How much does it cost to run the finance function? How much should it cost? And what best practices can companies implement to bring those costs down without reducing the quality of financial oversight and business support?

Answering these questions is one goal of the extensive benchmarking research compiled annually by The Hackett Group. According to the firm's benchmark reports, the cost of finance has been falling steadily for years. Even so, this year's result is notable: For the first time, the finance function in the median company cost less than 1 percent of corporate revenue. That's a 34 percent reduction from two decades ago. (See Figure 1, below.)

Technology has obviously played a key role in improving efficiency, but it hasn't been the only weapon in the finance arsenal. Treasury & Risk sat down with Hackett senior research director Lynne Schneider to uncover causes of the trend.

T&R: What have companies done over the past 20 years to bring the cost of finance down to less than 1 percent of revenue?

Lynne Schneider: World-class companies have been under 1 percent for quite some time. And there is still a gap of about 40 percent between the world-class companies and the companies that are not world-class—what we call the 'peer group.' But over time companies in the peer group have begun adopting many of the best practices pioneered by world-class companies. So while the cost of finance number has been falling over time in every group, the number is making less movement among the world-class organizations. They continue to squeeze more and more efficiencies from the transactional kinds of processes, but in many areas they've automated everything that can be automated.

T&R: So, are technology and automation the primary drivers of efficiency that you see for finance?

LS: Well, it's one thing to automate a process, but you need to make sure first that it's a streamlined process and you're not automating the process in five different ways for five different parts of your business.

One of the things world-class companies do very well is drive out complexity wherever it is. We did an analysis of our data a few years ago, looking at one specific type of complexity—the number of legal entities within a company. We found that companies with more legal entities per billion dollars of revenue had increased costs across a whole bunch of different finance processes. It almost didn't matter what process we were looking at; having more legal entities drove up costs.

Best practices in finance involve automating wherever it's practical, but also eliminating any activities that don't need to happen anymore. And simplifying and standardizing processes. If there's variation in how a particular process is done, is that variation really necessary? Every variation adds complexity, cost, and the opportunity for errors. The combination of process standardization, simplification, and automation has provided the biggest impetus for change.

T&R: What are world-class companies doing differently that is driving complexity out of their finance processes?

LS: I think it has a lot to do with the position of finance within the company. In world-class organizations, finance tends to have better relationships with their partners out in the business.

Complexity doesn't arise because a finance team says, 'We want to do this four different ways.' It's because different business unit leaders come to them and say they need to do things their own unique way. When finance is more respected as a partner, they're better able to negotiate and manage that.

T&R: If a finance team doesn't have that kind of partnership with the company's business unit leaders, what can they do to improve standardization of finance processes?

LS: The first step is for finance to get the basics right. If finance isn't achieving efficiency internally, no one is going to want to hear about how they need to do things differently for efficiency's sake. So, first, get your own finance outfit in order.

Then finance managers and staff need to raise their level of business acumen. In conversations with business unit leaders, finance should be able to use the kinds of terms the business leader uses. Finance needs to understand how their business unit operates so that they can have a good, informed discussion about the tradeoffs that will be necessary in rooting out complexity in finance processes.

It's really helpful to be able to say to someone, 'What you're explaining to me sounds a lot like what we're doing with this process over here…' It's important to become business savvy so you can have those conversations.

T&R: A Hackett white paper published earlier this year highlights three mandates for the finance function in 2014: realigning talent to add business skills and analytics expertise to the finance skill set; retooling finance to automate routine processes using technology; and re-architecting the function's service delivery model so that transactional activities migrate into a shared service center.

LS: Yes. In world-class organizations, finance has raised its reputation so that the function is seen not as an administrator but as a true partner to the business units.

T&R: The past two decades' reduction in the cost of finance is impressive. Do you still see room for continued improvement?

LS: Definitely. Even with the cost below 1 percent of revenue, we believe those numbers will continue to go lower. Finance teams will face continued pressure to keep reducing costs. And for finance functions that want to be a better business partner, they're going to need to invest in those capabilities. They're going to need to reduce costs elsewhere in finance in order to find money in their budget to fund that investment.

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