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

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

Technology has obviously played a key role in improvingefficiency, but it hasn't been the only weapon in the financearsenal. Treasury & Risk sat down with Hackettsenior research director Lynne Schneider to uncover causes of thetrend.

T&R: What have companies doneover the past 20 years to bring the cost of finance down to lessthan 1 percent of revenue?

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

T&R: So, are technology andautomation the primary drivers of efficiency that you see forfinance?

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

One of the things world-class companies do verywell is drive out complexity wherever it is. We did an analysis ofour data a few years ago, looking at one specific type ofcomplexity—the number of legal entities within a company. We foundthat companies with more legal entities per billion dollars ofrevenue had increased costs across a whole bunch of differentfinance processes. It almost didn't matter what process we werelooking at; having more legal entities drove up costs.

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

T&R: What are world-classcompanies doing differently that is driving complexity out of theirfinance processes?

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

Complexity doesn't arise because a finance team says, 'We wantto do this four different ways.' It's because different businessunit leaders come to them and say they need to do things their ownunique way. When finance is more respected as a partner, they'rebetter able to negotiate and manage that.

T&R: If a finance team doesn'thave that kind of partnership with the company's business unitleaders, what can they do to improve standardization of financeprocesses?

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

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

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

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

LS: Yes. In world-class organizations,finance has raised its reputation so that the function is seen notas an administrator but as a true partner to the businessunits.

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

LS: Definitely. Even with the cost below1 percent of revenue, we believe those numbers will continue to golower. Finance teams will face continued pressure to keep reducingcosts. And for finance functions that want to be a better businesspartner, they're going to need to invest in those capabilities.They're going to need to reduce costs elsewhere in finance in orderto find money in their budget to fund that investment.