Prove your worth

Finding ways of measuring the quality and performance of finance departments
is always difficult.

Having discussed this issue with numerous companies over the past year, the
message is that most of those involved, including those in finance, feel
misunderstood and under appreciated. One reason for this sorry state of affairs
is that their contribution is not properly acknowledged.

The good news is that morale in finance is generally higher than other
functions, including HR, IT, procurement and strategy. Indeed, the CFO’s
external role and assured place at the top table are the envy of other
functional heads.

Now the bad news – the changing management agenda, along with changes in
technology and the drive towards outsourcing, is a threat as well as an
opportunity. Internal audit sees itself as the logical home of risk management.

At the same time, the legal function has become indispensable to large
company decision-taking and more businesses are moving administrative
responsibilities to chief operating officers.

The danger is that finance will become smaller and more technical, while
other service functions pick off the growth areas, including increasingly
non-financial measurement. This threat is not new, but pressures on finance from
other functions are now greater as they demand their place in the sun.

Faced with these pressures, better measurement is essential, starting with
the CFO. Externally, finance providers (and for quoted companies, analysts)
rightly attach great importance to CFO quality. Internally, the annual appraisal
is a starting point, but its quality varies hugely, not least because most
colleagues have only a hazy understanding of the role.

Measures need to distinguish between a ‘licence to practice’ (for example,
knowledge of technical issues such as IFRS or Sarbanes-Oxley) and performance.
The former is about professional competence and credibility – the minimum
required – the latter is about quality as professional, manager, team member and
representative.

In most companies, performance needs to be linked to a framework made up of
four main elements of the role. In the CFO’s case, they are expert, finance
head, board member (how good is your contribution compared to others) and
external face (do you appear too close to the CEO?)

The focus should be on delivery against objectives, not over time.

This is a framework, not a blueprint – organisations vary, as does the way
CFOs work and their relationships to other key players. Nonetheless, a
comparison to objectives should build on annual appraisal against an individual
plan.

The focus should be on outcomes, not activity and process – success in
mid-year budgeting and clear succession plans need a far higher weighting than
meetings attended or posts filled.

A comparison with others is also important. Outsiders will be able to help
with CFO expertise and on matters such as risk management and finance’s
integration into the business. Finance providers and, if relevant, analysts will
be able to comment on the CFO as external representative and as a safe pair of
hands.

Independent board appraisal can help to establish quality – the question:
‘How well do I perform as a member of the management team, rather than as CFO?’
is too rarely asked, but the CFO ought to be playing a big role in strategy
formulation as well as execution.

Avoiding surprises and mistakes is just as important as hitting a target. It
will be more difficult to find these measures, but 360 degree feedback should
help, particularly in providing information from subordinates.

Finance is a natural home for good performance measures. Threats as well as
opportunities underline the importance of the CFO personally taking the lead.

Sir Andrew Likierman is professor of management practice at the London
Business School

TIPS FOR THE TOP

Without robust measures for the finance function,the CFO’s credibility will
be
undermined.Consider the following ways to gauge your performance:

• Keep the function’s objectives clearly linked to those of the company.Improve the sophistication of the measures.
• Focus on better and possibly fewer measures – go for performance (quality ofservice),not activity (numbers processed)
• Use comparisons with others wherever possible,not just for the whole
  function, but with parts (transaction processing) and processes (response
  times).
• Recognise that not everything will be quantifiable. Answers to well-framedquestions (‘How confident are you that management accounts provide a reliable
  basis for decisions?’) are better than spurious numbers.
• Improve feedback to and from customers. Use questionnaires with caution –
  those outside finance rarely have enough experience to judge a bad function from
  a good one.Some feedback should come through interviews.
• Acknowledge that some problems can only be mitigated,not solved.For example,
  a first-rate commentary is essential to get the most out of numerical measures,
  such as in the trade-off betweenmarketing and finance for credit policy.