CFO ADVISORY

Your Finance Organization: Time to Take Another Look?

KPMG LLP

The Opportunity to Revisit the Corporate Finance Organization Structure

Have you looked at your finance organization chart lately?
Unless you are a recently appointed CFO, preparing for an IPO, or reshuffling your organization after an acquisition, the answer is likely to be no While much . attention is given by analysts and vendors to topics of the day like outsourcing, shared services and business intelligence, addressing the finance organization structure is not commonly discussed as a strategic lever to improve performance. Recent research by KPMGs CFO Advisory Services suggests that this assumption is false. The research suggests there is a compelling case for finance leaders to assess how their functions are structured and aligned to their businesses. Based on the research conducted, we posit three principles of finance organization design. By addressing these principles along with a serious focus on how finance headcount is aligned to the business, significant benefits may be achieved in regard to the finance organizations ability to manage risk, reduce costs, and partner more effectively with the business. global company that has segmented its business into three business groups, each given its own P&L. As this matrix structure was created, the organizations finance structure was modified to include business group finance teams that are accountable for reporting on each business groups performance. While such business group finance teams may not be considered classic core finance functions, they are a logical example of how the finance structure often needs to change to meet changing business requirements. 3. As finance functions grow incrementally over time, the organizational structure often is not actively managed. As such, it is natural for less efficient legacy functions to survive past the point where they remain useful. For instance, an organization in its growth stage may decide to create a financial systems administration function that reports directly to finance, in order to provide support for queries and ad hoc reporting. However, as the organizations IT capabilities mature, a better alignment might be to dissolve that function to have financial systems managed by the IT organization. Without actively assessing the current finance function over time, the legacy financial systems administration function might remain in finance, creating redundancy and increasing technology costs. 4. Lastly, organizational politics has led certain finance functions to develop ineffective organizational structures. In many cases, new functions or reporting relationships were created to provide roles for certain individuals where such design does not make

Finance Function Evolution

Before reviewing the three principles, it is useful to understand how finance functions are often formed. Our analysis suggests that the typical finance organization structure is shaped over time by a combination of four factors: 1. Classic core functions, such as treasury, accounting, tax and FP&A are initially assembled to address common finance responsibilities. 2. Due to considerations such as international expansion or business model change, noncore finance functions and reporting relationships may be developed. For example, consider a

functional sense. For instance, we observed one global technology company that maintained no less than three field finance functions, where one global function would have clearly better served the business. Upon query, a determination was made that all three of the field finance leaders were well entrenched within the organization, and protected their unique functions using their political capital. By understanding how finance organizations are commonly formed, we can now utilize the three principles to begin the processes of developing a better organizational structure.

service levels and reduce costs. Principle #1 - The finance function structure should adapt based upon the organizations risk profile. For organizations that had recently had changes to their organizational risk profile, it was noted in our research that the finance structure often was changed to meet such circumstances. Identified events impacting the risk profile included: M&A activity, the transition to an outsourced finance environment, new regulatory requirements, or a shift in ownership (e.g., via a public stock offering). As risk increased, finance leadership realized that certain changes needed to be made to the organization structure. The following table highlights some of the common changes, along with their resultant risk benefits and potential disadvantages.

Principles for Finance Organization Design

By applying the three principles of finance organization design, finance leaders have a tremendous opportunity to objectively assess how their organization maps to the business, providing a clear case for change. Principle #1 The finance function structure should adapt based upon the organizations risk profile. Principle #2 Reporting relationships to the CFO should take into account key aspects of the business model. Principle #3 Sourcing alternatives should be assessed to improve finance

Table 1: Potential Options to Address an Increased Risk Profile Potential Organization Change Regional finance reports direct line to corporate finance, rather than to regional business leadership Risk Benefits Clear accountability for providing sound financial information to support the corporate financials Regional finance performance (and thus compensation) is dictated by corporate finance leadership Reduced potential for conflict of interest with regional business leadership The enterprise risk function is centralized, either within finance or in a separate function reporting to the CEO Clear accountability for the Strong communication is development of the enterprise required to help ensure risk strategy that business leadership is able to contribute to the Clear accountability for enterprise risk strategy managing enterprise risk Strong communication is If Compliance is centralized as required to help ensure a finance function, there is a that business leadership clear linkage between risk and understands its accountthe overall business model abilities for managing financial risk Promotes internal audits independence from the finance function, and is considered a leading practice for corporate governance None noted Potential Disadvantages Reduced responsiveness to regional business requirements Focus on financial reporting increases to the detriment of management reporting

Internal audit reports directly to the board of directors

Potential Organization Change The controller function is refocused on accounting and controls, where other administrative responsibilities are given to another function (such as a chief administrative officer or vice president of finance operations)

Risk Benefits Helps to ensure that the role of the controllership is focused upon maintaining financial records in accordance with key accounting policies

Potential Disadvantages Administrative functions such as corporate real estate or facilities, which have a direct impact upon OPEX, may not receive the proper cost focus or control monitoring

A prime example of where a risk event impacted the finance organization structure was the introduction of Sarbanes-Oxley in 2002, which significantly increased the risk profile due to increased compliance requirements for all U.S. organizations with publicly traded equity or debt. As a result of Sarbanes-Oxley, many organizations moved to separate their internal audit function from the finance domain, in order to promote objectivity. Additionally, many organizations chose to have regional and business group finance report directly to the corporate finance function, in order to reinforce the control environment. Over four years later, this trend is still evident within the companies we surveyed, where nearly 75% of the companies surveyed had internal audit placed outside of the finance function. Principle #2 - Reporting relationships to the CFO should take into account key aspects of the business model. The structure of the finance organization impacts the perception of key internal and external stakeholders. Internal stakeholders include the customers of finance,

including departments such as sales, marketing, and operations. External stakeholders include analysts, investors and potential job applicants, all of whom may draw conclusions from the organizational alignment. As such, finance leaders should evaluate the current organization structure to determine what messages are being sent to these important constituencies. In certain cases, it may be better for the overall organization to move certain functions out of the finance function. For instance, for a highly acquisitive company, corporate development may report directly to the chief executive officer and is a peer of the CFO function. This alignment signals both internally and to the investment community that this company considers M&A to be a critical component of its business model.

Furthermore, top-tier M&A talent that would otherwise not be interested in working within the finance domain might explore such companies due to the CEO reporting relationship. Based on our research, certain core functions nearly always reported directly to the CFO. These functions included: Controllership Reports to the CFO 97% of the time Tax Reports to the CFO 95% of the time FP&A Reports to the CFO 86% of the time Treasury Reports to the CFO 86% of the time Table 2 discusses other common finance functions where alignment varied within our research.

Table 2: Perception of Finance Based on Alignment

Most Common Functional Alignment Internal/External Perceptions Alternative Functional Alignment Corporate development reports to the CFO 36% of the time Corporate development is embedded within the FP&A function 22% of the time

Corporate M&A is deemed critical to the companys mission development (M&A) reports directly to Top internal and external the CEO 42% of talent is more attracted to the time the company Internally, may cause confusion as analytical skills may be split between FP&A and the corporate development teams Investor relations reports directly to the CFO 64% of the time Signals to investors a strong alignment between the business model and financial community Indicates that the CFO is empowered to speak to the business model , allowing the CEO to speak more strategically and longer term

Investor relations reports to the CEO 18% of the time Investor relations reports to treasury 18% of the time

Most Common Functional Alignment Risk management (i.e., the chief risk officer) reports to the CEO 38% of the time (this relationship was even more prevalent within the financial services industry)

Internal/External Perceptions Indicates to all stakeholders that risk/ compliance is actively managed by the organization Internally, may lead to confusion regarding risk reporting (i.e., the S-4 process) unless strong communication protocols are in place with finance and the risk function

Alternative Functional Alignment Risk management reports to operations 38% of the time Risk management reports to the CFO or treasury function 24% of the time

When determining the optimal alignment of the function, finance leaders must also take into account their span of control. This consideration is extremely important, due to the inherent difficulties associated with effectively managing multiple direct reports and business functions. While arguments can be made for many functions to be taken under the finance umbrella (i.e., corporate development, IT, sales operations, etc.), our research indicated that on average, seven functions reported directly to the CFO. This average did not include nonfunctional reporting relationships, such as regional or business group finance leadership. Based on this average, it is suggested that finance leaders review their direct reports to determine if nonstrategic functions can be either pushed down a level, consolidated, or moved outside of the finance organization entirely. For example, one $4B financial services organization had nine direct reports to the CFO, including separate IT finance and shared services functions. After evaluating this situation, the decision was made to combine the two functions under a single functional leader. This leaders mandate was to drive finance excellence by utilizing technology and process improvement in tandem with shared services techniques. Such a model made more sense for the maturing company, which needed to improve its processes and systems in order to compete effectively. Principle #3 - Sourcing alternatives should be assessed to improve service levels and reduce costs Overwhelmingly, 97% (see side bar) of the finance organizations researched utilized sourcing alternatives such as shared services and/or business process outsourcing. Based on follow-up interviews with research clients, it was apparent that the use of sourcing was driven by the following qualitative factors: Better scalability as transactional volumes increase, allowing finance to keep pace with business growth Improved service levels to the business by enabling centers of expertise for key finance disciplines Consolidated controls, reducing the effort and cost associated with documenting and testing controls for audit and/or other regulatory purposes (such as Sarbanes-Oxley). While these strategic factors have led many organizations to evaluate sourcing alternatives, the quantitative business case for sourcing was the primary driver for implementation. As organizations grew past the $1B revenue mark, the opportunity This high percentage is attributed in large part to the size of the organizations surveyed, where the smallest organization had $1.2B in annual revenues, while the average company had revenues of $46B. The average annual revenues decreased to $26.5B after factoring out three large oil and gas organizations, each with annual revenues north of $200B.

to shift transactional headcount to lower cost locations drove the decision to implement shared services, outsourcing or hybrid models. As sourcing alternatives are deployed, finance leadership should continually reevaluate the structure of their organization to determine where the sourcing function best resides. Based on this clear mandate for sourcing, we suggest that finance leaders conduct a simple exercise, segmenting headcount based on scope (enterprise versus business unit) and service type (decision support versus transactional). Figure 1 depicts a possible model for beginning this analysis, using a shared services example. Based upon an organizations business model, specific finance functions/responsibilities can then be added to the model, allowing headcount to be allocated accordingly. Figure 2 provides an example of such an allocation.

Figure 1: Sample Shared Services Evaluation Model Management Decision Support Services Specialty Services Externally defined activity High Profile mistakes Difficult to measure performance High-impact/specialty skill set Cost-Efficient Transaction Based Services Shared Services High volume Efficiency focused Repetitive activity Easily measured performance Consistent customer requirements Transaction/service-oriented skill set Analytical Services Drive high-level decisions Content focused Business Unit Specific Competitive advantage Project/issue driven Analytical/diagnostic skill set Management judgment Business Unit Transaction Processing Provides input to decisions Business-specific activity Broad content required Accounting skill set

Enterprise Generic

Figure 2: Sample Shared Services Headcount Allocation Management Decision Support Services Specialty Services Internal Audit Strategic Planning Treasury Tax Planning and Compliance External Reporting Insurance and Risk Management Cost-Efficient Transaction Based Services Shared Services AP Invoice Processing T&E Vouchers Processing GL Entries and Reconciliation Fixed Assets Payroll and Payroll Tax Processing Cash Management and Lockbox Event Management 232 FTEs Analytical Services Financial Budgeting and Forecasting Business Unit Specific Financial Analysis and Ad Hoc Reporting 191 FTEs Business Unit Transaction Processing Month-End Close Processing Statutory Accounting Regional Accounting Billing and Collections 146 FTEs 40 FTEs

Enterprise Generic

Based upon 1) the location of finance resources within the model, 2) benchmark comparisons of headcount and transaction levels against similar organizations, and 3) evaluation of operating/transactional costs against industry peers, finance leaders can quickly develop a business case for pursuing sourcing alternatives. While cost reduction is only one aspect of a well-rounded business case, our research suggests that it is an important driver. As such, we suggest that finance leaders conduct a similar mapping exercise when evaluating the finance organization structure, to identify sourcing opportunities to reduce headcount costs. .

Summary
Finance leaders have an excellent opportunity to assess their current organization structure, leveraging the three principles. Key questions that you can ask now include: Based on our current situation, are we optimally managing risk? What does our finance organization structure signal to our stakeholders, both internally and externally? Does our current structure align to our business model, and allow us to recruit talent for key positions? How many direct reports do I have? Are all of these reports truly necessary, given our current business model?

How does finance headcount align to our business model? Are we taking best advantage of our sourcing options to improve service levels and maintain costs? Based on the answers to these questions, finance leaders can begin to actively refine their organizations to better manage enterprise risk, improve service levels to the business, and attract key talent, while actively managing the cost of finance. Have you looked at your finance org chart lately? Regarding the Research: In March 2007 KPMG conducted research with 34 organizations to understand: , Which finance functions reported to the corporate CFO What responsibilities were included within each function What factors led to current organizational structure Whether regional finance reported directly to the corporate finance function or the business, as well as the reasoning for utilizing the chosen relationship model Whether a matrix structure was utilized, and the reasoning for utilizing such a structure Whether shared services or other sourcing alternatives (BPO, etc.) were utilized, along with the reasoning for utilizing such alternatives The process for conducting this research included: Developing a finance organizational map template, which was sent to over 75 KPMG account teams. Thirty-four out of the 75 account teams responded. The template was completed by the account teams, indicating where each function reported to directly. In addition, the primary responsibilities handled by these functions were listed. Functions assessed included: Controllership Financial Reporting Investor Relations FP&A Treasury Tax Internal Audit Risk Management After results were tabulated, follow-up interviews with the account teams were conducted to validate the results Corporate Development Financial Systems Administration Accounting Operations Finance Center of Excellence Information Technology Human Resources Other

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Key characteristics of the organizations surveyed include: All organizations surveyed could be classified as Global 2000 organizations, with revenues of $1.2B (USD) or greater Twenty-nine of the 34 organizations were U.S. multinationals, with the remaining organizations coming from Europe. Fourteen of the 34 organizations were from the financial services industry Five of the 34 organizations were from the consumer products/retail industry Three of the 34 organizations were from the oil and gas industry The remaining 12 organizations came from the industrial/manufacturing industry, including high technology and pharmaceuticals The findings of this research drove the three key principles that underpin this paper.

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Author Larry Melillo 55 Second St. San Francisco, CA 94105 415-254-3399 Contributors Arun Kumar 500 E. Middlefield Rd. Mountain View, CA 94043 650-404-4910 Anne Bothwell 500 E. Middlefield Rd. Mountain View, CA 94043 650-404-3084 Mike Scanlon 55 Second St. San Francisco, CA 94105 415-963-7137

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