4th Aspects and Visions of Applied Economics and Informatics March 26 - 27.

2009, Debrecen, Hungary

The challenges of the modern finance function

Andras Danko
Financial Controller, Amora Maille SI (Unilever), France.

Abstract
The 2008 global financial crisis has changed how we judge market trends, how we look
at companies results and how much we trust the leaders of many enterprises. It also
affects how certain business functions are regarded. Accordingly, trust and confidence in
financial institutions has been decreasing dramatically and this indirectly has a negative
effect on the overall reputation of the finance profession as well. Although finance and
accounting has been evolving continuously through its history, however, it is difficult to
claim that the traditional finance function is at its utmost strengths and reputation today –
at least challenge is growing and many people claim if proper financial controls were in
place the crisis might have not been so severe or long.

This article aims to discuss the key internal and external challenges of modern finance
and the journey finance has taken in its history. The included case study gives further
insight into recent developments and good practices of modern finance.

Keywords: Finance, Strategic Management Accounting, Business Partnering

1. Introduction

As with many other modern professions, it is difficult to trace back precisely when and
where were finance and the accounting professions were born or who were their first
practicioners. Based on Gary Giroux (1999) “The history of accounting is as old as
civilization, key to important phases of history, among the most important professions in
economics and business, and fascinating. Accountants participated in the development of
cities, trade, and the concepts of wealth and numbers”. Furthermore, James deSantis
(1999) writes that “evidence of accounting records can be found in the Babylonian
Empire (4500 B.C.), in pharaohs' Egypt and in the Code of Hammurabi (2250 B.C.).
Eventually, with the advent of taxation, record keeping became a necessity for
governments to sustain social orders.” Although the first ‘accountants' seems to have
been around since humans have started to use money in their transaction, the first person
whose name we can find in the history books is Luca Pacioli (1447-1517), who is
regarded as the father of accountancy. His groundbreaking work of the Summa de
Arithmetica, Geometria, Proportioni et Proportionalita was published in 1494 in the
renaissance Italy. Although Pacioli`s ‘Summa' has dedicated only a few chapters to
finance his concepts created the foundation of modern finance. Pacioli described the basis
concepts of double entry bookkeeping with making references to memorandum book,
journal and ledger. Furthermore, he suggested that all entries to be translated to a single
monetary unit – which in the context of 15th century is quite remarkable. Also the
governance structure in the middle-ages were different of today, as the CFO website puts
that “once upon a time, business bankruptcies resulted in jail time (if you were lucky),
treasurers defended their funds with a sword, and financial planning was tested by

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plagues and fire.” “Key virtues of the finance person at that age were to be known for his
honesty, strength, courage, martial experience, suspicious mind, and self-restraint.“
(R.G.Voorhees, 2007).

2. “Desperate times call for…”

Finance at the end of 20th century

After the short travel in history, we come back to modern day finance. Using the
definition of Riahi-Belkaoui (1995) “Today, accounting is generally regarded as being
the systematic development and analysis of information about the economic affairs of an
organization. In fact, one of the most important purposes of accounting is to
communicate relevant information between and among producers and users of such
information.” Accordingly, a key enabler of modern they finance was the standardisation
of accounting systems. International Accounting Standards Board (IASB) defines the
ultimate aim as ‘to provide the world integrating capital markets with a common
language for financial reporting'. This has been achieved by the creation of reporting
standards to provide a functional framework for the finance function. As of January 1st
2005, all European Union public companies had to conform to the International Financial
Reporting Standards (IFRS). In 2006 the IASB and FASB (standard setter in the USA)
agreed to launch a convergence program between IFRS and US GAAP (Generally
Accepted Accounting Principles). Another critical step forward was that China has
recently adopted accounting standards substantially in line with IFRS. Therefore, by the
dawn of the 21st century we need to acknowledge that finance and accounting has
become a truly international or moreover global function.

The traditional financial roles existing in most organisations are (Pike&Neale 1993):
Financial accounting, concerned with recording the financial transaction and reporting to
the stakeholder of the company. Corporate finance focusing on fund raising for the
business. Management accounting's priority is the decision support for the management
via monitoring of controls. Even if these roles seem cover the full spectrum of the
businesses, unfortunately all of them are internally oriented and focused at the past. In the
rapidly changing environment external focus and the use of benchmarking techniques are
essential as much as orientation towards the future to aid strategic business planning.
Studies show (Slang, 2006) that many finance managers still consider their main task to
be transactional processing and spend considerably less time for reporting and even less
on internal controls. This is unfortunately traditional finance and not business partnering
mindset. The Global CFO Study (IBM, 2008) concluded that despite this prevalent
exposure to risks, only around 52% of the surveys participants acknowledge having any
sort of formalized risk management program.

Accenture`s study, interviewing 1200 finance practitioners globally, describes among

others the following emerging issues that would affect future finance (Accenture, 2008):
Globalization is having a substantial impact on the finance organization, the finance
organization's overall performance is lagging, lack of alignment between finance and the
business impedes progress, use of benchmarking is not widespread, change is needed in
how enterprises manage risk.

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The 21st century finance function

While there were hundreds of books on financial methods, accounting standards there
were relatively few studies made in the area of how finance could be able to help
business grow further in the current challenging environment. The concepts proposed in
this article and the forthcoming international study is showing an alternative scenario to
tackle these issues. The study which is being carried out currently is comparing the UK,
French and Hungarian financial management practices. Acknowledging the complexity
of international research we will use anchoring vignettes (G.King, 2004) to facilitate
cross cultural comparability.

One of the criticism of traditional finance function is that it spends too much time on
analysing the past instead of looking into the future. While learning from the past is also
important, however, supporting strategic planning without looking into the future is
hardly possible. Similar problem is the orientation of focus, which in most cases inward
looking. Finding finance people who are outward focusing and using benchmarking
techniques are still very rare nowadays. The traditional inward and past focused
orientation limits finance's capabilities to help the enterprise gain competitive advantage
by closely monitoring competition via benchmarking or to gain further market trust by
providing accurate forecasting.

The summary of the directional change is represented in the below table.

Fut ure focused

21st Century Finance

Business partnering
Risk Management
Stra tegic support
Benchmarking

to
al
ion o
rat l ly t
e a
op fi n
m d ol e
e fro al an gic r
v i c te
Mo tact str a

Traditional finance
Transaction processing, account ing &
reporting
Past focused

Internal orientation External orientation

Source: Strategic positioning of future finance (A. Danko 2008).

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In the last decades a new concept has arisen suggesting the need of orientation change.
“Strategic management accounting is normally regarded as an integrated management
approach drawing together all the individual elements involved in planning,
implementing and controlling a business strategy. Thus it clearly requires an
understanding of the long-term goals and objectives of the organisation. There must also
be a comprehensive analysis of the environment in which the business both is and will be
operating.” (K.Ward, 1992)

The need of shift from tactical to a strategic role is also supported by the changing needs
and preferences of enterprises, recent studies (D.Durfee, 2005) claim that 20 % of
Fortune 100 CEOs were once CFOs themselves.

When we look at how finance could be more competitive in the long term there are 6 key
areas suggested to be in focus (A.Danko, 2008.)

- Information Systems: In today's changing world speed of reaction is part of

competitive advantage, therefore obtaining the right information at the right time and
making it available to the right people is key in order to succeed.
- Forecasting: finance is one of the functions where reputation does matter so
foreseeing the results with great accuracy – make a difference in the eyes of the
shareholders and financial markets.
- Outsourcing : Outsourcing allows the enterprise to focus on its strategic agenda
by freeing up resources from non-core activities. The efficiency gains would drive down
the costs and increase profitability which would allow funds to be invested again in
innovation activities. The future expectation is that outsourcing trends will continue and
the energy that finance will spend on transactional or control measures would reduce
significantly.
- Use of Benchmarking: inward focus is not enough anymore, the organisations
must be looking outside and compare themselves to competition. ‘Without proper
benchmarking, CFOs may be driving their enterprise, but they are driving it without a
road map.' (Accenture, 2008)
- Risk Management and Controls: Enterprise are taking risks every day at each
decision that they make, however, the related exposure and the mitigating actions could
make the difference of achieving competitive advantage or losing the profits. Since
corporate scandals of Enron, Parmalat etc., situation has improved (e.g. Sarbanex-Oxley
law in the US), however, new issues arising at the 2008 financial crisis show that focus
on risk management is still not sufficient.
- Business Partnering - Change of mindset is crucial. Ultimately finance is a service
department so it needs change the way it counteracts with the clients, active decision
support and close involvement into strategy formulation is key.
For the ease of use we can shorten the above into the acronym of i4B.

Another emerging concept is the Integrated Finance Organisation (IBM, 2008), which
operates with single set of facts, using a common ERP system (e.g. SAP) and is governed
by information standards throughout the organisation. Major benefit is ability to provide
information faster and more efficiently than currently dispersed systems. Once it has been

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set up it could provide major savings, however, initial investments and the need of
extensive change management program are key obstacles of implementation.

Forecasting has started to gain new importance in recent times. Putting an enterprise's
forecasting right becomes more and more important due to the potential impact on share
price. Companies who are able to deliver their forecast are increasing their reputation as
well. A report on the forecasting (KPMG, 2007.) suggests that “those companies whose
forecast came within five percent of actual saw share price increases of 46% over the last
three years compared with 34% for others (improvement of 35%). The good forecasting
accuracy implies to the external parties that the management is in full control of the
business and knows well which way the company is going - which helps strengthen the
reputation of the business and credibility of its leaders. The increased regulatory request
to forecasting driven by EU transparency directive and the SEC (both financial and non-
financial key financial indicators) avoided the decrease of finance department cost as
“tighter regulation appears to have offset savings from more efficient systems or more
effective staff. A recent study (Hackett, 2007) in fact showed that the “average Global
1000 companies spending on the finance function has risen 12 % over the past three
years.” The follow up of the same study in 2008 claims that 2/3 of the companies are
unable to accurately forecast earnings for the next quarter, missing the mark by anywhere
between 6 % and 30%. Forecasting errors are not only a theoretical threat but indeed
could affect the bottom line of the company as well, respondents of KPMG’s 2007 study
claimed “that errors in forecasting have directly knocked 6 % off their share prices over
the last 3 years, a significant part of which resulted from investor reaction”. In order to
gain more forecast accuracy good intent is not always enough but the use of relevant
methodology is also important. For this reason many companies are turning to statistical
tools, such as Monte Carlo simulations (recently implemented by Northrop Grumman and
Sara Lee). In many companies of today over-achievement of targets is appreciated more
than an accurate forecasting, which is not in the favor of management trying to hit the
forecast but instead of “sandbagging” the targets. To ensure forecasting is improved,
companies need to overcome these cultural implications first and focus on incentivising
their managers on forecast accuracy.

3. Case Study – Unilever transforming its information system and finance

function into enablers of long term competitive advantage

Unilever one of the largest consumer goods companies was facing increasing challenges
in 2004 as internal studies suggested that it could be lagging behind competition in
information management. While world class information management is dedicating 15%
on data collection and 85% on information analysis (Gartner 2002.), Unilever had spend
48% on info gathering and 52% on analysis. Without fast turnaround it could risk losing
competitiveness.

Accordingly a robust information management and transformation program was

launched, with the motto of “getting the right information, to the right people, at the right
time”. The project required a complete change of mindset and a radical rethink of the
information system. By being a global enterprise that is acquiring and disposing

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companies on a frequent basis, aligning information systems was a real challenge. While
the main IT function has been centralised, (with non-core activities being outsourced) the
decision has been made to implement a fully integrated ERP system globally. Throughout
the business regions implementation of SAP ERP systems had started (led by Accenture),
enabling intra regional and global communication arriving to a much more effective and
efficient level. To gain more efficiency Unilever has outsourced a major part of its
hardware capabilities to HP.

Parallel to the project, global information standards were set and information
management rules were created around the following themes:
• Principles:
- One version of the facts
- Information is for everyone to use
- Measure what you need to deliver objectives

• Design:
- Standardise information and how it is presented
- Build in quality at source

• Accountability:
- Business functions define information
- Provide information as a shared service

Parallel to the information management project Unilever has started to transform its
finance function in order to develop capabilities for the future. Key priorities set out by
the company were: Increased focus on governance and risk management, demand each
business entities to perform internal risk assessment procedure plus strengthen internal
audit. Outsourcing non-core financial activities – transaction processing has been
outsourced to IBM.

As Unilever spends significant amounts on A&P and brand management, it is crucial that
finance plays a strong part in supporting the decisions around this spend. The Innovative
Business Partnering (IBP) programme was created to develop leading-edge, decision
support capability in Finance that can drive the growth in the business by decision
support and control. As well analytical tools and business practices, the new approach
covered the softer business partnering skills vital for finance to make a difference. In the
recent years Unilever showed a mixed track record of its result forecasting capabilities.
Therefore, one of the priorities was to put the forecasting right. This meant creation of a
standardised, global forecasting policy, which has been reinforced by regional
management and reviewed by corporate audit on a regular basis. Also Dynamic
Performance Management (DPM) has been introduced, which was a new approach to
managing the financial performance of the business. It provides a set of tools and
techniques, which supports a more external focus - improving the company's
performance compared to the competition - and through simplification helping to free
managers to be more externally orientated and enterprising.

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In 5 years into the program what has Unilever achieved by now:

- Solid information discipline and alignment from ERP programmes
- Track record of success
- Information became more reliable by the creation of the central Unilever
Information Office (UIO) and the three regional information offices. This also
resulted improvements in customer service, speed, accuracy and cost
reduction.
- - Establishment of globally agreed Information Standards that glue together
regional and global initiatives and provide a true convergence path
- - Greater transparency around investment choices in information management

4. Conclusion and discussion

One of the questions arising from the ruins of the 2008 global financial crisis is whether
the traditional finance function would be able to control and defend our businesses in the
future or not. The studies examined and the case study presented supports the point that
finance should move away from the traditional inward looking, transaction processing
role and adopt a new mindset and use concepts of business partnering, risk management
and strategic management. The current global business climate provides the opportunity
to finance to reinvent itself and be the leader of the change and become formulator of
new strategies. However, if unable to do so then the future role of finance could be at risk
as well.

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