Armonk, N.Y. – In the past three years, 62% of enterprises with more than $5 billion in revenue encountered a major risk event, and 42% of these enterprises were not well prepared for the event, according to a study of more than 1,200 chief financial officers (CFOs) and senior finance executives from 79 countries worldwide. The study, from
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.
A key component of the study is the emergence of Integrated Finance Organizations (IFOs), which are defined as entities that, at minimum, mandate standards enterprisewide with a standard chart of accounts, common data definitions and standard common processes. The study concludes that enterprisewide 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.
CFOs are increasingly becoming “owners” of risk management within their enterprise and sharing ownership with the CEO, according to the study. The study found 61% of CFOs are expected to lead risk management within their organization, followed by CEOs (50%), chief technology officers (27%) and chief risk officers (19%).
The study lends credence to observations that globalization opens up significant opportunities for companies, but exposes more risks for the enterprise, IBM says. The IBM Global CFO Study found that in the past three years, enterprises encountered a range of risks including strategic (32%), geopolitical (17%), environmental/health (17%), financial (13%), operational (13%) and legal and compliance (8%).
“Globalization currently presents, at the same time, one of the largest challenges and one of the greatest opportunities for global enterprises,” says Stephen 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.”
While risks are prevalent, many companies do not have a formal risk management program in place, according to the study. At many organizations, formal risk management is still fairly immature. By their own admission, only 52% acknowledge having any sort of formalized risk management program. Moreover, only 42% of respondents do historic comparisons to avoid risk, 32% set specific risk thresholds and only 29% create risk-adjusted forecasts and plans.
The study concludes that through greater discipline, IFOs are more flexible, dynamic and effective at executing finance activities, and are better situated to handling risk. While this is important, less than one in seven enterprises with over $1 billion in revenue have an IFO.
Overall, IFOs are part of enterprises that achieve higher revenue growth rates—a five-year, 18% compound annual growth rate (CAGR) versus 10% for non-IFOs. 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% for IFOs versus 14% for non-IFOs.
The study findings suggest CFOs at IFOs 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% 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% of organizations more than $5 billion in revenue that experienced a material risk event in the past three years stated they were well prepared, versus only 29% 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% to 44%. The study finds that IFOs more proactively evaluate and address risk. They also formally conduct these activities enterprisewide. Sixty-six percent of IFOs formally identify and manage risk versus 51% for non-IFOs. Sixty-three percent of IFOs conduct routine management monitoring versus 49% for non-IFOs. In addition, 51% of IFOs perform a historical comparison of their data versus 41% at non-integrated finance functions.
IFOs and influential CFOs are more effective at executing their agenda. CFOs with an IFO feel they are extremely effective at measuring and monitoring business performance, which is much higher than their counterparts at non-IFOs (81% to 57%, respectively). The study also shows that 93% of CFOs with an IFO feel they are very effective at meeting fiduciary and statutory requirements versus only 79% for non-integrated finance functions.
IFOs that improve performance and increases responsiveness spend more time on analytical activities (decision support and control activities); report on 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 toward more globally integrated enterprises. More than two-thirds, or 69%, of finance executives believe greater integration is difficult to execute but an imperative.
Source: IBM
