Innovation on the ‘inside’
The notion that innovation has to be glamorous and ground-breaking is seriously misplaced – recent research shows that looking after core financial processes on the ‘inside’ of the organisation adds far more to the bottom line over the medium term than the latest customer-facing gimmicks.
A 2014 study by McKinsey highlights that while online sales, social networking and mobile applications have received most of the buzz its yearlong study found across the industries they studied that the average bottom-line impact that can be realised from digital sales over the next five years is 20 percent – a worthy prize, but much less than the bottom-line impact from cost reductions, which average 36 percent.
But what this study confirms indirectly is that the same technologies (cloud, mobile, social and analytics) play a vital role whether one is seeking innovation on the inside or outside of the organisation. So where is the innovation in internal processes?
The ‘low-hanging fruit’ is in process standardisation and automation. Take for example, the planning, budgeting and forecasting (BPF) process. BPF is central to the viability and growth of any organization, yet these core financial processes remain some of the most fragmented and challenging areas of management endeavor, marked by the proliferation of different budgeting tools and the inability to deliver robust and dependable processes on an enterprise-wide level.
In fact, recent research shows that 29% of large enterprises have between two and five different budgeting planning and forecasting systems across various functions and geographies, and a sizeable 43% have six or more different systems in place.
And when it comes to the potential for automation a recent study of banks reveals just how bloated and unproductive large organizations can become over time. In one McKinsey study, a large bank categorized its 900-plus end-to-end processes into three ideal states: fully automated, partially automated, and “lean” manual. This bank determined that 85 percent of its operations, accounting for 80 percent of the current full-time employees (FTEs), could – theoretically – be at least partially automated. At the time of this analysis, fewer than 50 percent of these processes were automated at all. The study concluded that if an ideal level of automation were reached, then almost 50 percent of the FTEs in operations could be relieved of their current back-office tasks. This story compellingly illustrates that seeking novel and innovative ways of automation is indeed a potent force when it comes to keeping the lid on costs.
So, for how long can CFOs put off the decision to innovate around their core financial processes? Well a third consideration brings home the dangers of neglecting innovation on the inside – especially if CFOs allow innovation on the inside to get out of equilibrium with innovation on the outside.
With the increasing trend for marketing budgets to outstrip IT budgets and for marketing to craft product and service offerings almost on an individual customer level (certainly through e-commerce interactions) some organizations are already finding that their back office systems can no longer keep pace with the variety and volume of transactions arising from marketing-led product and service innovation.
Ultimately, the self-imposed restrictions caused by neglect of process innovation on the inside will in some industries (and probably in all eventually) lead to a loss of competitiveness. Smart CFOs know that ignoring process innovation on the inside is putting their business at risk and that’s why process standardisation, automation and innovation must remain core values of the Modern Finance Agenda.