1 How Finance Departments Are Changing McKinsey Global .

1McKinsey Global Survey ResultsHow finance departments are changingMcKinsey Global Survey Results:How finance departments are changingGiven the current economic situation, it’s not surprising that financial executives saythey’re more focused than ever on planning and cost cutting. What’s surprising, though,is a reluctance to adjust the finance function’s structure.All eyes are on corporate-finance departments as they are asked to cut costs, reassessrisks, and cope with the deep uncertainty generated by the current economic crisis. Inthis survey,1 we asked finance and other senior executives how their finance departmentshave 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 centralizationor outsourcing plans are being modified; and how the CFO’s focus has shifted.1 The survey, in the field in Februaryand March 2009, generatedresponses from 591 executives.Most specialize in finance; the restare C-level executives with otherspecialties. The respondentsrepresent the full range of industriesand regions.2 Between these extremes, financedepartments may providemanagement with decision supportand financial analysis for financialand operating decisions or focus onprocesses and risk minimization,typically with key capabilities inmanagement reporting, tax, audit,and treasury.The results suggest that, at least so far in the current economic crisis, not manycompanies have made the kinds of structural changes that could most help the financeorganization to boost its performance. Few respondents report that their companieshave modified the organizational structure to give CFOs formal responsibility for moreactivities through solid-line reporting relationships. Fewer still report any increase in thedegree or pace of centralization. Moreover, few respondents report plans to increase theoutsourcing or offshoring of finance activities.What does finance do?We defined four possible roles for the finance function in a corporation. At one endof this spectrum, the function focuses primarily on reporting and compliance, withmost of its time devoted to transaction management in financial accounting. At theopposite extreme, finance serves as an integral part of the management team to supportthe creation of value by identifying opportunities and providing critical informationand analysis to make superior operating and strategic decisions.2 The largest groupof respondents report that in their organizations, the finance function falls into theJean-François Martin

2McKinsey Global Survey ResultsHow finance departments are changinglatter category, though—not surprising—the function’s role varies considerably acrossindustries (Exhibit 1). CFOs in manufacturing, for example, are significantly more likelytobe valueSurvey2009 managers than those in the financial-services industry, where the financestafffocusesmore on transactions.Finance organizationExhibit 1 of 7Glance:Exhibit title: A strategic roleExhibit 1A strategic roleCurrent role of finance at organization’s corporate level,% of respondents,1 n 591By industryRoleDescriptionValuemanagersAre integral part of management teamto support value/wealth creation byidentifying opportunities, providing criticalinformation and analysis to make superioroperating, strategic decisionsBusinesspartnersProvide decision support, sound financialanalysis to management for making financialand operating decisionsProcessmanagersFocus on processes and risk minimization,typically with key capabilities in managementreporting, tax, audit, treasury1812BeancountersFocus on the reporting and compliancefunction, spending most ofthe time on transaction managementin financial accounting15151RespondentsTotal,n 591Business, legal,professionalservices, n 7043Manufacturing, Financial,n 101n 1464849222130202019241220who answered “don’t know” are not shown.Respondents note a marked increase in the amount of time CFOs are spending inareas that are critically important during a crisis—particularly, financial planning andanalysis, financial-risk management, strategic planning, and credit decisions (Exhibit 2).These areas of responsibility are quite consistent with the most pressing challenges thatrespondents say finance staffs face: forecasting business results for upcoming periods(31 percent), implementing cost-saving measures (27 percent), and freeing up cash fromworking capital (18 percent). CFOs are spending less time on responsibilities more easilyleft to others.

3McKinsey Global Survey ResultsSurvey 2009Finance organizationExhibit 2 of 7Glance:ExhibitExhibit2 title: Devoted to planning and managing riskHow finance departments are changingDevoted to planning and managing risk% of CFOs or other finance executives, n 452Areas within scope ofcompanies’ finance functionbefore global economicturmoil1Financial planning and analysis86General accounting84Treasury81Accounts payable79Tax77Financial-risk gic planning51Internal 284634652633146Optional-risk management277860Credit decisionsDecreased responsibility/don’t know6865Travel and expense processingNo change1775Accounts receivableBusiness developmentChange in responsibilities by end of June 2009because of global economic turmoil244538910131Respondents2Figureswho answered “other” or “don’t know” are not shown.may not sum to 100%, because of rounding.What’s surprising, while respondents see a significant increase in the time CFOs spendin key areas, those shifts have not been supported by changes in the structure of thefinance organization. Looking ahead, very few respondents expect greater centralizationof any finance responsibilities (Exhibit 3).

4McKinsey Global Survey ResultsHow finance departments are changingSurvey 2009Finance organizationExhibit 3 of 7Glance:Exhibit 3Exhibit title: Staying centralizedStaying centralized% of C-level or finance executives, n 452To what extent is each financeactivity or process centralized in acorporate center or shared-servicecenter?Fully centralizedPartly centralizedIncreased centralizationNo changeNot centralizedDon’t knowDecreased centralizationDon’t knowTreasuryResults: Economicsnapshot, November 2008,”mckinseyquarterly.com,November 2008.17707 61180Internal audit65159 12684Tax622210 7686Accounts payable3 See “McKinsey Global SurveyHow has your company changedor planned to change centralization by the first half of 2009 as aresult of the global economicturmoil?2948Financial planningand analysis44General accounting44Accounts 2118987777As for moves specifically in response to the crisis, a large majority of the respondentsreport a clear emphasis on reducing operating costs, with majorities also emphasizingseveral other areas (Exhibit 4). Tasks involving risk management and financing fallfurther down on the list; for example, only 23 percent of the respondents say the financefunction will pursue M&A opportunities in the coming months, a figure consistentwith the views of executives in other McKinsey surveys.3 That said, it’s worth notingthat nearly half of our respondents report no change in the amount of time the financefunction spends on M&A activities—and nearly a quarter report an increase.

5McKinsey Global Survey ResultsHow finance departments are changingSurvey 2009Finance organizationExhibit 4 of 7Glance:Exhibit4Exhibit title: emphasisShort-term onemphasisonplanningcutting, planningShort-termcutting,% of C-level or finance executives,1 n 452Which, if any, of the following reactions to the global economic turmoil has your company’sfinance function taken or is it likely to take by the end of June 2009?Reduce operating costs81Increase focus on cost reductionin performance reviews65Reduce capital investments60Look for alternative financing methods39Introduce new methods, such asscenario modeling, sensitivity analysis,or contingency planning37Strengthen the role of finance at thecorporate level3331Increase frequency offorecasting activities53Shorten periods between risk reviewsTighten cash managementthrough changes in customerand supplier-payment terms51Pursue M&A opportunitiesEnhance credit checks forcustomers and/or suppliers49Increase hedging activities1Respondents2312who answered “none of the above” or “don’t know” are not shown.Governance and leadershipOf all the changes in finance driven by the global economic turmoil, a majority ofrespondents expect only one to be permanent: the continuous effort to reduce costs(Exhibit 5).This probably explains the ambivalence among respondents toward changing thegovernance model for finance because of the global economic turmoil. Fewer thana quarter of the respondents report that their companies are moving toward tightercontrol through a solid-line governance model for the finance function. More than twothirds report no change in the governance model or no intention or decision to change it(Exhibit 6).

6McKinsey Global Survey ResultsHowfinanceSurvey2009departments are changingFinance organizationExhibit 5 of 7Glance:Exhibit5 title: Long-term emphasis on reducing costsExhibitLong-term emphasis on reducingcosts% of respondents,1 n 591Which changes to the company’s finance function are most likely to be madepermanently in your company as a result of the global economic turmoil?Continuous effort to reduce costs52Tighter management of working capital48Increased focus on operational- andfinancial-risk management43Corporate-wide initiatives driven by financeFewer full-time employees within finance10More full-time employees within financeIncreased responsibilities for finance atthe corporate level25Decreased responsibilities for finance atthe corporate levelChanged forecasting methods24No permanent effects expectedFinance reporting lines with tighter control231Respondents15408who answered “don’t know” are not shown.Instead, companies seem to be relying on the CFO’s more informal influence. Fiftythree percent of the respondents, for example, say the CFO and finance functionshould provide more leadership in educating the organization to focus on costs andrevenue, while only 13 percent believe they should gain direct responsibilities forbusiness development. Further, 55 percent of the respondents (and 63 percent of thoseat the largest companies, with annual revenues of 10 billion or more) say that sincethe 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 outsideit—for example, in business units—is surprisingly high, however, at 51 percent, amongthose who have an opinion; nearly a quarter don’t.Finance’s financesIn general, the larger the company, the lower the cost of its finance organization as apercentage 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 theirfinance function as less than 1 percent. This suggests that once the finance functionestablishes its capacity to perform, its size doesn’t necessarily grow as revenues do.