In this summary, we will cover:

  • Managers in finance function play an important role in a transformation initiative
  • The importance of a financial base for a transformation initiative
  • How to fully realize the benefits of a business transformation

Takeaways:

Transformational initiatives can improve a company’s earnings by 25% or more

  • If CFOs are charged with a broader spectrum of roles in the transformation plan, they can transform the finance function itself through modeling the right behavior and mindset within the organization.
  • It is only possible to establish the true value of a transformation by comparing it to a clear baseline, which is a typical finance function.
  • Finance professionals rely on their knowledge of the business to determine the key players in setting the assumptions when evaluating the likely performance of the company without any material transformations. And from that evaluation, the company should be able to evaluate its level of success with and without any transformation. The results should then be used to communicate the progress of the organization to all stakeholders.
  • Even after creating the perfect financial baseline for a transformation, the execution could still pose a danger to the success of the whole process. Lack of coordination and initiative between the various functions can prevent the full benefit of a transformation from being realized.

Summary

 The involvement of the finance function in an organization’s transformation plan is very important.

When an organization needs a change in its performance, managers will push for a business transformation. The changes may be fundamental to the extent of altering the primary operations of the organization such as marketing, purchasing, accounting, or research and development.

Reports show that transformational initiatives can improve a company’s earnings by 25% or more.

From the nature of such changes, the financial input can play a big role.

CFOs are key players in any organization when it comes to implementing financial processes, both routine and new business processes. CFOs have a wider view of the processes in an organization and by extension; the value that change may bring to an organization. Despite the change being sponsored by company CEOs, the finance unit of an organization has the ability to measure the value of that change.

It is unfortunate that most organizations with chief transformation officers vest the whole process of change entirely on such executives – while other units of the organization are left to handle the implementation part in their respective departments. This leaves the CFOs with a lesser role to play in the whole cycle of change.

Most managers like to focus on visible or big projects that have almost instant results; this makes them miss out on the future-oriented transformations whose results may not be felt immediately but over time. And due to this conventional way of handling the business transformation initiatives, the real benefits are never fully realized.

If CFOs are charged with a broader spectrum of roles in the transformation plan, they can transform the finance function itself through modeling the right behavior and mindset within the organization.

Setting an explicit financial baseline
It is only possible to establish the true value of a transformation by comparing it to a clear baseline, which is a typical finance function.

Consider this:

One may not know the true value of a transformation if a company achieves an earnings increment of, say, $50 million in a market that increased by the same margin. In the same way, a transformation which led to a decrease in revenue by 10% may sound like a total failure to non-financial team members, but it would otherwise have made more sense to evaluate and realize that the overall market dropped by 20%.

Besides, the performance of an organization can be altered by a lot of other factors; factors not relating to a transformation. These may include the price of commodities fluctuating, poor monitoring and evaluation, restructuring expenditures, or opening and closure of production plants. As simple as this may sound, more often than not, most non-financial executives get it wrong.

Most baselines set by companies are based on the previous year’s financial statements; as much as that sounds like a fair parameter to use, there’s one problem with it.

Last year’s statements may not portray the true conditions of the business in the current year – take for instance a soft drinks company which might have encountered one-time adjustments in sales revenue due to favorable climatic conditions, or the revenues might have dropped due to unfavorable climatic conditions. The same can happen to other industries.

Another example would be a company dealing in equipment sales with sporadic price shifts due to competitions and so on; relying on the previous year’s financials might not be the best yardstick for setting transformation goals in the current year.

In such a scenario, the managers would be required to obtain a forecast of the expected deterioration in prices for every region and for the company as a whole.

Financial specialists regularly use baselines in evaluating the value of single initiatives and general transformation performance.

Establishing a baseline often involves a lot of processes and this differs from one company to another; there is no single formula for adjusting a baseline.

If for example, an IT company seeks to set a baseline, it might be crucial to consider variations in the prices of commodities, an increase and reduction in sales from one market to the other, and the likely effect of additional programmers and software engineers.

Finance professionals will ultimately have to rely on their knowledge of the business to determine the key players in setting the assumptions when evaluating the likely performance of the company without any material transformations. And from that evaluation, the company should be able to evaluate its level of success with and without any transformation. The results should then be used to communicate the progress of the organization to all stakeholders.

Categorize all value-adding initiatives
Transformation within an organization requires a lot of time and money, so managers are always forced to set priorities according to their values. This is to prevent resources from being strained by lesser important activities.

Consider a restaurant whose managers are certain that their dismal performance is due to low sales volumes. Of course, if sales were to be increased, that would be a great strategy; but then the profit margins were also very low to an extent that more sales were unlikely to have a significant impact on the restaurant’s performance.

The managers must have overlooked the possibility of cutting down on the operational costs which offer a much better chance of improving the performance of the restaurant.

If financial knowledge was incorporated in such a scenario, possibilities such as reducing operational costs to improve product margins would have been considered.

Ensure the benefits of a transformation are fully realized
Even after creating the perfect financial baseline for a transformation, the execution could still pose a danger to the success of the whole process.

At one time in a certain firm, managers needed to hire equipment for a certain job. They successfully negotiated the rates and took custody of the items. But when the job was done and the rental period had expired, they failed to return the equipment as agreed. Luckily, a member of the finance team noticed the extra equipment in the assets register and alerted the managers to return the rented equipment before they had accrued significant costs.

As you can see, lack of coordination and initiative between the various functions can prevent the full benefit of a transformation from being realized.

Conclusion 
Generally, the finance function has a big role to play in an organization’s transformation initiative. Finance professionals can help cut costs especially when the resources are strained, and most of the time, they are.

 

References:

https://www.mckinsey.com/business-functions/rts/our-insights/transformation-with-a-capital-t
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-cfos-need-a-bigger-role-in-business-transformations
https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Strategy%20and%20corporate%20finance%20special%20collection/Final%20PDFs/McKinsey-Special-Collections_RoleoftheCFO.ashx