Finance transformation in the competitive business environment

Finance transformation in the competitive business environment

The finance functions in Indian companies are facing increasing demands as a result of the dynamically growing business environments, rapid technological changes, increased linkages with overseas environments  and enhanced standards of reporting, etc. In this evolving business scenario, the chief finance officers or CFOs are seen putting a lot of thought into transforming the finance functions. Such finance transformations include revisiting structure of finance function of their respective organisations to make them more agile, efficient and effective in managing costs and risks.

Over the years, it has been observed that legacy and decentralised structures have become inefficient from control, cost, scale and risk perspective for companies with multiple units and locations. In the 1990s most business units operated in a decentralised fashion and the reverse is true in most present circumstances.

A recent study indicates that 75 per cent of Fortune 500 companies have adopted some form of centralisation and shared services. Many still view a pitch for centralised transaction processes or shared services as solutions to lower costs. However, this is no longer true, especially in today’s environment which necessitates enhanced controls, reporting and certification on internal controls.The regulatory environment in many cases today necessitates certification by board of directors and auditors that the organization has an effective system of internal controls. A case in point is the recent requirement of Indian Companies Act, 2013, which mandates directors of the companies as well as the auditors to certify that the company has an adequate IFC (Internal Financial Controls) system in place and that these are operating effectively.

The example of a centralised worldwide transaction processing of an American Fortune 500 MNC during late 1990s into a shared service center established out of China shows a lot of planning and effort that lead to achieving defined systematic processes and enforcement of standards.  This even included the lesser insignificant job of convincing the managers that Chinese accountants could understand accents from the western hemisphere. Given the benefits, we could be more confident that most, if not all, transactions are processed in accordance with policy. A simple test case could be about a business travel policy that mandates all air travel less than four hours to be undertaken by economy class, to be rigidly enforced by all units, all transactions to be processed the same way, resulting in enhanced efficiency and control. Also, there would be no risk of a single payroll accountant going on leave, bringing the payroll process to a halt at any unit.

An example of a different company with multiple business segments and units with decentralised finance teams and transaction processing could be a very different experience with policies merely existing on paper and their rampant violations. In many cases, the decentralised teams could be influenced by local senior management to delay or not entirely implement policies. This might result in processes not functioning at optimum levels, possibilities of several leakages and inefficient controls. It would take a huge effort to do any certification in such an entity on effectiveness of controls.

The example above clearly conveys the risks posed by decentralised transaction processing. In addition, managers are often faced with the challenges of choosing between external versus internal centralisation or outsourcing. The example quoted above of the MNC having own internal shared services worked very well. But, this is not recommended in all cases, especially in present day’s dynamic and rapidly evolving business environments. The case of a very large joint-venture on telecom infrastructure with nation-wide operations in India, set up in 2009, that decided to centralise and outsource all payment processing to external service providers is interesting. There were instances of hiccups mostly in managing local management perceptions, but even today the structure is working fine, and is a role model for others.

The advantages of using an external company was speed in set up, availing best practices which external companies are exposed to and ability to scale quickly. Building infrastructure and an efficient team internally could be time consuming. However, merely getting people, and creating facility are not going to get the job done as there are integral aspects of training, setting processes and culture assimilation to create the expertise, and which will delay the effective results. This is clearly not desirable by many companies in present dynamic business environments of continuous policy changes from the government and competition, among other issues. Organisations have finite bandwidth and have to prioritise to use the same for its core objective, and should consider external options to outsource the process.

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