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Beyond Boundaries: A New Role for Finance in Driving Business Collaboration
Collaboration is also known as :
Collaboration Platform,
Critical Thinking,
Design Thinking,
Problem Solving,
Facilitation,
Collaborative Software,
Collaborative Innovation Network,
Cooperation,
Collaborative Learning-Work,
Collaboration Science,
Collaborative Methods ,
Knowledge Management,
Collaborative Translation,
Collaborative Project Management,
Collaborative Management,
Knowledge Management,
Communication Tools,
Contents
- Executive summary
- Managing performance and risk beyond traditional business boundaries
- Doing the deal right, or doing the right deal?
- Elevating finance’s role in building trust and strategic communications
- Filling the information gap
- Conclusion
- Sponsor’s perspective
Executive summary
In an increasingly global economy, collaboration with
other businesses is becoming more widespread and
more important to a company’s business strategy,
whether to control costs, enter new markets, or expand
product and service offerings. Accordingly, the finance
function is being called upon more and more to evaluate
and monitor an entire range of different business relationships
with third parties, from traditional sourcing
and procurement agreements to business process
outsourcing to alliances and joint ventures in sales and
marketing, R&D, and production and delivery.
In June 2008, CFO Research Services (a unit of CFO
Publishing Corp.) conducted a research program among
senior finance executives in the United States, Europe,
Asia, and Australia to examine these shifts. Through
an electronic survey and a series of interviews in each
region, we looked at what kinds of alliances companies
are forming, and how finance sees itself working with
internal and external partners to establish and assess
successful alliances. Our research revealed three major
themes:
Companies are managing performance and risk beyond
traditional business boundaries. We found that the vast
majority of companies use third-party business alliances
as part of their business strategy—regardless of how
big the companies are, where they are located, where
they do business, or what business they are in. In addition,
we found that finance typically is closely involved in
evaluating business opportunity and risk, and in helping
to implement and manage these relationships. We also
found that finance executives see their involvement
growing even more over the next two years, as much
of corporate performance depends on the successful
execution and mitigation of risk in these business
partnerships.
Finance’s role in building trust and strategic communications
is being elevated. Finance’s expanding role
calls for an expanded set of education, communication,
and collaboration skills as well. The finance executives
in our study say that one of the most important factors
for a successful alliance is to develop trust in working
relationships. Thorough and fact-based communication,
grounded in a common understanding of objectives
and transparent metrics among all the parties involved,
is critical in building the trust necessary for a successful
partnership. Consequently, finance executives are
fi nding that they really are in the communication business
with both internal and external partners.
Dedicated business and IT resources are important for
managing alliances well. Finally, we found that finance
executives report they are more effective at developing
and managing alliances when they have resources
formally dedicated to alliances and technology that
supports their decision making. Companies that dedicate
an individual or a team to be responsible for alliances
typically are better able to identify, evaluate, and
execute alliances than are companies without a dedicated
resource. And companies that have standardized
their IT platforms for finance systems report that their
finance functions are more involved with, and are more
effective at, developing and managing alliances.
Managing performance
and risk beyond traditional
business boundaries
In a world increasingly reliant on networks of electronic
connections to dissolve barriers and strengthen relationships,
the use of business collaborations is on the rise for
many companies. CFO Research Services conducted a
research program to examine how senior finance executives
see finance’s role changing as companies increasingly
form these networks of business relationships. In
this study, we defi ned a business alliance as any type of
formal arrangement or agreement a company has for
working collaboratively with external partners to execute
its business model. These arrangements may include partnerships,
joint ventures, licensing agreements, co-development
arrangements, contracted services, outsourcing,
preferred vendor programs, and other types of relationships
that allow a company to tap external expertise to
provide a value-added business activity.
While businesses have always relied on other companies
for supplies or services, we found that, today, the number
and importance of these relationships are greater than
ever. The vast majority of finance executives in our
survey (89%) say that third-party business alliances are
an important part of their business strategy, and slightly
more than half (51%) expect their companies to have
more alliances in two years’ time than they do today.
About one-quarter (24%) of the companies in the survey
can be considered to be active practitioners—those
whose finance executives agree strongly that alliances
are important to their business strategy. These companies
use alliances at far higher rates than others: 66%
of the respondents from active practitioners report that
their companies have more alliances now than two years
ago, compared with only 35% for everybody else; in addition,
71% of the most active practitioners expect their
companies to have more alliances in two years’ time,
compared with 45% for everybody else. (See Figure 1.)
Business collaborations are on
the rise—the use of alliances is
not limited by how big a company
is, where it does business, or what
business it is in.
For these active practitioners, collaboration is at
the core of their business model. "We proudly, and
sometimes jokingly, say that one of our core competencies
is being a good partner," says Bharat Doshi,
executive director and group CFO of Mahindra &
Mahindra Limited, an Indian industrial giant that
last year had revenue of $6.7 billion. Mr. Doshi notes
his company has been executing substantial and
successful business alliances for more than six decades,
commenting, "Maintaining relationships with alliance
partners is in the DNA of the company."
However, the growing importance of business alliances
is not limited to these active practitioners. As shown in
Figure 1, even among those who did not "strongly agree"
that alliances are important to their companies’ business
strategy, 45% still see their companies entering into more
alliances two years from now. And all of the companies in
our survey use a wide range of collaborative arrangements
to accomplish many different business objectives. The use
of alliances is not limited by how big the companies are,
where they do business, or what business they are in.
Collaboration is important across the board
The very largest companies in our survey (those with
more than $10 billion in annual revenue) are more likely
to be active practitioners than companies smaller than
$10 billion; higher percentages of finance executives
from the largest companies agree strongly that alliances
are important to their business strategy and anticipate
growth in alliances over the next two years.
But respondents from midsize companies ($500
million–$1 billion in annual revenue) seem to be somewhat
more active than others in identifying and evaluating
collaborative opportunities. They report that they
are involved in assessing alliance risk and developing
alliance agreements more frequently than their peers
at other companies. They also tend to rate themselves
more frequently as being excellent in identifying and
evaluating alliance opportunities—35% of respondents
from midsize companies give their finance staffs
high marks in this area, compared with 27% of respondents
from the largest companies (more than $10 billion
in annual revenue) and only 12% of respondents from
companies in the $1 billion-$5 billion range.
Business collaboration is not restricted to particular
industries: for every type of arrangement we asked
about—from preferred vendors to joint ventures—more
than half of the survey respondents in each industry
segment reported that their companies employed that
type of alliance at least occasionally. But collaboration
appears to be particularly ingrained in two of the
industry sectors: health care/life sciences, and business/
professional/information services. Practically all of the
respondents from both sectors (more than 90%) say that
alliances are an important part of their business strategies.
Interviews with health care executives provide
insight into why such relationships are so commonplace
in the industry. (See "Reducing costs and complexity in
the health care industry," page 6.)
Collaboration takes many different forms
The alliances established by the companies in our study
take a variety of forms—everything from formal joint
ventures to outsourcing routine administrative tasks,
such as payroll. The use of the different types of collaboration
is fairly well distributed—each kind of alliance
we asked about is employed by at least 40% of the
companies in our survey.
Preferred vendor relationships and business process
outsourcing are most often cited as being frequently
employed in all regions (the United States, Europe,
and Asia/Australia), while exclusive sourcing arrangements
and joint ventures are cited least often. This
difference may refl ect the relatively straightforward
nature of preferred vendor programs and outsourcing
agreements—they are just easier to do. For example,
deciding whether a company should be in the real
estate or payroll business is relatively straightforward
compared with assessing an alliance involving marketing
or R&D. Often, it is also easier to fi nd the right partner for
these types of services nearby; 45% of respondents note
that their administrative activities are primarily domestic
in nature, and potential partners may be found just around
the corner rather than halfway around the globe. (A notable
exception may be in China, where international alliances
may be more common than domestic ones. See "Growing
pains in China," page 7.)
Companies around the world report that they are establishing
alliances in all areas of business activity: product
and service development, production and delivery, sales
and marketing, and administration. Alliances for administrative
activities are seen as somewhat less important than
alliances in the other areas, but companies are by no means
neglecting collaboration in this area. Administrative alliances
can be especially useful as companies look to control
costs and focus resources on their core competencies.
Reducing costs and complexity in the health care industry
The health care/life sciences industry shows the
most growth by far in its use of collaborative arrangements,
with 71% of respondents from this sector saying
they have more alliances now than two years ago.
According to these respondents, within the past two
years their companies have established collaborative
relationships of every type at much higher rates
than any other industry sector in our study. And this
trend is likely to continue: 90% of the health care/life
sciences executives in our survey expect their companies
to increase the number of alliances they have
over the coming two years.
In our interviews, one representative from the health
care industry discussed how health care providers
form purchasing groups that give them greater leverage
when negotiating discounts with manufacturers,
distributors, and other vendors. This allows even
relatively small health care fi rms to gain advantages
previously limited to only the largest organizations.
According to the Health Industry Group Purchasing
Association, there are more than 600 health care
organizations in the United States that participate in
some form of group purchasing.
"The thing that’s interesting about health care providers
is that we can [form purchasing groups] on a
national perspective," says Phil Geissinger, executive
director of primary-care operations for CMC-North-
East Physician Network, a North Carolina hospital
and clinic. "We can be in our system here and somebody
that’s in Atlanta and somebody in Florida can
all be part of that alliance. It is basically purchasing
at the local level but negotiating on a global scale."
Concerns over increasing costs and increasing
competition in the health care industry may be
refl ected in these companies’ signifi cantly higherthan-
average use of alliances to cut costs (82% vs.
48% for all sectors combined) and to focus on competitive
advantage (64% vs. 41%). The complexity
of regulatory requirements, supplier relationships,
and business models—not to mention operating
activities—throughout the industry makes it diffi
cult, if not impossible, for a single organization
to house all the capabilities it needs. "We cannot
afford all of the expertise on an in-house basis,"
says Mr. Geissinger. "Thus, the more alliances we
have, the more we can leverage those relationships."
Because health care providers are so regional
in scope, they may have advantages over other
organizations when it comes to negotiating and
assessing alliances. "I think our industry has a lot
more [alliances] because of the fact that you do not
have inter-state competitive relationships," says
Mr. Geissinger. "So I can pick up the phone and call
somebody in Atlanta and say, ‘What do you think
about vendor X?’ And they are willing to share all
of their information because it does not affect them
other than they’re sharing information."
Companies collaborate
for many different reasons
The companies in our survey seek out collaboration for
a wide variety of reasons; no one rationale or objective
dominates. (See Figure 2, page 8.) Of the top four reasons
respondents cite for having established an alliance within
the past two years, two target growth (gaining access to
new customer segments, gaining access to technology or
expertise) and two target effi ciency (improving production
and delivery, achieving cost savings).
This refl ects the two main reasons for entering into
an arrangement with another company—either to do
something the company can’t do alone (extending its
reach into new markets or into additional products and
services) or to do it cheaper or better than the company
can itself.
For example, Mr. Doshi at Mahindra describes his
company’s successful partnership with Ford Motor
Company, which lasted for almost a decade and in which
each partner capitalized on the strengths of the other.
"Ford wanted accelerated entry into India [following
liberalization], and we were looking for a partner for
passenger cars," he explains. "We had been manufacturing
the four-wheel drive and SUV but had never made
a passenger car, and we wanted to learn how. And they
wanted to gain an understanding of the Indian market,
as well as a manufacturing facility to make the Ford
Escort their fi rst product in India."
Another example comes from the transportation industry
and illustrates the opposite end of the spectrum, where
a company looks to alliances for a level of expertise in a
fi eld that is not related to its core products or services.
As Kevin Schick, senior vice president and CFO at
Con-way Inc., a $4.7 billion freight transportation and
logistics services company based in San Mateo, California,
notes, "Some of these disciplines—like claims
adjudication—have become so complex that there was
just no way we could keep up with all the accountability,
controls, checks, and balances. It just made good sense
to stick to what we do best in terms of transportation
and logistics and work those aspects, and in some of
these other areas [worker’s compensation and casualty
claims assessment], defer to outside providers who have
the expertise."
Growing pains in China
The Chinese market may be poised for growth
in partnerships as the country continues to
develop its internal business infrastructure.
Many Chinese companies already have alliances
with international businesses, such
as for the manufacturing of products that
are then sold in the United States under the
brand of a company that is based elsewhere.
However, many services that are provided via
partnership in other nations have yet to be developed
in China.
"Many of the disciplines in China are new,"
says Erick Haskell, CFO for greater China for
sporting-goods manufacturer adidas, which
had more than $16 billion in worldwide sales in
2007. "For example, with law you don’t have
hundreds of years of legal training to rely on
[here]. Yet the country is just growing so fast
and demand is growing so fast for these kinds
of things, they can’t develop the people quickly
enough."
While China goes through these growing
pains, Mr. Haskell fi nds that he is constantly
surprised at some of the types of challenges
finance must manage. "In all my experience
in the United States, no retail company would
insource the performance of their inventory in
the stores," he says. "In China, there is no opportunity
to outsource this. It is all done internally
and usually by the finance department.
We will sit down and argue with people every
night and do inventory in retail stores, which
is something I have never seen elsewhere or
thought would be possible."
Scott Goble is the CFO of Alliance Flooring, a Chattanooga,
Tennessee, retail-licensing group representing
more than 450 retail fl ooring locations across the United
States with more than $1 billion in annual sales. He
comments, "I try to outsource where possible so that we
can concentrate more on our core functions."
However, Colin Storrie, CFO of Qantas Airways Limited,
Australia’s largest airline, sounds a caution about
forming an alliance for the wrong reasons. "If you
haven’t got control either over the fi nancials or the
process, it is not a good idea to give it to someone else,"
he warns. "If you don’t have a good handle on your own
costs and specifi cations, controlling them when they’re
in someone else’s hands only makes it that much more
diffi cult. You end up outsourcing the problems. Some
of where we’re seeing relationships go wrong is where
we’ve got a problem on our hands, and we try to give it
to somebody else and expect them to sort it out." Mr.
Storrie concludes, "Our principle has always been if we
have a process or a function that we want to outsource,
we have to make sure that we understand it well, we
understand the economics of what’s being performed,
and it is a process that is under control."
Collaboration is strong and
growing in all regions.
Even fi rms that have long been wary of venturing
outside their corporate boundaries now see collaboration
as essential in today’s business environment. "The
core business of Nokia is being owner of its own manufacturing
supply chain," says Javier Pineyro, a senior
controller for risk management based in the United
States for the Finnish wireless giant, which had $75
billion in sales in 2007. "But these days they realize that
this is a different game, and you cannot have in-house
all these skills and capabilities.... Rather than waiting for
people to come to us, we’re actually seeking out opportunities
in the United States, Asia, and Europe."
A global phenomenon
Finally, collaboration is strong and growing in all the
regions we targeted in our study, with 85% of respondents
from Europe, 90% from the United States, and
93% from Asia/Australia saying that alliances are important
to their companies’ business strategies. Alliance
activity in Asia/Australia may grow faster than in the
other two regions, especially as companies in countries
such as India, China, and Australia seek the economic
advantages of business relationships with their counterparts
in Europe and North America as well as with Pacifi c
Rim countries closer to home. In Asia/Australia, 63% of
executives in our survey expect their use of third-party
alliances to increase over the next two years, compared
with 50% in the United States and 46% in Europe.
The respondents from Asia/Australia also have the
highest percentage of alliances formed to gain access
to new customer segments (60%), whereas U.S. companies,
for example, are more likely than companies in the
other two regions to collaborate with others simply to
cut costs. Our survey shows that U.S. companies tend
to stay at home more often for administrative activities
and for sales and marketing activities, but third-party
relationships in these two areas are just as important
to them as to their peers in Europe and Asia/Australia.
It may be that U.S. companies have more opportunity
to form domestic alliances, given the relative size and
stage of development of the U.S. economy.
Overall, however, we see little distinction in responses
among the three regions. The increasing importance of
collaboration truly appears to be a global phenomenon.
Doing the deal right, or
doing the right deal?
As collaboration between companies becomes more
widespread, the demands on finance grow as well. In
this regard, the finance executives in our study see themselves
as having a critical responsibility: making sure the
alliance works.
In our survey, finance executives indicate how involved
they are in activities needed to develop and manage
alliances. Their list, ranked from involved most often to
least often, is seen in Figure 3. Not surprisingly, the areas
where finance is involved most frequently—monitoring
performance, assessing risk, and developing metrics—
are largely the things that can be measured, the traditional
realm of finance.
Strategic fi t is paramount
But the fact remains that one can’t know the right things
to measure without knowing the strategy behind the
numbers. In a different survey question, finance executives
say that misaligned strategic objectives and poorly defi ned
strategic objectives are two of the top four challenges their
companies face in establishing successful alliances. (See
Figure 4.) They recognize that strategy must drive execution—
making sure the engine is running smoothly without
knowing where you’re going is just a waste of gas.
One problem finance executives note in interviews is that
proposals for alliances or partnerships sometimes are
based on nothing more than a desire to work with a particular
company or get access to a hot, new technology. The
idea for a new alliance can come from anywhere. Although
more than half of all respondents in our survey (56%) say
their companies’ alliances originate at the corporate level,
the other 44% say alliances originate with the business
units. "Quite often it happens that the business-line
people who are interested in the alliance will approach
the managing director of the company," says Mahindra’s
Mr. Doshi.
A key to successful collaboration
is "searching for win-win, not
win-lose or even win-neutral
results," advises one CFO.
"Someone will tell me, ‘This is a great vendor. We
ought to work with them,’" comments Phil Geissinger,
executive director of primary-care operations for
CMC-NorthEast Physician Network, a North Carolina
hospital and clinic. "[My response is], ‘Okay, how do
you know them?’ ‘Oh. Well I just met them last week at
a conference.’" In which case, it is up to finance to work
toward developing the business case for this specifi c
alliance, so that decisions can be based on fact, not
feeling or anecdotal information.
The finance executives in our interviews underscore
the folly of developing an agreement with a partner
without knowing why the alliance is being undertaken
or what both sides hope to get from it. Martin Novák,
CFO of ? CEZ Group—the largest power generator in the
Czech Republic, and among the ten largest in Europe—
notes that, when considering a new partnership, "what
immediately raises a red fl ag is real non-compatibility of
the objectives. On the other hand, if both parties have
compatible objectives and the joint venture is the way to
achieve what they both truly want, then the probability
of succeeding is very high."
One finance executive in our survey, responding to
an open-text question, notes that a key to success is
"searching for win-win, not win-lose or even win-neutral
results." Mr. Schick at Con-way explains: "We realize
they [i.e., potential partners] have to run their numbers
and see what kinds of returns there are. We realize that
they’re in business to make money, just like we are, so
there’s just a healthy respect on both sides." If there
isn’t an upside for both parties, the alliance is all but
guaranteed to fail. That’s because one party will quickly
realize there is no reason for them to contribute to it.
Getting in the game early
Finance must fully understand the strategic objectives
underlying an alliance in terms that make business
sense—that is, in terms that can be used to measure the
impact on the two businesses—and may even participate
in the formation of those objectives to help alliances
succeed. For this reason, in many of our interviews
the finance executives stressed the importance of being
involved earlier rather than later. "It is important to be
involved early enough, to be involved in the whole business
model," says Jörg Vandreier, CFO of IDS Scheer AG,
a German provider of business-process management
software and services with 2007 revenues of $616 million.
"This lets us really focus on what is the benefi t to the
partners, and what is the benefi t to us." Mr. Vandreier
says being involved from the start allows finance to make
the most of an alliance in terms of IDS Scheer’s P&L.
Johann Murray, CFO of Hilton Grand Vacations Club
(HGVC), which operates time-share resorts for Hilton
Hotels, notes that letting finance weigh in early on
bottom-line issues gives other units an idea of how
much time and effort they should be investing in a business
relationship. The alternative, which happens all
too frequently, is having corporate or business units
trying to decide whether or not working with another
company was actually a good thing after the effort
had already been expended. Being excluded from the
front end means finance is frequently asked to decide if
the numbers work without being given the full context
of the problem.
One senior finance executive (who asked not to be identifi
ed) said this is a regular problem for him: "The most
diffi cult part is people coming to us with preconceived
notions, looking to us to support what they’ve already
decided they’re going to do. What they really want is for
us to fi nd the numbers that justify this concept."
Mr. Storrie at Qantas makes a similar point: "That’s why
you want to make sure you’re in there with the business
when the whole thing develops as opposed to coming in
at the back end and just saying, ‘No. This doesn’t meet
our fi nancial criteria or this doesn’t meet our technical or
business or strategic objective.’ When you get involved
at the back end, that’s where the business units get
upset because they’ve invested a lot of time, and we
get upset because it’s almost too diffi cult to change the
momentum of the particular project."
But finance needs to involve itself judiciously. "You can
get too many chefs in the kitchen," cautions Robert
Cotton, senior director of finance at BMC Software, Inc.,
a Houston-based provider of business software and
services with $1.8 billion in revenues. Mr. Cotton and others
believe that it is up to the business unit originating the
alliance to make the case for it, and that the finance role
is to review the business cases and arguments made
by the operational or marketing departments, provide
fi nancial expertise, and act as advisor.
Even when ideas for collaboration originate within the
business unit, our interviewees note that it is important
for finance staff to be involved early in the process.
For example, at WSP Group plc in the United Kingdom,
Malcolm Paul, the group finance director, describes the
evaluation process at this global design, engineering,
and management consultancy. Any joint venture over a
certain size requires signoff from either the CEO or the
CFO. Even though Mr. Paul reserves his personal involvement
until the end of the evaluation process, his finance
staff works closely with business managers to develop
the case for or against a proposed project and delivers
a robust package of information on which he bases his
own "yes/no" decision. "It’s a mixture of operational and
finance people who are fully involved from the minute
[the evaluation of a proposed alliance] starts," he says.
"I get a full business case, and a full fi nancial out-turn.
[My role is] as a checker, an approver, a tester. I am the
guy who says, ‘Well, how does this work? You explain it
to me, and [then we can decide] if we want to do it.’"
Finance’s role in assessing "the right deal" does not
end once the relationship is established, however. The
leading finance organizations are also involved with
monitoring the performance of alliances and ensuring
that they keep making business sense for the partners.
The executives we talked to recognize that the world
changes around them, and sometimes so does the
rationale for partnering.
The leading finance organizations use the same type
of fact-based assessment of strategy and performance
to continually monitor the usefulness of alliances.
"Because we’ve always done it that way" is no reason to
continue with a relationship that has outlived its usefulness;
in many companies, it is up to finance to pull the
plug. "If something does not make economic sense, then
the chances of survival are reduced," says Mr. Doshi of
Mahindra. Things always change—the economics of the
alliance, the strategies of the partners, the performance
of the partner—and Mr. Doshi notes that finance must
continuously keep on top of the situation and recommend
changing the alliance structure or even discontinuing
the alliance to adapt as circumstances dictate.
Elevating finance’s role in
building trust and strategic
communications
According to BMC’s Mr. Cotton, finance’s strength lies
in its ability to use the facts to identify information gaps
and help fi ll them in. "On the R&D side, you can get a little
emotional with, ‘Hey, I really want to build this product,’
or ‘I want to do this project,’" he says. "We [in finance]
can take the role of unbiased, unemotional third party,
listen and evaluate without a pre-set agenda. We don’t
write code. We don’t know how this all comes together.
We can understand the dynamics of the proposed product,
quantify the possible impact to performance targets, etc.
Finance should be saying, ‘But it seems to me, here are
your gaps or here are some problems that you’re not
talking about, so how do we address these?’ Thus, being a
partner rather than arbitrator."
Mr. Doshi at Mahindra also comments on the value of
keeping focused on the facts. "The CFO has the job of
bringing objectivity to this discussion in terms of deciding
whether an alliance continues to make fi nancial sense,"
he says. "And also at what point is the company overstretching";
that is, in helping to distinguish what a
company or a business unit is well prepared to do, and
what may strain the fabric of the organization’s abilities.
Understandably, finance sometimes fi nds itself at odds
with business units that may seek to stake out their own
territory. "In general, people think that you will be a more
short-term, black-and-white kind of person," says Nokia’s
Mr. Pineyro. "They think that you will not understand qualitative
things like brand awareness, brand preference, or
segmentation."
The finance executives we talked to are eager to correct
this misapprehension. "It takes a village to raise a child,"
notes Mr. Murray of HGVC, "and it takes a village to run
a company. Everybody [in the company’s other functions]
is an expert in his or her own area of specialty, but
it is very important to get everybody involved in the front
end because everybody looks at problems from different
angles."
For this reason, finance’s ability to communicate well—
both internally (with other functions and business units)
and externally (with partners)—is a critical success
element. It is common sense that all relationships—business
or otherwise—live and die by how well those involved
communicate, and our survey results back up this view. Some
93% of those surveyed say communication between partners
has at least a moderate impact on the success of alliances,
and fully 60% of the respondents say it has a substantial
impact. (See Figure 5, next page.) Common strategic objectives
also appear high on the list; these are the only two
selections for which the percentage of respondents saying
these issues have a "substantial" impact is higher than the
percentage saying they have a "moderate" impact.
However, finance seldom seems to get credit for its
communication skills. Communication is perceived as
a "soft" skill, not a quantifi able one. It is an expertise
that many in management seem to think resides in other
departments, such as marketing. For most business units,
communicating is primarily about talking or writing.
For finance, effective communication means something
more—communications are much more likely to be judged
on the basis of whether or not they are analytically sound
and verifi able. Finance is constantly asking if the record
supports the claim. This may help explain why finance executives
in our survey tend to view their ability to communicate
with other internal functions as being excellent more
often than they do other abilities associated with developing
and managing alliances. (See Figure 6, page 16.)
Because finance has to make sure of the connection between
words and performance, it has a leg up on other parts of the
business. Finance’s effectiveness in communicating with
partners is grounded in the facts. "The numbers tell the
fi nancial story to give you the insight as to how the alliance is
working or might work in the future," says Mr. Murray. "This
is clearly an advantage over those business units that do not
have or do not understand the records and numbers."
Mr. Storrie at Qantas comments, "I don’t think it’s productive
to just say, ‘This is the way that it is, and that’s it.’ I
think you always have to consult with the business and
make sure that you’ve got a healthy relationship. You
want to make sure that the relationship is constructive
enough so that the communication fl ows freely between
the two groups." He explains how the airline’s matrix
organization aids finance’s ability to communicate
effectively: "We have a small central [finance] group, but
we also have a very strong presence down in the line businesses.
The finance functions in the line are very close to
the businesses, and they’re dealing with them on a dayto-
day basis. [So when a difference arises,] generally we
will consult with the line managers and explain why we
have a difference. In some cases, it can be that they’re
just not aware of some of the other implications of what
we’re doing. [Finance] gets a view right across the group,
whereas a business unit might only specifi cally understand
what they’re doing in their part."
The more communication is verifi ed by the facts, the
better the relationship with external partners as well. The
survey responses indicate that the ability to have faith
in your partner is a make-or-break item for collaboration.
Given the opportunity to tell us in their own words
what they consider the vital success factor for alliances,
finance executives in our study most often cite trust. In
an open-response question, one survey respondent put
it succinctly when asked what was needed to assure a
successful partnership: "Trust, trust, trust."
The basis for a good working relationship and trust is information.
Do the companies agree on the objectives for the alliance?
Are the partners willing and able to share risk as well
as rewards? Is it a win-win—equally benefi cial to both partners?
As Mr. Novák, the CFO at the Czech energy company
?CEZ, explains, "You know, it’s very important to understand
where [the partner is] coming from, where they see the value
of the joint business. It’s all about open communication—
you have to discuss things in depth so that you are perfectly
aware of what the other party expects, and you just have to
sit down and [align] those expectations. And then do the
deal in the end. That’s how it works."
Mr. Doshi at Mahindra puts it this way: "You help build
credibility and that’s where finance can play a greater role.
In a situation of crisis of confi dence and trust, finance can
act as the glue by being transparent."
Filling the information gap
However, our survey also reveals a worrisome problem
when it comes to assessing and monitoring collaborations:
Many companies seem to be making decisions in
the absence of truly reliable numbers. Indeed, our survey
shows just how often companies lack robust and comprehensive
data on which to make decisions. Only 3 out of 10
respondents (30%) say they use a rigorous set of metrics
when looking at an alliance’s fi nancial performance. Even
fewer say they use a rigorous set of operational metrics,
such as error rates, product quality, customer satisfaction,
and process speed. In qualitative issues—such as ease of
doing business, improved managerial focus, and corporate
or brand reputation—the number drops further. In
fact, for qualitative assessments more respondents say
they use few, if any, metrics than say they have a rigorous
set of metrics. (See Figure 7.)
The problem is underscored by the relatively high
percentage of companies that evaluate alliance risks
only informally. To make sure their companies are doing
"the right deal," finance executives need to know what
assumptions are underlying any proposed alliance, and
what risks can threaten those assumptions. Yet a large
number of companies in our survey lack formal, documented
processes for evaluating such basic categories
as fi nancial or regulatory risk. (See Figure 8, next page.)
Other areas of risk management fare even worse.
Few companies in our research program are well equipped
to construct a comprehensive and holistic analysis of
performance and risk associated with alliances. The
consequences are underscored by HGVC’s Mr. Murray:
"At the end of the day, it’s hard to put a cost on tarnishing
your image."
As noted earlier, some companies—the active practitioners—
are simply better at collaboration than others.
These companies also tend to be good at the information
game. They report that they use formal, documented
evaluations in all risk categories at much higher rates
than others do. They also use rigorous sets of fi nancial,
operating, and qualitative metrics to evaluate alliances at
substantially higher rates than others. (See Figure 9.)
Our survey shows that two factors correlate to better use
of information and more effective decision making in developing
and managing collaborations: one is whether or
not a company has explicitly designated resources for the
responsibility of managing alliances; the other is whether
a company has standardized the IT systems its finance
function uses to gather data and make decisions. Finance
executives in our study show that they are more effective at
developing and managing third-party relationships when
they have resources formally dedicated to alliances and
technology that supports their decision making.
A dedicated resource makes a difference
Having a dedicated resource—a person or team—responsible
for an alliance from planning through execution is
positively correlated with several measures of how well
a company manages its working relationships with other
companies.
Three-quarters of respondents say responsibility for
alliances at their companies is centralized in some way.
This result holds true whether a company originates alliances
primarily at the corporate level or at the business
unit level. One-third of respondents (33%) report their
companies have a dedicated team focusing on alliances,
and another 17% say their companies have designated an
alliance offi cer or other individual to take responsibility
for alliances. One-fi fth (21%) say alliances are the responsibility
of the executive team at their companies.
Our study shows that finance
executives develop and manage
third-party relationships better—
and consider a wider range of
opportunities—when the resources
and technology are in place to
support effective decision making.
Companies employing some form of dedicated management
or oversight of alliances report establishing
collaborative relationships of all types more often than
companies without dedicated resources, and they also
consider a wider range of opportunities. The finance functions
at these companies consistently are more involved in
alliance activities, and typically use formal, documented
evaluations of alliance opportunities more often. They
are also more likely to conduct qualitative evaluations of
alliances.
Respondents from these companies rate their finance
functions as either "adequate" or "excellent" in all activities
at higher rates than do their peers at companies
without dedicated resources. They also indicate that they
manage alliances more effectively.
The power of consistent information
There is a difference between centralization and standardization
of responsibility for alliances, however. Most
of the executives interviewed for this report say that even
when responsibility is centralized, the process and the
people involved in it usually vary according to the dictates
of the situation. (See "Hitting a moving target," page 21.)
At Nokia, for example, all the signifi cant alliances are
examined at the corporate level, but the actual owner of
the relationship may vary according to the business unit
involved. "There is a group of people sitting in Helsinki
[Finland] who are like the base point for every task force
involved in that alliance activity; however, many or all
participants in that task force might be sitting around the
world," explains Mr. Pineyro. "But, in many cases, they
are just making the checks and balances of the activity.
They might not really be the owner of the business or the
alliance."
The fact that each alliance is unique only increases the
need for information that is as standardized as possible.
In order to assess any part of an alliance—from doable to
done—finance has to be assured that it is not in a position
of comparing apples and oranges. Doing that requires an
IT platform that is standardized across the enterprise.
Companies that have standardized their IT platforms for
finance systems report that their finance functions are
more involved with and are more effective at developing
and managing alliances. First of all, these companies are
much more likely to agree that they have the IT systems
and software solutions they need to support alliances.
Seven out of 10 (71%) survey respondents from companies
with standardized IT platforms say their companies have
the right software solutions in place to support alliances,
compared with only 51% of respondents from companies
without a single platform. The companies with standardized
IT are also more likely to say that they are able to
implement or integrate the IT systems needed to support
alliances.
Hitting a moving target
What makes assessing alliances so challenging for
finance is the fact that no two are really alike. This
means that being asked to assess the risk on an alliance
often doesn’t mean the same thing twice.
"It is hard to establish, in my opinion, a standard
form because the goals are so different," says Scott
Goble of Alliance Flooring. "It’s not always a direct
value or profi t-maximizing proposition on the table.
Sometimes we’re going to do things just because
they’re right for our membership. Not every decision
criterion falls neatly within the constraints of
traditional fi nancial analyses. Forcing such analyses
as a matter of form is a time-waster in a best-case
scenario and leads to poor decisions and costly delay
in worst cases."
Assessment can also mean assessing ROI. What is
the risk that a company will be wasting its money?
This is frequently the point on which finance and
marketing tangle the most. Perhaps to its own surprise,
finance is fi nding that it can pay to accept
some very soft measures of success.
Kevin Schick of Con-way points to his company’s
marketing agreement with NASCAR (the National
Association for Stock Car Auto Racing), which he
was not happy about at fi rst. Marketing argued that
the sponsorship deal had several soft benefi ts, such
as increased visibility and building morale among
Con-way’s truck drivers who have a strong affi nity
for NASCAR. Mr. Schick’s fi rst reaction was to want
proof that those things were worth the price. Eventually,
he came around and decided the returns were
worth the risk.
"There’s no question, and quite honestly, I have to
admit that our drivers and their families seem to
really get engaged in NASCAR," he says. "In a case
like that, you’re not going to box us in with hard
numbers. I have to recognize the fact that you can’t
put everything into a balance sheet or a P&L and
glean all the results from it."
Mr. Goble says that standardizing the process works
only when you are doing the same things over and
over, such as when you conduct credit checks. But
activities such as acquisitions or major third-party
relationship-building require "a very open mind.
Once you document a process and say that we’re
going to do A through Z, someone is going to become
married to that concept and you’re going to
have a diffi cult time divorcing it in order to allow for
the unique analysis necessary," he says.
Aside from the capabilities of the information systems
themselves, finance executives from companies with
standardized IT platforms also report more frequently
that finance is "always involved" with the entire range of
tasks associated with implementing and managing alliances.
And these companies are more likely to consider,
evaluate, and implement a complete range of alliances
than companies that haven’t standardized finance’s IT
platforms. Finally, companies with standardized IT platforms
much more frequently rate their finance functions as
being "excellent" at the complete range of tasks involved
with identifying, establishing, and managing alliances.
These trends suggest that companies with a better handle
on managing the information they collect and use also are
better equipped to apply that information to evaluate
their alliances. The better a company is at collecting and
analyzing the relevant data, the more likely it is to pursue
and establish alliances of all kinds, and the more likely it is
to feel comfortable that it is making good decisions.
Conclusion
"When we’re looking at any alliance or any supplier, we always
ensure that we have the right to have a look at their systems
and processes and controls. Otherwise, it’s a bit of a black
box."—Colin Storrie, CFO, Qantas Airways
"It’s about education. It’s about explaining the bigger picture,
about explaining to [your business partners] how their piece fi ts
into the overall whole."—Johann Murray, CFO, Hilton Grand
Vacations Club
Finance needs to be part of the strategic discussions
around alliances in order to fulfi ll its assessment and
monitoring responsibilities. Key to finance’s ability to do
this is what might be called "hard" communication—the
ability to verify the accuracy of what it is told, and to use
those facts to bring everybody onto the same page.
The current global economic instability means organizations
are having to quickly adapt to mercurial
business conditions. This uncertainty could increase
companies’ reliance on alliances to provide as-needed
skills, resources, services, and products. Even if specifi c
areas are—or become—less volatile economically, such
stability is unlikely to diminish the ubiquitousness and
usefulness of alliances of all types.
Every alliance an enterprise looks at requires finance to
do additional work by assessing the potential partnership,
negotiating its terms, and then monitoring it. This
job is made easier when finance comes into the alliance
discussion as early as possible; however, other units are
frequently hesitant to bring finance on because of preconceived
notions about what finance does or is willing to do.
Survey respondents say fi nancial risk is the area that
is most often subject to a formal, documented process
(54%), followed by regulatory risk (48%) and operational
risk (44%). The relatively high percentage of companies
formally documenting operational risk suggests the need
for increased operational expertise or knowledge on the
part of finance. In this way, finance will be able to come up
with new, creative, and responsible methods for assessing
situations and opportunities. Only by approaching peers
on their own terms will finance be able to educate them
on the necessity of an expanded role and communicate
analyses clearly and convincingly.
Finance’s real value in developing
and managing alliances depends on
the quality of the information it uses
and communicates.
Clearly, something has to change if finance is to get the
information it needs and the access to strategic-level
discussions it deserves. That change must involve how
other business units view what finance brings to the table.
This perception will not change on its own: finance has to
show it is able to work closely with business units and
external parties in a variety of situations. Such challenges
will sometimes push it outside of its traditional comfort
zone of assessing fi nancial risk.
Finance’s success in establishing itself in this role is
enhanced when it is seen as being the keeper of the "real"
numbers—the measures that make the most difference
for the business and its strategy. Our study fi nds that
finance’s real value depends on the quality of the information
it uses and communicates, and the best information
comes when a team or person dedicated to handling alliances
can work with consistent data provided by a standardized
IT platform.
Sponsor’s Perspective
Tear Down this Wall, Mr. CFO!
Prepared by Jonathan Becher, Senior Vice President of
Marketing at Business Objects, an SAP company
Executive Summary
The title is a reference to the historic moment when U.S.
President Ronald Reagan beseeches the USSR’s Secretary
General Mikhail Gorbachev to "tear down this wall" and
end the Cold War, prophetically ushering in decades of
global productivity through collaboration across national
boundaries. Similarly, business leaders now need to
step up and tear down the barriers that inhibit corporate
performance today—those that separate boardroom
strategy from execution in the trenches and those that
prevent a company from taking advantage of its business
network for faster co-innovation, better customer experience,
and quicker market access in emerging regions.
As primary custodians of corporate performance, CFOs
must help make finance a forward-looking strategic function,
closing the loop between strategy and execution
across the business network. IT can play a crucial role in
boosting performance when strategic planning is tied to
insights from optimized processes and effective management
of risks across the business network.
Managing Performance by Closing the Loop
Between Strategy and Execution
Robert Kaplan and David Norton, in an article in the
January 2008 issue of Harvard Business Review, state
that 60% to 80% of companies fall short of the success
predicted from their new strategies. Strategic planning
and operational execution have historically worked in
isolation, often driven through different people, information,
and processes. Strategy without synchronized execution
has led to wasteful corporate maneuvering, while
fl awless execution in the absence of a good strategy has
led many companies towards perilous decline. Insights
and risks from operational processes are not taken into
account, or action across the company is not properly
aligned with a carefully crafted business strategy.
As the CFO Research Services study highlights, most
companies are also evolving to a networked model, in
which they rely on their partners for product co-innovation,
outsourced manufacturing, third-party logistics,
and alliance channels for sales. While closing the loop
between strategy and execution is challenging enough
within a company, it becomes crucial to success when
companies expand traditional business processes in
R&D, sales, operations, manufacturing, and finance to
their partners, alliances, suppliers, and customers. In
that ecosystem, strategy and execution must be planned,
executed, monitored, and improved across a business
network for maximum corporate performance.
Managing Governance, Compliance, and Risk
In business networks, companies have to manage higher
risk for higher performance. Understanding risks holistically
and mitigating them effectively requires visibility,
trust among business network partners, and formal and
documented methods. As this report highlights, finance
professionals have traditionally paid more formal attention
to fi nancial, regulatory, and operational risk. Workforce
risks, such as segregation of duties; market risks,
such as rising global commodity prices; and reputation
risks, such as product recalls, have not received the same
level of formal scrutiny. They could be managed implicitly
within a company because they were obvious, but as
more and more of the risks come from outside the core
company, they must be formalized and managed proactively
with business partners. The Mattel executives who
suffered through a recall due to lead-based paint in toys
built by their suppliers can testify to the importance of
risk management in business networks. Companies need
a unifi ed information foundation to manage compliance
requirements, automatically monitor risks, promote
company values, and build sustainable operations across
the business network.
Moving Forward with
a New Role for Finance
Finance has long played a crucial role in cost control
and corporate reporting. CFOs have helped line of business
executives manage their bottom line by negotiating
procurement terms based on past vendor performance.
And they have been the rock-solid foundation for monthly,
quarterly, and yearly performance reporting. While important,
these roles have been backwards-looking, concerned
with lagging indicators of corporate performance and
largely standardized into fi nancial shared services. To
provide a competitive edge, successful CFOs are elevating
their role to that of the Chief Performance Offi cer, driving
performance forward by proactively managing strategy
and planning functions across their business networks.
Since corporate performance increasingly depends on
loyal customers and revenue from alliances, fast-emerging
regions, and new channels, the focus for CFOs is also shifting
from pure cost control to sustained profi table growth.
Managing enterprise performance is the new imperative for
finance professionals in this global networked economy. It
requires a unifi ed foundation for information, supporting
collaborative decision making across teams with smooth
fl ows for both structured and unstructured data and the
ability to optimize processes across the business network.
Role of IT and SAP’s Unique Value
Finance needs to leverage IT, not only to simplify and
standardize business processes that accelerate end of
quarter close, but also to deploy the corporate strategic
plan and monitor its execution proactively. To accomplish
these tasks, transactional investments in enterprise
resource planning and other enterprise applications need
to be supplemented with investment in an information
management platform to integrate enterprise performance
and governance, compliance, and risk. SAP helps
finance professionals align execution with strategy by
delivering an IT solution that marries process execution
holistically with strategy development, planning, and
management of risk. It is our fundamental belief that SAP
and Business Objects, an SAP company, are uniquely positioned
to help close the performance gap and ultimately
transform the way the world works by connecting people,
information, and businesses.
About SAP
For more information about how
SAP solutions can help finance
professionals increase their
strategic performance by taking a
holistic approach to strategy
development, execution, and the
management of risk, please visit
http://www.sap.com/solutions/
index.epx. You’ll discover why the
best-run businesses run SAP.