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Refreshing The Financial Operating Model To Enhance Business Performance & Increase Business Accountability

SITUATION:

The financial performance of the business was consistently below expectations with margins dropping by up to 70%. Readily available explanations were becoming less convincing, and whilst the business was perceived as a market leader it now faced an uncertain future.

The performance management of the business had evolved over many years, leading to inconsistent reporting across functional areas, poor alignment of financial goals to strategy and a financial performance framework. This impaired staff performance with no consequence management.

The ability to make decisive investment decisions was halted because the business understood the cost of each line item but could not equate this to client value. Client pricing was no longer transparent, with pricing decisions taken remotely from head office and margin control at best described as weak. The financial management of the business was inhibited, by a lack of information, an inappropriate financial operating model and ineffective financial performance measures.


CHALLENGE:

The business, a major player in the market, needed to redefine its financial operating model in the light of poor business performance, changing market conditions and client expectations. The business was facing a difficult time:

  • The cause of financial leakage remained vague and fiercely disputed, wasting significant amounts of senior management time and energy.
  • The financial model was inappropriate as the “true” cost of business was not accurately reflected against specific functions or lines of business.
  • The historical client proposition had been built on cost and not on value, effectively putting the client in charge of how services would be provided, but accountability and risk being borne by the business.
  • The contracting “mindset” was submissive with performance incentives being the primary and often the only way, a profit could be made, whilst hefty performance penalties were contracted and regularly incurred.
  • Earnings were not solely attributable to the core service offering, and frequently overshadowed by billing for non-core items – ironically this was becoming a major profit driver.

APPROACH:

The Vsolution multi-disciplinary project team adopted a five stage approach, which included establishing a solid fact base to identify the cause of financial leakage and designing a robust financial operating model that supported value based pricing within the context of a Client Value Proposition.

BUSINESS OUTCOME:

The implementation of the new financial operating model increased financial control through a few key, defined control points, improved financial accountability and provided a platform to challenge the current way of doing business in order to drive increased efficiency and effectiveness. The main achievements of the new financial operating model included:

  • Increased accountability for line managers, functional heads and corporate overheads that improved overall cost control and business investment focus.
  • Line managers and functional heads were given clear financial ratio targets specific to their span of control.
  • The level of corporate overhead was minimized and assigned to an accountable executive.

BUSINESS OUTCOME:

The implementation of the new financial operating model increased financial control through a few key, defined control points, improved financial accountability and provided a platform to challenge the current way of doing business in order to drive increased efficiency and effectiveness. The main achievements of the new financial operating model included:

  • Increased accountability for line managers, functional heads and corporate overheads that improved overall cost control and business investment focus.
  • Line managers and functional heads were given clear financial ratio targets specific to their span of control.
  • The level of corporate overhead was minimized and assigned to an accountable executive
  • The achievement of targets necessitated an active involvement of all managers in the budgeting process a so they could accurately predict the financial resources and contribution their area of accountability would deliver…enhancing management performance.
  • A consistent basis for financial evaluation across all lines of business that supported the identification and control of “financial leakage” and improved financial decision making and financial performance.
  • Introduction of standard rate cards, and centrally monitored discount allowances / allocations supported improved governance and management control.
  • Standard reporting across business areas highlighted variances and provided internal benchmarks.
  • Clearly defined financial performance targets provided direction and robust performance management.
  • The introduction of transfer pricing created constructive tension between the “business” and service providers, enabling the “business” to make sound financial decisions and encouraged support functions to identify and provide value adding service bundles.
  • The creation of service bundles by each of the support functions delivered value adding services – relevant and appropriately priced.
  • Business took accountability for the “purchase” of services required, and were now in a position to better manage costs through demand management – volume and specification.
  • An established framework supported client pricing, based on market value and not input costs, resulting in revenue being driven by the value created for the client.
  • Clearly defined financial performance measures cascaded from the Business Strategy, and aligned all elements of the business, including embedding the measures in individual KPIs.

INSIGHTS:

  • Human reaction to increased accountability and performance transparency needs to be recognised and addressed for the implementation to be successful. It is not only about the financial model.
  • Whilst a new financial operating model is a good first step, the business needs to develop the ability to design and sell value based propositions.
  • The business must adopt increased discipline w.r.t to business processes, in particular transfer pricing and performance management, if the full benefits of the financial operating model are to be realised.
  • The Budgeting & Planning process will include “contracting” between business and support functions, as budgeted costs often depend on volumes and specification of service. This will require modification to the budget process that allows sufficient time for the contracting to take place.
  • Transfer pricing becomes a constructive “negotiation” about service bundles and service specifications / expectations. This must be seen as a positive business outcome and given the necessary time, support and governance.
  • Increased Exco control and accountability will require changes to governance – different approaches to meeting structures, business reporting, contract approval and risk management will be the primary changes.
  • Ready acceptance of reporting structures may be elusive, particularly if it increases individual accountability, this is often best driven top down.