A report from KPMG, in association with CIMA, shows how top performing finance functions in the energy and natural resources sector gain their advantage. It offers insights which are relevant to all sectors.
High performing finance functions in the energy sector are twice as efficient as their competitors, according to KPMG’s 2009 Energy and Natural Resources Finance Survey. High performers report finance full time equivalents (FTEs) of 37 per US$ billion operating costs, compared to the average of 81.
The survey, entitled ‘Insights from leading finance functions’, also reveals that high performing finance functions devote more resources to business decision support. This is particularly at the asset level where half undertake these activities compared to approximately a third across all respondents.
Michiel Soeting, global chairman of KPMG’s Energy & Natural Resources practice, says: 'Our research indicates that high performing finance functions anticipate the needs of the business throughout the commodity life cycle and continue to refine their role, the services they provide, and the appropriate size and shape of their supporting model.'
Startling differences
KPMG surveyed 20 leading mining and upstream oil and gas organisations in 2009 and analysed their views on the latest trends, priorities and challenges for finance in the ENR sector. It also examined and compared responses to the current global economic crisis. The findings reveal some startling differences in how finance functions in the companies surveyed operate and at what efficiency levels.
Further and perhaps most concerning, the survey reveals that nearly four-fifths of respondents lack a global view of key finance processes and allow local systems, manual processes and spreadsheets to pervade management reporting, business planning and project accounting.
The survey also reveals that poor systems and inefficient processes have helped to create a vicious circle. This hinders finance’s performance with unnecessary effort spent on data collection, duplication and re-work in order to gain confidence in the integrity of the data.
Finance it appears, has added its own complexity and financial labyrinth to an already complex industry.
Breaking the circle of complexity
Simon Osmer, partner from KPMG in the UK, says: 'The best finance functions break the circle and burden of complexity by standardising, simplifying and automating. They have already adapted to these turbulent times by altering their focus to help the business and are perceived as business advisers rather than controllers. Some of the worst just add up the numbers and tell everyone what they already knew.'
The high performers are in the minority however. Less than 20% of respondents in KPMG’s survey have a leadership role as a business adviser. Nearly all have a contributing rather than a leading role for advising on operating decisions and asset management, capital expenditure initiatives, controlling costs, working capital management, and scenario planning.
The research found standardisation across key processes to be very low with less than 10% of respondent’s managing all key finance processes on a global level. Of concern is that the survey also found that only 10% of respondent’s envisaged a change to global process standardisation in the next three years.
Low shared services implementation
KPMG‘s research identified that the sector is developing a bespoke shared services model which is narrower than in other industries. This is being driven by a lack of key enablers prevalent in other industries – global technology platforms, strong functional reporting lines, global process governance and standard finance organisation design. These issues appear to have been exacerbated by complex sector characteristics such as remote locations and diverse regulatory environments.
However, implementation levels among respondents remain low. This represents a missed opportunity to gain efficiencies and enable finance to focus on more value added activities. Only a third of the companies surveyed have successfully established shared services to drive cost efficiencies in transactional processes. In contrast the high performers make greater use of shared services and centres of excellence and benefit from being freed to provide a greater focus on business planning, management reporting and analysis at the asset level.
The survey reveals that - although finance is working harder than ever and two thirds of respondent’s cite finance as having a leadership role in both financial and operational reporting - functions are constrained by a serious lack of skills at the asset level, where it matters most.
The survey identifies attracting and retaining quality employees at the asset level as the major stress point in the finance operating model. Nearly two thirds of respondents cited a lack of technical and commercial skills together with low levels of employee mobility. The high performers have solved these issues by implementing finance leadership development programmes and role rotations supported by standardised ways of working where it will be beneficial and appropriate and are able to retain a deep and mobile finance talent pool.
KPMG believes that developing and nurturing a global finance team is critical to enabling high-performing finance functions.
In examining the high performing finance functions’ ability to be twice as efficient as the sector average, KPMG identified some of the essential characteristics needed for survival and success during the current economic crises and beyond.
Finance functions should enhance their focus on working capital management, cost control, budgeting, forecasting and scenario planning. Two thirds of respondents identified these areas as priorities for improvement. So it seems the current economic crisis has served to highlight the shortcomings that some finance functions should urgently seek to address.
CIMA perspective
Peter Simons, technical specialist at CIMA, said: ‘The findings of KPMG’s survey are consistent with CIMA’s work with the CIMA Network Forum. The findings are relevant for most organisations in other sectors too.
‘Leading organisations are already transforming their finance functions to be ever more efficient; to provide better information to enable evidence based decision making; and to partner with the business to ensure performance and risk are managed in the long term interests of shareholders. Others could be putting their competitive position at risk.’
Simons said that a crisis tends to increase emphasis on governance, risk management and the veracity of statutory reporting. The credit crunch and subsequent downturn also focussed attention on cost control, working capital and cash flow management. But these are as important in good times too. The underlying challenges which will need to be addressed as the economic conditions improve are:
- the relentless pressure to increase efficiency through investment in systems, standardisation, centralisation and continuous business process improvement
- stakeholders’ and decision makers’ need for better information including leading indicators about the organisation’s position, performance, risks and opportunities
- the need to cascade strategy implementation and performance/risk management throughout the business to ensure it is run in the long term interests of shareholders
- the need to develop finance people who can combine accounting expertise, commercial awareness and influencing skills to help improve decision making.
Links
CIMA encourages business leaders and management accountants to consider how their finance function can be transformed to address these challenges. See Decision making.
For more detailed comment read the full KPMG survey (PDF 723KB).
Mastercourse: Transforming the finance function