In the Digital Age today, most industries today in a state of flux driven by volatile market forces. These market changes are affecting how Finance needs to operate. Specifically, more than ever, Finance needs to be more strategic and likewise in stronger alignment with Strategy. Resultantly, an optimal Target Operating Model (TOM) is one that aligns for Strategy Development with Finance.
But, first, let’s take a step back and look at some the global trends–and what their implications are on Strategy and, thereby, Finance.
Trend #1: Rising affluence of middle classes in emerging markets, rising risk profiles in individual markets.
The organization’s strategic response to this trend can be summarized by: be global, act local. In other words, our market entry strategies should provide tailored, market-specific offerings–as opposed to a one-size-fits-all approach. A great example of this are financial product (e.g. insurance, banking) customization by country.
So, what’s the implication for Finance?
We should develop alternative product and customer profitability models for markets.
Trend #2: Market consolidation.
As we see markets consolidate, the strategic response is faster entry into new geographies, as well as adopting business models with both organic and inorganic changes. We see this in the Hi-Tech industry, as companies are bundling and cross-selling products acquired through M&A.
The implication for Finance?
We need to make investments for more rapid integration. This is done through —
- Robust process models and ERP system blueprint; and
- Master data management
Trend #3: Dramatic shift in consumption patterns and emergence of consumer power.
The Strategy to react to this trend is to change business models to enable on-demand consumption of preferred devices. In Software, we see a noticeably shift from on-premise software to the rise of SaaS cloud consumption.
The implication for Finance?
We need to develop new pricing models. Furthermore, we should enable seamless bundling and cross-selling of services.
Trend #4: Boundary-less workforce.
Organizations now globally source talent with broader, deeper third-party leverage to create flexible capacity at low fixed costs. As for Financial implications, we can leverage a broader ecosystem of service providers for leading practice infusion. We also can develop more structured evaluation frameworks for service entities.
Trend #5: Increase in volume, velocity, and complexity of business data.
The strategic response is to develop new skills to best leverage newly available information. The financial response is train workforce on new methods (e.g., driver-based planning) and leverage external providers for niche services (e.g., advanced Analytics for second-order effects).
True gains are realized when Finance can strategically respond to changing operational requirements.
For the Finance Organization to be appropriately aligned with our Strategy Development, we require an Operating Model that supports this alignment. For us to design this Target Operating Model, we require a robust Governance Program that is anchored on 5 foundational elements:
Let’s dive a bit deeper into the 3rd element. The right metrics establishes the standards of measure in terms of Performance Management. The metrics framework should embody 3 factors:
All participants in the Value Chain must know how to contribute to the outcome. This requires understanding of the process inputs, outputs, and performance drivers.
Good structures connect corporate goals to business drivers, performance metrics, and levers that impact those metrics.
Measures should be effective and efficient, as well as reactive and predictive. Soft metrics such as succession readiness and the effectiveness of training program should also be measured by the scorecards. For more information on this topic, take a look at our materials on the Balanced Scorecard.
Be aware that Finance programs may take months or years to generate planned returns. This must be measured using separate scorecards and targets.
Interested in learning more about these elements of Governance? This, and most aspects around aligning Strategy and Finance, is discussed in our framework Strategy and Finance Alignment.