Assessing Finance Effectiveness

Is your Finance function effective?

There are many different ways of looking at the performance of a Finance function. As with any question of performance, before you can tell how well you’re doing, you have to know “what good looks like”. How can we tell if we’re doing a good job if we don’t know what the definition of “good” is?

Normally, the definition of doing a good job is that you are meeting your objectives and making the progress you wanted to. So, you have to know at the outset what your objectives are and what progress you want to make.

Mission and vision

At an organization level (and the Finance function is an organization within a business), those are questions of mission and vision.

A mission is what you do, and includes the purpose of the organization. A vision is what your aspirations are in doing what you do.

The way I see things, the purpose and mission of the Finance function is to drive business performance. And our vision is to do that efficiently, but also primarily effectively, such that the performance of the business actually improves.

Efficiency and effectiveness

So, the performance of the Finance function should be assessed in terms of both effectiveness and efficiency.

It’s effectiveness that I want to talk about mainly today. And we measure effectiveness in terms of how good our Finance functions are at doing what we’re here to do – driving business performance.

Assessing Finance EffectivenessThat’s not to say that we don’t care about efficiency. It’s just that the standard way of measuring efficiency is by benchmarking – comparing how our efficiency measures up to other organizations on a consistent basis. And you’ll need to spend some money with someone like The Hackett Group to do that. They’ve defined standard efficiency measures and collect data to enable these comparisons. It is worth doing if you are ready to have a fully rounded Finance strategy. Once you have the efficiency performance measures, you will be able to report them regularly. And then periodically you can update the benchmark data if you want to.

Effectiveness, on the other hand, can be looked at fairly subjectively, and that’s where it can be useful to know what kind of questions to ask. We can suggest what good looks like, but we may not have a numerical metric and a scale to work on. In cases like this the actual scores are not so important. It’s the identified areas of improvement that matter most.

A word of caution, though. Accountants love numbers and data. And managers gravitate to the performance measures they can influence most easily. So if you have ten numerical efficiency KPIs for Finance, and a couple of subjective effectiveness measures, Finance managers will naturally focus on efficiency.

And yet, I would argue that effectiveness is the most important. There’s no point being really efficient at being ineffective!

What is an effective Finance function?

As I said earlier, an effective Finance function is one that carries out its mission well, it drives business performance. But there are several angles in looking at how well a Finance function drives the performance of the business. Here are a few:

  • Functional leadership
  • Communication
  • Culture
  • Skills, training and development
  • Innovation and transformation
  • Continuous process improvement
  • Teamwork
  • Business partnering

These are all angles that are worth considering. And I mention them only so that what I’ll outline below is not the full picture. But it will give a good start.

The angle I find most valuable is to ask basically how well the business manages performance. Because if the business is doing a good job of managing performance, the CFO and his/her team is probably doing a good job of making that happen.

The reasons they are doing a good or bad job may or may not be due to the CFO. That’s not the point of this angle. It’s not concerned with how well the CFO is performing. The point is to highlight areas where the CFO and Finance can help to improve the management of performance, and therefore drive performance.

The major advantage of this approach is that it keeps Finance focused on the business, rather than on itself. Any areas of improvement identified by this approach will tend to be driven by concern for business performance, which is the kind of mindset we want to encourage.

How is business performance managed?

If you’ve seen anything else from Supercharged Finance, you may have seen that I see business performance management as made up of eight key activities:

  1. Strategy and planning
  2. Execution and delivery
  3. Measurement and reporting
  4. Analysis and feedback
  5. Risk management and control
  6. Stakeholder management
  7. Resource management
  8. Transaction management

Points 1-4 make up the performance cycle, points 5 and 6 relate to the performance environment, and points 7 and 8 are the performance hub.

Driving business performance is a combination of how well each of these things is done, and how cohesively they work together. See the 7-minute video on the superchargedfinance.com website for slightly more explanation.

Finance effectiveness self-assessment

Hence, when assessing the effectiveness of a Finance function, I tend to follow those headings. I would outline “what good looks like” for each one, and point out the most important integration points with the other activities.

And this is a good point to mention the Finance Self-Assessment Questionnaire that we’ve got available on the superchargedfinance.com website. Download it by clicking here and following the instructions (there’s one more button to click, as far as I remember).

That’s exactly the process the questionnaire follows. It takes each element listed above. It then outlines “what good looks like” and the important links with the other BPM processes. And then it goes into a series of questions, so that you can assess how much room there is for improvement in your business. It’s not an exhaustive list of questions. But there is plenty there to get you going (more than 120 questions altogether). And these questions will spark others in your own mind that will be more specific to your business and your Finance function.

Finance strategy
assess finance effectiveness and make a plan

What this self-assessment does is to provide part of the strategic analysis (what I’d call the “factbase”) for your Finance function. It is only a part, as I said before. However, that strategic analysis should indicate your strategic priorities, and your strategies will emerge from that using the insights gained.

So, if this is part of your strategic fact finding, make sure you also consider efficiency, and brainstorm to identify the strengths and weaknesses, opportunities and threats relating to your Finance function.

The main thing you will have to reflect on (and I can’t give a “silver bullet” answer on this) is how you bring about necessary change when Finance is not directly responsible for an area where improvement is needed. If another department is falling down in an area of business performance management, how does Finance drive an improvement, and thereby drive better business performance?

My advice would be to think of options for either direct or indirect action. For example:

  • You could influence the management in the area responsible, through showing them the impact of the weakness, and showing them the benefit to business performance if they make the improvements you suggest.
  • You could introduce a Finance control to give Finance an avenue to send things back for rework, which eventually should get the message across. At some stage you will be asked for an explanation of the amount of rework requested, and that will be an opportunity to then work together to improve things.
  • You could escalate to the CFO or CEO, explaining the impact on business performance, and ask for their support in requesting improvements.

But remember two things:

  1. Any transformation, any strategy, is likely to involve a long journey. You will not solve everything at once, and sometimes the best way is to start with small steps. And it’s best to bring the business with you, rather than continually telling them where they need to improve. The most important thing is the direction – having the aspiration, the mission and the vision.
  2. Even if you are only able to influence a small improvement in what the other department is doing, it is more than if you’d never done the analysis and never spoken about a need to improve.

Conclusion

Assessing your Finance function is crucial if you want to know what the right things are to improve. There are several angles from which to come at the performance of Finance. However, I believe that since the purpose of Finance is to drive business performance, the primary angle should be to look at how effectively the Finance function does that.

Please do have a look at the Finance Self-Assessment Questionnaire to help you kick off an assessment of your own Finance function.

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