Sizing The Prize: The Digital Finance Advantage

Nilly Essaides

Everywhere we look, we see finance experimenting with and deploying smart automation solutions, like intelligent data capture, cognitive computing, and robotic process automation (RPA). Finance executives tell us they expect that digital transformation will have a dramatic impact on their performance, their operating model, and their skills and role definitions in the next two to three years. The results of The Hackett Group 2019 Key Issues Study predict a steep upward trajectory in the adoption of digital tools over the same period. For example, we foresee a more than threefold increase in the implementation of robotics.

But just how much impact can digital have on finance’s performance?

As finance people, we like numbers. So at The Hackett Group, we leveraged our extensive finance benchmark database to quantify the effects of smart automation on functional efficiency – at least for now – by looking at the effects of automation on full-time equivalent (FTE) requirements. We then used that information to calculate finance operating cost as a percentage of revenue.

We didn’t select efficiency metrics randomly. Nor did we do it just because it’s easier to collect and analyze the data. The reason we chose to focus on cost optimization first is that it is a huge driver of finance going digital. Seventy-five percent of finance organizations in our 2018 Digital Transformation Performance Study listed cost reduction as the number-one business objective for going digital.

The reality is that cost is a front-and-center issue for finance executives today (see image below). They are under pressure to improve margins by shrinking the bottom line, as senior executives worry about a weaker global economy, escalating trade wars, and the relentless introduction of new technologies and business models. The Hackett Group’s 2019 Key Issues Study revealed that cost reduction was finance’s top improvement priority for this year.

Quantifying the digital advantage

Is digital transformation helping finance meet these imperatives?

When we ran the numbers, we found exciting news. Our analysis of the efficiency impact of digitalization shows that the typical (i.e., peer) finance organization can slash its operating cost by 42% through digital transformation. Thus, by taking full advantage of digital tools, peers can match the efficiency levels of today’s world-class finance functions. Plus, even the best of the best (we label them world-class) can significantly widen the efficiency gap with peers (see image below).

Moving all the way to the right on this chart (from peer to digital world-class) takes significant time and resources. The shift must involve not just technological advancement, but also re-tuning processes and a massive effort to reskill talent.

But finance cannot wait that long. Our data also shows that by just deploying smart automation solutions, peers can accelerate their journey to world-class by 13%. Emergent digital technologies take a lot less time to implement and yield results faster. Thus, while it’s important that finance takes a holistic approach to digital transformation, it must also take immediate steps so as not to fall behind. From both our research and our work with clients, we know that this is already happening, and at an ever-faster pace.

Of course, efficiency is only one of the measures of digitalization success; the other two are effectiveness and experience. (Taken together, we call them the 3 E’s.) It’s harder to quantify how smart automation impacts the other two E’s. But we’ve made headway there, too. On the effectiveness front, we see that digitally enabled finance functions make fewer mistakes and complete their planning cycle much faster. On the stakeholder experience side, we found that internal customers of highly technology-enabled finance organizations are significantly more likely to perceive the function as a valued business partner.

At the most fundamental level (beyond the 3 E’s), digital technologies will alter the very nature of finance work. According to our analysis, the digitally enabled finance function will be able to perform today’s work with half as many people.

That does not mean half of finance professionals will lose their jobs, although some jobs will become obsolete. What it means is that the kind of work finance does will expand and evolve into more value-creating activities, such as analytics. We already see signs of this shift. According to our 2019 benchmarks, world-class finance functions allocate 18% of their staff to analytics and value-creating work, compared to only 10% for peers. They also dedicate 30% more staff to strategy and transformation work.

Here’s a fact that may surprise you: Our data shows that for the past decade, the efficiency gap between peer and world-class finance organizations has remained fairly fixed at 40%-45%. Digital transformation can disrupt the pattern and ultimately create a whole new category of world-class finance functions. What’s world-class today is not what’s going to be world-class tomorrow. Digital will change everything. The numbers foretell it. It’s therefore incumbent upon finance leaders to rev up their digital transformation engines.

Read more in The Hackett Group report, “World-Class Finance: Redefining Performance in a Digital Era.”

Nilly Essaides

About Nilly Essaides

Nilly Essaides is senior research director, Finance & EPM Advisory Practice at The Hackett Group. Nilly is a thought leader and frequent speaker and meeting facilitator at industry events, the author of multiple in-depth guides on financial planning & analysis topics, as well as monthly articles and numerous blogs. She was formerly director and practice lead of Financial Planning & Analysis at the Association for Financial Professionals, and managing director at the NeuGroup, where she co-led the company’s successful peer group business. Nilly also co-authored a book about knowledge management and how to transfer best practices with the American Productivity and Quality Center (APQC).