisation or group-wide mandates – with the teeth to enforce standards and drive change. In some cases, global process owners even have “pay-and-rations control” over the people working in their process areas.
To ensure success, CxO sponsors must aggressively manage change
Setting up a Global Business Services organisation requires significant change that affects a wide range of functions and business stakeholders. It is important to develop a structured change and communications plan well in advance that can help deliver clear and consistent messages to all functions and stakeholders involved in the process.
To read more about how your organisation can deliver the essential behaviours of Global Business Services, read our latest thinking now.
What’s in your pocket?
CFOs have long been confident in their ability to affect the cost side of the margin equation. But with multiple layers of overhead wrung out of the system and product costs rising unabated, unlocking the price side has taken on a certain sense of urgency.
Effectively implementing a pricing strategy, however, is more than simply viewing products on a cost-plus basis. It is also more than tracking pricing performance at the aggregate level. Instead, the promise of pricing is in the details: an effective strategy should rely on understanding economic profitability at the customer, product, and segment level—the so-called pocket margin—and using that information to inform overall decision-making.
To get to that level of detail, though, may require overcoming cultural, data, and compensation barriers to determine pocket costs. The effort is worth it, however: research has shown that pricing has up to four times more impact on profitability than other improvements. In this CFO Blog, we’ll look at the power of understanding pricing at the customer level and discuss ways to install pricing disciplines that deliver consistent, positive results.
What are pocket margins?
Customer-level economic profitability can offer an untapped reservoir of information—and potential for improved margins for CFOs. For example, which customer segments are being given unwarranted volume discounts; which are unaffected by slight price increases; and where are delivery promises being made that materially increase transaction cost, but are not charged for?
To get at that level of information, however, may require moving past the aggregate view of pricing (gross margin, net margin) that finance typically demands to the “pocket” view that takes into account everything from payment terms to freight costs in order to identify the true profitability of a transaction (that is, gross margin less detailed allocations of fixed costs and SG&A).
And from that information, CFOs can extrapolate how profitable individual products, customers, and channels are and inform decisions better business decisions.
Identifying and leveraging pocket information
While the analytic tools exist to identify costs at a pocket level, the data is often widespread and incomplete, and frequently siloed. To fully assess pocket costs, finance should identify the components that add or subtract value from the business on a marginal basis. Those include factors that are not part of cost of goods sold (COGS), such as expedited shipping, fixed-asset or fixed-cost productivity, the cost of capital included in payment terms, and the various discounts and promotions offered.
Working backwards from the list price, CFOs can use the tool to identify margin leakages and create visibility from a reference list price down to the pocket margin, including discounts, rebates, and other cost elements. While a product that earns 40% margin may look like the a winner in the product portfolio, if it turns out to be highly engineered and highly specialised, and requires extra sales support, it may not be. Instead, it may be the product that earns 20% margin and only has to be packed and shipped that you should be expanding.
Knowing what your costs are going forward may allow you to make the decisions that fit into the overall product strategy and build economic models that:
- Affect strategy - by making sure everyone involved in the pricing equation has a proper understanding of the economics of the business, CFOs can influence not just pricing policies, but overall business strategy.
- Educate stakeholders - Having pocket-margin information can allow a CFO to educate his or her peers, CEO, and the board about pricing policies that work.
- Institute controls - One outcome of pocket costing is often the exposure of “unwarranted discounting”—awarding discounts to customers whose volumes do not justify such action. One solution is to put limits on who can discount to what level and assign a finance person to authorize discounts that exceed that level.
- Create a single version of the truth - A single version of the truth allows individual functions to make decisions about resource deployment, such as where distribution centres should be located, how much product should be kept in inventory, and how goods should be delivered.
To adequately price in today’s competitive marketplace, finance should build economic models that maximize sale-by-sale profit. Central to creating those models is a granular understanding of customer analytics on a product-by-product basis.
The company wide deployment of such information can help clear the way for informed decisions about everything from channels and products to sales and advertising. In addition, once a company has an understanding of the impact on individual products and customers, that information can offer a window into other areas of operations, such as the proper levels of safety stock and the cost-effective delivery methods.
Finally, gaining a handle on pocket margins can give CFOs another tool for growth and allows them to further drive the alignment of pricing approaches with corporate strategies. Pricing, after all, can expand earnings faster than cost cutting. What’s in your pocket?
How using business operations metrics as leading indicators can provide better financial forecasts
As part of their performance management process, companies often rely heavily on historical information, or lagging indicators, to make decisions. Why? Because this information is clear-cut, readily available in information systems, and consistent with external reporting requirements.
But how can you see where you are going if you are always looking backwards?
Senior decision makers would actually be better served by using information on current operations—information that drives, or can be correlated with, future performance - or ‘leading indicators’, that can provide greater insight into future performance and allow for more timely decision making.
Why leading indicators?
Managers constantly make decisions to better the performance of their businesses. Many of these decisions involve making investment or resource commitments designed to drive improved, long-term performance, and, for these, managers often rely on historical financial data.
Using this historical data to make forward-looking plans has its limitations and over a given time - such as quarterly revenues or net profit - cannot be used to predict future performance. The real challenge for managers is to identify those operational events that can.
Leading indicators for a business enterprise include both qualitative metrics, such as customer satisfaction, product quality, and employee development, as well as certain key quantitative metrics, such as orders placed or sales forecast. Both types of leading indicators are essential and can help management make better decisions in a timelier manner.
Identifying and developing leading indicators
While the concept of leading indicators – such as customer satisfaction as a driver of repeat business - is easy enough to grasp, however efforts to “peel the onion” on leading indicator drivers within an enterprise often can produce confusion, analysis paralysis, and delay.
So, identifying leading indicators should be viewed as both a science and an art. The “science” aspect is measuring events that have a close correlation with the activity being measured. The “art” of identifying leading indicators is to know when to stop “peeling the onion.”
Steps 1 - Define future performance to forecast
- Identify Financial goals - determine the set of financial goals that drive shareholder value
- Identify top-level contributing activities - Break down each financial goal into the top-level set of contributing factors
Step 2 - Identify drivers of performance
- Define universe of drivers - To better understand the most meaningful drivers of performance, begin by identifying the list of potential drivers that could contribute to performance.
- Identify measures for drivers - To make effective use of drivers, they must be measurable, so identify the most appropriate measure for each driver.
- Analyse the correlation between the driver and performance to forecast - By definition, drivers have different cause-and-effect relationships with the performance to be forecast. Those with the strongest correlation are the most effective leading indicators of future performance.
Step 3 - Put leading indicators to work
- Formalise reporting of leading indicators - In order to capture their long-term benefits, leading indicators should be incorporated into standard reports and dashboards that are regularly evaluated by operational management.
- Incorporate into other performance management processes – Leading indicators can provide additional insight when fully incorporated into performance management processes, including strategic planning, annual budgeting, forecasting, and analysis.
- Incorporate into investment evaluation processes - Further benefit can be gained by incorporating leading indicators and drivers into business cases for investment. By definition, leading indicators have a strong relationship to shareholder value and allow for more effective quantification of investments.
Providing a future direction for the organisation
Incorporating the use of leading indicators can significantly improve management’s ability to direct the future course of the company. The key is developing quality metrics that are rooted in business drivers correlated with financial performance to use as the indicators and to engage all business unit managers in the process.