Typical companies see 18 percent increase; world-class performers now spend 42 percent less than typical companies
Atlanta September 27, 2005 Finance costs at typical companies rose by 18 percent over the past two years, in part due to increased compliance-related costs, according to newly-released 2005 Book of Numbers research from The Hackett Group, a business process advisory firm.
Typical companies now spend 1.26 percent of revenue on the finance function. This is the first time in Hackett's 13-year history of benchmarking that finance costs have risen for typical companies.
The first look at Hackett's 2005 Book of Numbers analysis found that typical companies now spend $940,000 per billion dollars of revenue on compliance management, while world-class companies spend 36 percent less. According to Hackett, world-class chief financial officers (CFOs) rely on standardization and reduced complexity to more effectively manage compliance costs. As a result, leading CFOs have continued to see reductions in the total cost of finance over the past two years.
Hackett's research also found that world-class finance organizations now spend 42 percent less in the finance function than typical companies and have 44 percent fewer finance staff.
Richard Roth, Hackett's chief research officer, said that CFOs are being challenged as never before by the demands of regulatory compliance, specifically Sarbanes-Oxley and other global compliance initiatives such as IFRS. For most CFOs, the resources and focus required to comply have turned the tide of more than a decade of efficiency improvements and caused an increase in the total cost of finance, he said. At many typical companies, the bright-line focus on compliance has forced them to put alignment initiatives and support of the business on the back burner. World-class CFOs, on the other hand, have been able to better manage through this period. While they've also seen a rise in compliance costs, they have continued to improve overall efficiency and effectiveness.
According to Hackett's research, world-class finance organizations now spend 42 percent less than typical companies overall (0.73 percent of revenue versus 1.26 percent). Typical companies have seen an 18 percent increase in total finance costs since 2003, while world-class finance organizations have seen a 5 percent drop during the same period.
Compliance costs have risen significantly for both world-class and typical companies since 2003.
World-class now spend 36 percent less on compliance than typical companies (.060 percent of revenue versus .094 percent). For instance we see that the typical company is spending an additional $340,000 per billion in revenues, or a total of $940,000 per billion in revenues for additional internal finance and external resources to meet today's compliance requirements.
However, these figures are just the tip of the iceberg. Hackett believes that average companies are spending an additional amount, potentially equal to or greater than the compliance management costs on key control activities. These activities would include documenting, testing and potentially remediating key controls throughout the business.
World-class finance organizations now operate with 44 percent fewer staff than typical companies (63 employees/billion of revenue versus 112). More than half of the overall spending gap between world-class and typical companies is attributable to lower labor costs, despite the fact that world-class finance organizations pay staff more, with fully-loaded wage rates 11 percent higher than typical companies ($79,345 versus $71,411). According to Hackett, this higher wage rate is an indication that world-class finance organizations are changing their staffing profile, employing more skilled employees capable of delivering higher-value finance activities.
World-class finance organizations also spend 63 percent less than their peers on technology. However this is not because they use less technology. Rather, they make better use of technology they have by simplifying and optimizing their infrastructure. For example, world-class finance organizations rely on just one enterprise-wide finance platform, while typical companies rely on two. World-class finance organizations also process a larger percentage of their payments electronically, and rely on online systems for T&E submissions more than twice as often as typical companies.
Across a range of effectiveness metrics, world-class finance organizations show superior performance. World-class companies are more than twice as likely as typical companies to play a proactive role in decision-making, and 90 percent of all internal customers at world-class firms believe that cost analysis provided by finance is on target and makes a positive contribution to the effort of decision-making. World-class finance organizations are also significantly more likely to be viewed as a business partner by executives in other areas of the business.
According to Hackett Finance Practice Managing Director Mark Krueger, The drive toward compliance is by no means over. Sarbanes-Oxley compliance is still very much a moving target. It's possible that the SEC will now begin work on making Sarbanes-Oxley more business friendly.' Companies will welcome this, but it may also mean more work.
Krueger added that what is also clear is that every firm will need to adopt sophisticated risk-management tools that evaluate risk on the front-end, as well as monitor and report control risks and variances in a real-time environment. In addition, he said, companies will want to continue efforts to streamline close and reporting processes, and elevate financial statement review and signoff procedures to the audit committee to reduce the potential for severe financial penalties and even executive indictments for financial reporting lapses, which some companies have already seen.
While typical firms are still focused on driving cost out of transactions, Krueger said that world-class finance organizations are far down the path toward providing better value to the organization as a whole through high levels of best practice utilization, standardization of business processes and practices company-wide, and extensive improvements in planning and analysis, compliance and risk management. Their efforts are clearly paying off, he said.
The Hackett Group's research into world-class performance is compiled in its Book of Numbers series, which provides senior executives with fact-based performance metrics based on Hackett's database of best practices and process metrics in finance, information technology (IT), human resources (HR), procurement and other areas.
The firm conducts best practice research, benchmarking and advisory services. Its analysis is backed by metrics derived from 3,300 benchmark studies over 13 years at nearly 2,000 of the world's leading companies, including 93 percent of the Dow Jones Industrials.
For more information on Sarbanes-Oxley, read Parts 1 and 2 of the recent SDCExec.com series on Contract Management: Five Myths of Contract Management, and Contract Management: Improving Corporate Governance.
Other recent SDCExec.com articles on Sarbanes-Oxley:
- More articles about Sarbanes-Oxley.