All eyes are on corporate-finance departments as they are asked to cut costs, reassess risks, and cope with the deep uncertainty generated by the current economic crisis. In this survey, we asked finance and other senior executives how their finance departments have changed since the crisis began: what new challenges these departments are facing; which activities are taking up more, and less, of their time; whether their centralization or outsourcing plans are being modified; and how the CFO’s focus has shifted.
The results suggest that, at least so far in the current economic crisis, not many companies have made the kinds of structural changes that could most help the finance organization to boost its performance. Few respondents report that their companies have modified the organizational structure to give CFOs formal responsibility for more activities through solid-line reporting relationships. Fewer still report any increase in the degree or pace of centralization. Moreover, few respondents report plans to increase the outsourcing or offshoring of finance activities.
What does finance do?
We defined four possible roles for the finance function in a corporation. At one end of this spectrum, the function focuses primarily on reporting and compliance, with most of its time devoted to transaction management in financial accounting. At the opposite extreme, finance serves as an integral part of the management team to support the creation of value by identifying opportunities and providing critical information and analysis to make superior operating and strategic decisions. The largest group of respondents report that in their organizations, the finance function falls into the latter category, though—not surprising—the function’s role varies considerably across industries (Exhibit 1). CFOs in manufacturing, for example, are significantly more likely to be value managers than those in the financial-services industry, where the finance staff focuses more on transactions.
Respondents note a marked increase in the amount of time CFOs are spending in areas that are critically important during a crisis—particularly, financial planning and analysis, financial-risk management, strategic planning, and credit decisions (Exhibit 2). These areas of responsibility are quite consistent with the most pressing challenges that respondents say finance staffs face: forecasting business results for upcoming periods (31 percent), implementing cost-saving measures (27 percent), and freeing up cash from working capital (18 percent). CFOs are spending less time on responsibilities more easily left to others.
What’s surprising, while respondents see a significant increase in the time CFOs spend in key areas, those shifts have not been supported by changes in the structure of the finance organization. Looking ahead, very few respondents expect greater centralization of any finance responsibilities (Exhibit 3).
As for moves specifically in response to the crisis, a large majority of the respondents report a clear emphasis on reducing operating costs, with majorities also emphasizing several other areas (Exhibit 4). Tasks involving risk management and financing fall further down on the list; for example, only 23 percent of the respondents say the finance function will pursue M&A opportunities in the coming months, a figure consistent with the views of executives in other McKinsey surveys. That said, it’s worth noting that nearly half of our respondents report no change in the amount of time the finance function spends on M&A activities—and nearly a quarter report an increase.
Governance and leadership
Of all the changes in finance driven by the global economic turmoil, a majority of respondents expect only one to be permanent: the continuous effort to reduce costs (Exhibit 5).
This probably explains the ambivalence among respondents toward changing the governance model for finance because of the global economic turmoil. Fewer than a quarter of the respondents report that their companies are moving toward tighter control through a solid-line governance model for the finance function. More than two-thirds report no change in the governance model or no intention or decision to change it (Exhibit 6).
Instead, companies seem to be relying on the CFO’s more informal influence. Fifty-three percent of the respondents, for example, say the CFO and finance function should provide more leadership in educating the organization to focus on costs and revenue, while only 13 percent believe they should gain direct responsibilities for business development. Further, 55 percent of the respondents (and 63 percent of those at the largest companies, with annual revenues of $10 billion or more) say that since the crisis began, the finance function’s role in the corporate center has strengthened. The proportion of respondents who say that the function’s role hasn’t changed outside it—for example, in business units—is surprisingly high, however, at 51 percent, among those who have an opinion; nearly a quarter don’t.
In general, the larger the company, the lower the cost of its finance organization as a percentage of revenues. Respondents in companies with annual revenues upward of $1 billion are more likely than those at smaller companies to estimate the cost of their finance function as less than 1 percent. This suggests that once the finance function establishes its capacity to perform, its size doesn’t necessarily grow as revenues do.
Furthermore, finance companies and companies with headquarters in Europe appear to have somewhat more efficient finance functions, measured by cost, than manufacturing companies or companies with headquarters in the United States (Exhibit 7).
In spite of the strong emphasis on cost management generally, a remarkably high percentage of the respondents—over two-thirds—report that their companies are not currently outsourcing or offshoring any finance activities. Among those that are, 67 percent report no change in the pace of either activity. However, larger companies are likelier to be taking this route than smaller ones are.
The survey suggests that many companies have yet to centralize their treasury functions. They may well want to do so. In times of crisis, the inefficiency of a decentralized structure extends overall cycle times and makes cash flow and other key performance drivers less visible.
More broadly, the data also show that many companies are increasing the CFO’s purview into strategy, risk management, and performance management. This movement in the right direction should help companies manage themselves better through the crisis. However, without specific training and preparation, most finance functions will struggle to add value in those areas. One quick way to build up skills is to pull in analytically strong employees from the business side.
The data show that few companies are changing their governance structure in response to the crisis; most are relying on the CFO’s informal influence instead. This approach risks resurrecting old problems. Companies that formally extend the CFO’s reporting authority are likely to be better prepared for ongoing risk and performance management, which also depend heavily on the skills and training of the CFO and the finance function staff.