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May 12, 2018

Breaking the Finance Cost Barrier

By Nilly Essaides  – Senior Research Director Finance/EPM/FinOps at The Hackett Group

For the past several years, the cost of running finance organizations has been flat, even for the best-performing organizations. The Hackett Group’s research shows world-class finance organizations continue to run their finance functions at around 40% less than typical finance organizations.

Why have leading finance organizations’ cost basis plateaued? Over time, these functions have squeezed as much inefficiency out of their operations as possible. They’ve optimized their processes. They’ve rationalized their technology infrastructure to spend a lot less on system ownership and support. They’ve used automation to improve cycle time and reduce manual intervention. They’ve shifted repetitive, standardized activities into shared services centers, outsourced them, or moved them offshore.

Reducing finance cost is not just an exercise in cutting expense. It’s about building a leaner organization that (1) frees up funds for redeployment into growth opportunities; and (2) creates a more agile base for finance to be responsive to the demands of its stakeholders.

Finance has been stuck for a while. How can it break through the cost barrier? One answer is by more broadly adopting digital technologies. Our Digital Opportunity Model attempts to identify the potential savings that could result from mainstream adoption of smart technologies, by applying an estimated percentage “digital enablement” factor to their performance. It produces the probable impact of mainstream adoption of digital tools on the cost of world-class and peer finance organizations. (The populations are determined based on a robust set of efficiency and effectiveness metrics.) The results for 2018 are just in (see image below).

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By broadly adopting digital tools, both world-class and peer finance organizations can significantly reduce their finance cost as a percentage of revenue. World-class organizations can cut cost by 21%. Peers can reduce cost by 35% (because they have more inefficiencies). Indeed, the model shows that peers can almost catch up to current world-class status by going fully digital. However, the reality is that the challenge of meeting the world-class bar will get harder, as world-class finance organizations continue to optimize their processes, refine their service delivery model, and more broadly adopt new technologies. However, even if the gap remains the same, the absolute numbers are bound to decline.

For more on this topic, see How Finance’s Intelligent-Enterprise Mindset Fuels Smarter Processes.