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24 Oct 2007:
According to the study, in the past three years 62 percent of enterprises with over $5 billion in revenue encountered a major risk event. When a major risk event did occur -- such as strategic, operational or geopolitical -- 42 percent of these enterprises were not well prepared for the event.
The Global CFO Study, titled "Balancing risk and performance with an Integrated Finance Organization" was developed by IBM Global Business Services' Financial Management practice and the IBM Institute for Business Value (IBV), with assistance from the Wharton School at the University of Pennsylvania and the Economist Intelligence Unit. Over half of the participating CFOs and senior finance executives participated in a face-to-face structured interview, designed to capture insights on the subject of risk management and finance transformation. The remaining balance responded to an online survey.
Another key component of the study is the emergence of Integrated Finance Organizations (IFOs) which are defined as entities that, at minimum, mandate standards enterprise wide with a standard chart of accounts, common data definitions and standard common processes. The study concludes that enterprise wide common data definitions, a standard Chart of Accounts, common standard processes and globally mandated standards are the components of good governance and what the study calls the Integrated Finance Organization (IFO). Fewer than one in seven enterprises govern and manage the integration of their Finance organization by the combination of these four criteria.
The study finds that IFOs provide greater resiliency, better decision support and help to drive outperforming enterprises. Additionally, the study shows that enterprises with IFOs are more likely to perform better financially than non-integrated finance organizations and are more likely to proactively manage risk.
Who owns Risk?
CFOs are increasingly becoming "owners" of risk management within their enterprise and sharing ownership with the CEO. The study found 61 percent of CFOs are expected to lead risk management within their organization, followed by CEOs (50 percent), Chief Technology Officers (27 percent) and Chief Risk Officers (19 percent).
The study lends credence to observations that globalization opens up significant opportunities for companies but exposes more risks for the enterprise. The IBM Global CFO Study found that in the past three years enterprises encountered a range of risks including strategic (32 percent), geopolitical (17 percent), environmental/health (17 percent), financial (13 percent), operational (13 percent) and legal and compliance (8 percent).
"Globalization currently presents, at the same time, one of the largest challenges and one of the greatest opportunities for global enterprises," said Stephen J. Lukens, Global Financial Management Leader, IBM Global Business Services. "Forward-thinking executives locate operations and functions anywhere in the world based on the right cost, the right skills and the right business environment. The world is shifting towards a new definition of globalization, but a majority of companies are still maintaining the old worldview. Enterprises need to transform their financial management models. They need to integrate their finance operations to take advantage of this new perspective on globalization. Integrated operations alleviate the threats they face and improve the operational performance of their organizations."
Formal Risk Management is Immature
While risks are prevalent, many companies do not have a formal risk management program in place. At many organizations formal risk management is still fairly immature. By their own admission, only 52 percent acknowledge having any sort of formalized risk management program. Moreover, only 42 percent of respondents do historic comparisons to avoid risk, just 32 percent set specific risk thresholds and only 29 percent create risk-adjusted forecasts and plans.
The Rise of the Integrated Finance Organization (IFO)
The study concludes that through greater discipline Integrated Finance Organizations (IFOs) are more flexible, dynamic and effective at executing finance activities and are much better situated to handling risk. While this is important, less than one in seven enterprises with over $1 billion in revenue has an Integrated Finance Organization.
IFOs Perform Better Financially
Overall, IFOs are part of enterprises that achieve higher revenue growth rates -- a 5 year 18 percent Compound Annual Growth Rate (CAGR) versus 10 percent for non-integrated finance organizations. Fifty percent of IFOs are in high growth markets. Integrated enterprises in high growth markets outperform industry peers in stock price and revenue over a five year CAGR period. Revenue jumped 24 percent for IFOs versus 14 percent for non-IFOs.
IFOs Handle Risk Better
The study findings suggest CFOs at Integrated Finance Organizations are more proactive at supporting and managing risk management than their counterparts in non-IFOs. Sixty percent of those surveyed in the study say they are more effective at managing risk versus only 43 percent at non-IFOs. IFOs are also twice as likely to be prepared for major risk events. When IFO respondents were asked to measure their own risk preparedness, 62 percent of organizations over US $5 billion in revenue that experienced a material risk event in the past three years stated that they were well prepared, versus only 29 percent of non-IFOs in the same situation.
CFOs executing effective risk management are 1.2 times more likely to have risk management reporting directly to them, that is 54 percent to 44 percent. The study finds that IFOs more proactively evaluate and address risk. They also formally conduct these activities enterprisewide. Sixty-six percent of IFOs have a formally identify and manage risks versus 51 percent for non-IFOs. Sixty-three percent of IFOs conduct routine management monitoring versus 49 percent for non-IFOs. In addition, 51 percent of IFOs perform a historical comparison of their data versus 41 percent at non-integrated finance functions.
Integrated Finance Organizations and influential CFOs are more effective at executing their agenda. CFOs with an IFO feel that they are very effective at measuring and monitoring business performance than their counterparts at non-IFOs, 81 percent versus 57 percent. The study also shows that 93 percent of CFOs with an IFO feel they are very effective at meeting fiduciary and statutory requirements versus only 79 percent for non-integrated finance functions.
IFOs Improve Operational Performance
An Integrated Finance Organization improves performance and increases responsiveness. IFOs spend more time (10 points or 21 percent) on analytical activities (decision support and control activities); report on 20 percent more dimensions and are more likely to focus on customer, industrial and channel activities. They also access data more quickly and provide confidence in data veracity.
Many enterprises are currently non-integrated, but the future is evolving towards more globally integrated enterprises. More than two-thirds or 69 percent of finance executives believe greater integration is difficult to execute but an imperative.
About the Global CFO Study
The findings of this report are based upon a survey conducted in the spring and summer of 2007 by IBM Global Business Services' Financial Management practice and the IBM Institute for Business Value (IBV). Over 1,200 Chief Financial Officers and senior Finance executives from 79 countries participated in structured interviews or online surveys designed to capture insights on how Finance professionals are affected by and deal with performance, risks, operational levers and governance. The majority of these interviews were conducted in person by IBM practitioners, with the remainder interviewed online through a partnership with The Economist Intelligence Unit (EIU). The Wharton School of the University of Pennsylvania assisted with survey design, data organization and interpretation. Participants represent organizations across a variety of industries, geographic locations and revenue size.
About Financial Management Practice
IBM Global Business Services' Financial Management practice focuses on enabling enterprise innovation and performance through improved Finance organization efficiency and effectiveness. With more than 4,000 practitioners, Financial Management has a full suite of end-to-end capabilities to address a client's challenges. Our capabilities include Finance Transformation, Finance Operations Improvement, Business Performance Management, Business Risk Management and Finance Enterprise Applications.
About the IBM Institute for Business Value
The IBM Institute for Business Value provides strategic insights and recommendations that address critical business challenges to help clients capitalize on new opportunities. The Institute is comprised of consultants around the world who conduct research and analysis in 17 industries and across five functional disciplines, including human capital management, financial management, corporate strategy, supply chain management and customer relationship management.
About the Wharton School
The Wharton School of the University of Pennsylvania -- founded in 1881 as the first collegiate business school -- is recognized globally for intellectual leadership and ongoing innovation across every major
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