Get your financial organization close to the business.

Last year, Financial Executives Research Foundation published Changing Roles of Financial Management by Patrick J. Keating and Stephen F. Jablonsky. In the FERF study, Keating and Jablonsky chronicled the emergence of the competitive-team orientation in the financial functions of six leading U.S. companies, an approach to financial management that integrates finance in the lines of business. These companies have developed the team orientation, say the authors, to meet - and beat - competition. In the following article, Keating and Jablonsky take Changing Roles one step further- they suggest strategies you can use to implement the team-oriented approach in your organization.

As Corporate America moves toward leaner, more flexible, and more knowledge-based forms of organization, the walls between finance and line management are coming down. Organizations are moving toward a competitive-team orientation. For financial management, the team orientation means integrating a financial perspective into business strategy and line operations, and sharing financial control with line management. The result is greater efficiency of the financial function and a better overall management control system.

Financial work in a team environment is characterized by a shift away from top-down monitoring to down-lip competitive analysis, and from top-down hierarchical control of production operations to midlevel involvement in local process-improvement programs.

The hallmark of the team-oriented financial organization is "getting close to the business." For many traditional financial organizations, this will mean moving members of the financial staff out of the front offices and back offices of corporate America and onto the competitive playing field.

The four cornerstones of a team-oriented financial organization are:

* Service to customers - The members of the financial staff serve their customers - often company employees from other department - as advisors who understand the business.

* Shared control - The financial function relinquishes the role of corporate policeman, responsible for overseeing work clone by others, and becomes instead tile systems controller, responsible for monitoring the financial health of ongoing operations.

* Seamless communications When financial control information is generated as it by-product of basic operating systems, communication becomes part of the process. Financial professionsls in a world of seamless communications have dual responsibilities: responsibility for providing analytical support to the business units and responsibility for maintaining the integrity of the corporate information system.

* Sophisticated capabilities people, financial tools., and technology are required to support management at all levels within the corporate hierarchy.

All team-oriented financial organizations are anchored to these four principles to one degree or another. Each organization's history, culture, and competitive and regulatory pressures play an important role in determining which of these principles it will emphasize. 3M, for example, relies strongly on sophisticated computer capabilities for producing market-oriented performance reports. But Citicorp emphasizes seamless lateral communications through electronic mail.

Making the change

To create a team-oriented financial organization, you should begin by figuring out where you are now. Your present position determines the distance your must travel. And then you have to decide if you really want to take the trip.

You may find helpful the three types of financial orientations described in Changing Roles - the conformance orientation, the command-and-control orientation, and the competitive-team orientation - in assessing your current position and your most recent history. (See the excerpt below.) Each orientation describes it distinctly different pattern of financial participation in the management of the firm, and each requires a strategy different from the others. The challenges of transforming the conformance-oriented financial organization to the competitive-team organization are quite different from those encountered in transforming the command-and-control orientation.

To be successful, you need to develop a vision of team-oriented financial work that is compatible with your organization's culture, and focus on those changes that best demonstrate how the financial organization can add value to the firm.

Plotting your strategy

As we have said already, service to customers, shared control, seamless communications, and sophisticated capabilities are the cornerstones for restructuring the financial organization.

The figure below identifies four strategies for building a team-oriented financial organization. Each strategy links two of the cornerstone elements of the team-oriented financial organization. Involvement links service to the customer with shared responsibility for financial control. Integration links shared financial control to seamless communications. Investment links communication with sophisticated capabilities, and innovation links sophisticated capabilities back to the customer.

We have found that financial executives develop strategies consistent with senior management's operating philosophy. Merck, for example, uses innovation: Merck's financial people get close to the business by developing financial products that add value to line management. integration and investment support innovation. Ford, on the other hand, uses integration, supported by innovation and investment.

What follows is a discussion of each of the four strategies. Where appropriate, we have used specific examples from Ford and Merck.

Involvement

First and foremost, getting close to the business means getting involved, becoming players on the management team, not staying distant or isolated. The financial staff needs to move out of the front office and back office operations and get close to the action. As players on the field, they are expected to coordinate their specialized knowledge with other, equally competent players who are also making contributions.

Getting involved requires more than a declaration by the CFO. Financial people must be committed to providing service to the management team and be comfortable sharing financial control with line management.

For many financial executives, getting involved will require a complete change in mindset. A financial person aspiring to be a business advisor or business-unit CFO cannot function as a corporate policeman, independent commentator, or custodian of accounts. These roles, consistent with traditional concepts of workplace specialization and internal control, extend back to mass production management practices that promoted highly specialized, hierarchical patterns of work organization. They are, of course, antithetical to the team concept.

So if you want to get involved, you need to start with a realistic assessment of what line management and employees think about your financial organization.

Financial managers' perceptions of themselves frequently differ markedly from what line managers think of them. As one might expect, financial managers think they are actively involved in the business. But line managers think of the financial organization primarily in terms of command-and-control and conformance orientations, as independent and impersonal, and most certainly not involved. So we recommend that any financial organization attempting to adopt the team orientation get a heavy dose of line input when they begin the process.

Ford, for example, has taken the time and effort to assess realistically what line management thinks of its financial organization. As a result of this analysis, Ford's financial organization has moved away from facing off with line management to handing off responsibility to other members of the management team.

Integration

As organizations embrace teamwork, financial communications are restructured to match an operating philosophy of shared control.

In the new corporate workplace, the separation between those who do and those who control is diminished. The change toward greater self-management and the horizontal flow of information directly challenges the logic of financial control as a specialized activity of an independent financial staff. Instead, responsibility for control is entrusted to those who perform the activity and know best how to control costs - line management. Financial controls are integrated directly into the operating systems. And, rather than maintaining separate cost accounting and cost allocation systems, organizations are moving toward operating systems that generate cost information and using that information to monitor ongoing activities.

Shared responsibility for control does not signify less financial discipline but rather more effective financial discipline through a reconfiguration of responsibilities and information systems based on mutual trust and respect, instead of oversight and surveillance. The corporate financial information system will be considered a shared resource that supports the economic activity of the entire firm. Financial work and financial systems will be integrated into the fabric of the business.

How do financial executives who see the need for greater integration proceed? Ford is doing it by pushing responsibility for cost control down into the organization. Those who perform the activity - shopfloor workers, engineers, or line managers - are entrusted with the responsibility for cost control.

But at Ford, shared responsibility goes both ways. As line managers take on more responsibility for cost control, the financial staff is expected to take on responsibility for nonfinancial objectives. For instance, plant and division controllers "sign on" for quality objectives, which in turn affects their level of compensation. At the Wayne, Michigan, assembly plant, the plant controller has direct responsibility for all manufacturing quality problems related to door mechanisms for cars assembled there. The controller spends up to half a day a week on these problems and reports on them at the plant's Monday management staff meetings.

Seamless communications are based upon shared responsibility and shared values, which in turn requires information providers to be close to their customers. As Ford's finance staff become team players, financial personnel are integrated into the business units. Previously centralized plant-level staff functions are dispersed onto the production floor under the direction of production managers. Cost analysts, who in the past worked out of a central office under the direction of the plant controller, now work on the production floor and report in a matrix fashion to both the plant controller and the area production manager.

Merck's approach illustrates a different integration strategy. To foster shared responsibility for control with line management, Merck's financial organization has developed an aggressive program to educate all employees about basic financial concepts and how their actions affect profitability, and about the financial dynamics of the pharmaceutical industry. They are also educating managers about the ethical aspects of their stewardship responsibilities. As part of this program, Merck's financial staff has developed an educational simulation, called DRUG, or the Drug Research Uncertainty Game. The game helps educate managers about the risky nature of pharmaceutical research and the factors that must be controlled to insure competitive advantage and long-term financial success in the pharmaceutical industry.

While Ford has concentrated on tearing down the boundaries between finance and line operations, Merck has concentrated on tearing down the boundaries within the financial organization between treasury and controller, and between accounting and finance). The CFO (recently promoted to senior vice president) promoted cross-fertilization by placing key controllership responsibilities under the corporate treasurer and created a financial evaluation and analysis (FE&A) unit to cut across the long-standing boundaries within the financial organization.

Innovation

Service and leading-edge financial sophistication are the hallmarks of what's thought of as the value-adding financial organization.

How does a financial organization become a leading-edge financial innovator? It takes vision. It means moving financial people into the R&D labs and onto the factory floors close to the customer. ovation thrives in an environment where management expects, encourages, and rewards innovative behavior on the part of the financial staff.

From our perspective, Merck has made the most visible commitment to building a leading-edge financial organization. In the pharmaceutical industry, where R&D is king, Merck's financial organization stresses the importance of financial R&D.

Merck invests in the development of individuals with the drive and capability to do leading-edge financial work. Management accepts the responsibility for establishing a professional environment designed to encourage creative behavior. In exchange, top management expects a financial chemistry to take place similar to the chemistry that occurs in the research labs. As a staff person, you are given the resources and moral support to perform, but you are evaluated on the basis of the measurable difference that you make.

The R&D planning model developed by Merck's financial people embodies state-of-the-art financial modeling techniques and demonstrates Merck's strategy of innovation that combines sophistication and service to the customer.

The planning model provides management with a tool to explore the economic and regulatory implications of alternative investment decisions with greater sophistication and in greater detail than had been possible in the past. But beyond mere analytic sophistication, the model promotes management integration through the numbers. Members, of the management team can now see the complex interrelations that must be managed across functions and over time for Merck to be a success. By providing a common language and a common set of definitions and terms, the model has paved the way for improved communications.

At Merck, the formula for marrying sophistication with service is not left to chance. Merck's entire financial organization operates under a strong issues orientation to insure that innovative behavior addresses the needs of the business. in the words of Frank Spiegel, the former CFO who initiated this process and who is now senior vice president, "Once you get through people and technology... it is an analysis function and an issues function that really makes the [competitive-team orientation] work. We've identified 10 key issues in the company. That's all we want to have. And we rang bells like the Salvation Army making people address issues, to come up with strategic action programs to deal with these issues. And we feel if that's successful, we're going to be successful."

All analyses produced by the staff members must be focused on these issues. Merck's top financial executives meet routinely to formulate and monitor the strategic direction of the financial organization, including making an assessment of the most fruitful areas for development of new financial products. The CFO also holds monthly strategic issue sessions, which deal with such issues as R&D productivity, asset utilization, capital structure, and manufacturing cost control. The meetings serve as brainstorming sessions which result in new ideas and proposals for financial products a decision tools.

Benchmarking overcomes complacency 

Innovation at Ford has a different twist. With its "whiz kids" reputation, no one has ever accused Ford's financial organization of lacking sophistication. The problem at Ford was the complacency and bureaucracy that had set in during the decades of post-war market dominance. So innovation at Ford means breaking free of this complacency and the institutionalized management practices that put Ford behind japanese automakers in quality, cost, and development time.

To break free, Ford managers needed competitive benchmarks that provide realistic signals about competitive performance, and streamlined systems of financial control to speed up organizational processes while trimming corporate overhead.

In the area of competitive benchmarking, Ford's finance organization has led the industry in its ongoing analysis of Japanese manufacturers' cost advantages. But the phrase that best captures the innovation thrust at Ford is "continous process improvement." The finance organization has undertaken a highly visible and successful program of continuous process improvement. Through an aggressive program of systems simplification and consolidation, the finance staff of the North American Automotive Operations was reduced by approximately 40 percent from 1979 to 1987.

At Ford, the strategy of systems integration goes hand-in-glove with systems innovation (via simplification). it addresses the overlaps, gaps, and double handling of data resulting from organizational chimneys and fragmented information and control systems through cross-functional process simplifications. As a result of past fragmentation of manufacturing processes, Ford managers do not have timely or detailed access to vehicle product cost information. The finance organization is currently in the process of developing a whole new information architecture for a common manufacturing management system.

While innovation is synonymous with sophistication at Merck, innovation is process simplification. The two different strategies are directed at two different sets of needs. But both efforts at innovation are grounded firmly in a team-oriented, customer-focused financial management orientation.

Dan Coulson, former corporate director of accounting at Ford, sums up the relationship between continuous improvement and customer service this way, "We know we have to improve our quality. We know we have to become more customer oriented. We know we have to reduce our costs. And we know we have to do these things as far forward as the eye can see. It's with that perspective that all of us come to work every single day - and that means everything we're looking at in our accounting.

"We're always looking for ways to do it better and more efficiently to satisfy our customer, mostly our internal customer. Because of the environment we're operating in, everything we're doing is challenged on a continuous basis for ourselves."

Think "investment"

Whether it's the development of sophisticated capabilities or an aggressive program of process simplification, innovation does not come free. Innovation requires investment. Financial executives must learn to think in terms of a return on human investment and investment in technology. The language of investment must take priority over the language of cost. When you think cost, you try to minimize your expenses. When you think investment, you try to maximize your return.

To make the transition onto the economic playing field, financial executives who have managed large front office and back office operations must be prepared to invest in the development of people and systems capable of financial innovation and sophisticated analysis. For those individuals who have worked in the back offices of the financial organization, sophistication will most likely focus on developing knowledge of the business and developing better communication skills. For those individuals who have worked in the front offices, sophistication will most likely focus on climbing down from the ivory tower and coming into contact with suppliers, customers, and shopfloor workers.

A revealing aspect of Merck's commitment to being a leading-edge financial organization is evidenced by management's investment in people. While Merck had the lowest ratio of financial function costs to company sales of all the pharmaceutical firms reporting these figures in a recent study conducted by the Pharmaceutical Manufacturer's Association, it had the second highest cost per financial employee in the financial planning and analysis area. This figure is consistent with Merck's strategy for building a leading-edge organization by investing in high-impact individuals who possess the skills and talent to produce financial innovations that enhance the profitability of the firm.

As we noted earlier, Merck hires individuals with the talent to do leading-edge financial work. But Merck recognizes that hiring the best does not guarantee innovation. Hiring practices must be complemented with effective human resource development practices. To insure that managers take training and education seriously, staff development is integrated into the performance evaluation system. In calculating year-end management incentive compensation, a certain number of bonus points is given to those managers who at least reach the floor on expenditures for training and development. Additional bonus points may be earned by investing additional resources in training and development. Between 1986 and 1987, the financial organization increased its budget for training and development by over 20 percent.

Ford invests in process improvement efforts. Process improvement has received the attention of top management as well as the board of directors. A process improvement unit located at corporate headquarters has lead responsibility for the development of process simplification and systems commonization projects.

Possibly the most telling evidence of Ford's seriousness about process improvement is budgetary in nature. From 1979 to 1987, when Ford cut its finance staff overall by some 40 percent, its process improvement unit increased the quantity and quality of its staff, the only organizational function to do so.

Do it your way

Change is not easy. Nor is it effected over night. Ford still has its share of chimneys and green eye-shaded controllers. Merck surely has its tree trunks - staff (and line managers) whose deeply rooted commitments to past practices impede change. As the famous economist Lord Keynes noted, "the difficulty lies not only in the new ideas, but in escaping from old ones." To meet this challenge, financial executives must combine broad vision and single-minded persistence in breaking down old habits and building up new ones with the commitment to support all those who must make the journey together.

Every firm has its own unique history and competitive environment that shape the organization of the financial function. The specific strategies for building involvement, integrating financial systems and structures, offering innovative financial services, and investing in new capabilities will differ from firm to firm. We cannot and do not offer a fixed formula for change. We hope, however, that the framework we have described will help financial executives customize their own strategies for building a team-oriented financial organization.

The orientations of financial work where does your firm fall?

* Command-and-control orientation: This orientation of financial work is found in firms with a traditional functional organization and a chain-of-command style of management. It stresses corporate oversight, operating efficiency, and conservation of corporate resources. in these firms, the financial organization provides an independent financial assessment of business plans.

* Conformance orientation: It is found in organizations that do a sizable amount of business with the government or those subject to pervasive government regulation. The financial function is organized as a bureaucracy, with fixed routines for processing financial information. This orientation is subject to external accountability, technical compliance with rules and regulations, and technical bookkeeping procedures. The financial organization in these firms is the repository for all the technical and procedural knowledge required for compliance with externally imposed regulations.

* Competitive-team orientation: Firms with this type of financial orientation are ones where financial work is focused on the market, those that integrate financial work into the business organization, and those that use the matrix style of management. Companies with this orientation stress commitment to using financial analysis to enhance the firms' core competitiveness and strategic competitiveness through customer service, financial leadership, value-added involvement with the management team, and a sophisticated knowledge of the business.

--From Changing Roles of Financial Managaement