Six Levers for Digital World Class Finance Performance

July 6, 2021
5 Min Read

Finance leaders have been counting on technology and digital transformation to accelerate performance improvement. But how high can you reasonably expect the bar to go? Now, we have a clearer idea.

In 2021, we incorporated the structural changes associated with technology innovation and digital transformation into our annual benchmarking methodology, creating a new target that we call Digital World Class. Here’s what we found:

In 2021, digital world-class finance organizations are operating at 43% lower cost[1] than typical finance organizations (i.e., peers), with a 48% productivity advantage. But their advantage is not just about cost. They are also able to deliver higher-quality services – for example, they spend more time on forward-looking analysis to inform future decisions. And they are 39% more likely than peers to be perceived as agile in meeting business challenges. It is this type of value contribution that drives the ability to be a strategic partner to the business, which happens to be the top priority of chief financial officers (CFOs) for 2021.

The bar will continue to go up from here. In this article, we highlight the performance characteristics of digital world-class finance organizations and the six key levers that they pull to get there.


 

Understanding the sources of Digital World Class performance

Rationalizing the legacy technology environment has traditionally enabled top-performing finance organizations to operate with a lower technology cost than peers. Digital World Class finance organizations continue to modernize the technology landscape, which explains why their technology cost is 19% less than that of peers. But they also invest in technology architecture modernization and emerging technologies such as smart automation, advanced analytics, and collaboration tools that enable greater automation.

Their cost, productivity and technology advantages reflect their ability to substitute labor with technology; however, not all technology cost is associated with labor-eliminating automation. As the finance service portfolio shifts toward higher value-added services, leaders also invest to equip their expanding pool of knowledge workers with modern digital tools.

Furthermore, Digital World Class finance organizations operate with 63% fewer full-time equivalents (FTEs) in transactional processing roles than peers, but just 21% fewer FTEs in financial planning and analysis (FP&A) roles and 36% fewer in specialist finance roles. This indicates a shift of resources into higher-value roles, explaining their superior value contribution, customer experience, and effectiveness.

 

Digital World Class finance organizations excel in six areas

Technology enablement is at the heart of the Digital World Class performance advantage. However, to fully unlock the potential of technology, your organization must also transform in five other key areas. Here’s a look at how Digital World Class finance organizations do it.

  1. Technology enablement

Finance automation efforts have traditionally focused on transactional processes such as accounts payable and accounting. By upping the automation quotient, the function has been able to reduce or even eliminate manual intervention, thus significantly lowering process cost. Digital World Class finance organizations have a clear lead in transaction automation over peers and in some cases have reached maximum levels. For example, they have automated 96% of journal entries, versus 77% for peers. They also receive 83% of supplier/vendor invoices electronically, versus 50% for peers.

These organizations have also made substantial inroads in automating knowledge processes, freeing up staff capacity to perform value-adding work and building a strong data architecture to enable insight generation and self-service reporting and analysis. For example, 73% of Digital World Class finance organizations provide online access to management reports and the ability to run ad hoc reporting and analysis, compared to just 40% of peers.

 

  1. Data and analytics

The coronavirus outbreak and its business and economic repercussions lent new urgency to improving forecasting and analysis. In our 2021 Key Issues Study, improving analytics, modeling and reporting was the No. 3  transformation initiative on the CFO agenda. The heightened demand for faster and more accurate forecasts is forcing organizations to rethink their existing data analytics approach and required tools. Sophisticated FP&A teams are beginning to create an end-to-end view of the data analytics process, automating data collection and embracing new analytics techniques such as predictive modeling. Digital world-class finance organizations have a significant head start. They spend 2.4 times more time employing sensitivity, investment and value analysis techniques, and 38% more analytical time focused on proactive decision-making, rather than historical reporting.

They also have a more robust data foundation as part of their modernized digital architecture: 95% of digital world-class finance functions have a central data repository to generate business performance reports, versus only 67% of peers.

 

  1. Cloud-based modern architecture

The Digital World Class finance transformation involves integrating or retiring legacy systems, adopting emerging technologies, migrating applications into the cloud and integrating data from disparate sources. Modernizing architecture design and managing it effectively are absolutely critical for simplifying the complexity. Probably the most impactful aspect of finance architecture modernization is the transition to the cloud. Our 2021 Key Issues Study projects 25% year-on-year growth in adoption of cloud-based core finance application suites, and most finance best-of-breed applications are now deployed in the cloud.

Digital World Class finance organizations are at the forefront of architecture modernization and cloud migration. They have developed clear capability ownership models within finance via process ownership roles and forged effective partnerships with their internal technology groups, leveraging the deep technical skills required in both finance and the technology organization. Finance organizations with large-scale cloud deployments are 32% more likely than peers to meet enterprise business objectives and 44% more likely to meet finance functional objectives.

  1. Operating model evolution

Digital World Class organizations are evolving their operating models from primarily labor-centric to technology-centric. This transition has far-reaching implications for the finance operating model. The model will shift from predominantly functionally aligned resources (i.e., under the control of the CFO) to a hybrid model of functionally and enterprise-aligned resources. One key change will be the digital enablement of global business services capabilities. In this future state, the relationship among the finance organization, internal technology group, and the evolving digital operations organization, as well as external service providers, evolves from a rigid hierarchy to a fluid network of resources that can be deployed to support the highest-value activities across the enterprise. Our analysis projects that finance resource allocation will shift from 36% enterprise aligned today to 65% enterprise aligned in the future model.

  1. End-to-end process design and ownership

The expected pacing of transformation and deployment of new capabilities underscores the importance of end-to-end process design and ownership within finance. It is critical for the function to have capabilities designed to deliver the expected outcomes. Customer-centricity must be at the forefront of these designs. In our 2021 Key Issues Study, the leading impediment to finance transformation was process and technology complexity. When a process is executed in a piecemeal fashion, it is not only more expensive; it also undermines the ability to respond quickly to changes in business conditions or stakeholder demands. Dedicated global process owners oversee and govern the process, data, and technology capabilities from start to finish and, therefore, can spot bottlenecks and make changes more easily. Digital World Class finance organizations are significantly ahead of peers in this regard. For example, 100% have an end-to-end process owner for the general ledger accounting/consolidation process, compared to only 57% of peers.

  1. Talent

With many processes becoming more technology-enabled or migrating to digital operations centers, leading finance organizations are rebalancing their workforce and increasing FP&A head count as a percentage of total FTEs to improve their ability to foresee change and affect strategic business decisions. Digital World Class finance functions have 42% of total staff in FP&A roles, compared to 28% for peers. Highly skilled business enablement leaders are at the core of FP&A. This role requires advanced analytical acumen to drive insight and technical IQ to deliver operational efficiencies through automation and digitization of work, as well as skills essential to business partnering such as emotional intelligence, relationship management, innovation, and change orientation. This role also requires enhanced understanding of business operations. Digital World Class finance organizations are 85% more likely than peers to have staff with direct operations experience. Those in digital operations roles will also require new skills. For example, they must understand process mining, intelligent automation techniques and customer-oriented service design.

Mobilizing your journey to Digital World Class

The key to moving forward is to start by understanding where you can unlock new value:

  • Create a baseline of key performance indicators for your current levels of efficiency, effectiveness and experience.
  • Assess the capabilities and maturity of your current finance operating model, resource allocation, and technology effectiveness based on leading and emerging best practices.
  • Identify and prioritize performance gaps that outline critical focus areas for accelerating digital progress and future business needs.

From there, you can begin to design future capabilities to advance your digital agenda and chart the road map for achieving your Digital World Class aspirations.

[1] Finance operating cost as a percentage of revenue; for a $10 billion company, this represents finance cost savings of $41.4 million.