In large and established businesses with global operations, back-office functions, like finance (including risk and compliance), procurement, supply chain, HR, and IT, are traditionally tagged as cost centers and considered in strategic discussions only in the context of cost reduction or cost transformation agendas. This has meant that they play second fiddle to the customer-facing or revenue-generating business units, thereby putting back-office functions in the unenviable role of playing catch up with other strategic priorities.
While this may be the case, I believe the top priorities and challenges any organization faces demand a greater level of partnership with back-office functions. Let’s try and understand this by looking closer at business priorities.
What are the business priorities?
I look at the top priorities of any organization from two broad perspectives:
1. Board priorities
The Stanford Business School’s Corporate Governance Research Institute’s Quick Guide on Board Duties & Liabilities offers the following summary of board responsibilities:
“The board of directors has a dual mandate:
- Advisory: consult with management regarding strategic and operational direction of the company
- Oversight: monitor company performance and reduce agency costs“
According to research on more than 5,000 board members by Harvard Business School’s Boris Groysberg and Yo-Jud Cheng on the biggest challenges facing companies, the top challenge for most boards is attracting and retaining top talent. Although everyone (not just leaders) in the organization is responsible for attracting and retaining talent, the key processes, talent framework, benefits, and overall employee experience are owned and delivered by HR supported by finance (compensation, bank payments, etc.) and procurement (employees’ experience of workplace equipment, services, accessories, etc.). Note that all of these are back-office functions.
In addition, most of the other leading challenges (like regulatory environment, competitive risks, innovation, etc.) in the Harvard survey results require the back-office functions to play a pivotal role while keeping in mind the strategic and operational direction of the company.
Hence, it is fair to say that back-office functions are key to addressing board priorities and challenges.
2. CEO priorities
In the fourth quarter of 2018, Gartner conducted its annual CEO survey of over 473 CEOs and senior executives to identify their business priorities. Out of the 11 business priorities considered, the top priority was growth followed by IT-related priorities. One obvious immediate question: Does this mean there is an inherent conflict in the priorities of the board and the CEO? Without delving deeply, I feel it isn’t when corporate governance works well and the board does justice to its role. (I believe some of the recent issues at WeWork, Uber, etc. were related to boards being subservient to the CEO’s agenda rather than partnering for the long term.)
As shown in Figure 1 in Gartner’s press release, the greatest focus is on growth (driven by access to new markets or, as Gartner says, “diversification.. by the application of digital business to offer new products and revenue-producing channels”). Digital business that drives cost reductions and growth is the reason “IT-related” is the CEOs’ second priority. If digital business is the key driver of growth, it needs back-office functions to come together to build the digital platform. That means IT builds and connects the platform; procurement identifies the right partners; HR enables employees to upskill and acquire the right skills; and finance/risk identifies margin drivers and manages risk. Even in cases where new markets are the driver of growth, some or all of the back-office functions have a key role to play.
Like with the board priorities, it is evident from these studies that most of the 11 CEO priorities need ownership and/or active partnership of the back-office functions.
The shift needed: from playing catch-up to playing as one team
Forward-thinking organizations are already ensuring that back-office functions have a key role to play not just in executing but also in defining strategic initiatives; in other words, moving them from a catch-up role. Startups, smaller companies, and leading companies may not experience the challenges mentioned above if they have a more strategic approach to back-office functions. Also, some digital companies do have IT, procurement, and other back-office functions as a key differentiator and core of their strategy.
Some of the key roles played by back-office functions in digital businesses are:
- Finance: Strategic role in new business models, e.g., how do we price the new digital models while considering the risk to existing margins and business?
- Procurement: Agility in bringing in new suppliers, temporary workers/skills to build the capability to deliver digital channels, products, or services
- HR: Hiring the right talent, making the culture more nimble to address competition from digital natives
- Supply chain: Agility in responding to customer demand with ecosystem plays
- IT: Building and supporting the digital platform to enable a digital business
In addition, some internal functions can be an enabler and testbed for new business models and/or new ways of working, especially with newer technology use cases such as blockchain, AI, chatbots, etc. A great example of this is the growth of Amazon Web Services (AWS) moving from the cost center (IT function) for the Amazon group to being the top contributor to Amazon’s operating income (per Amazon’s third-quarter results).
In conclusion, CEOs and boards have to consider their back-office functions as partners to help shift their models and stay relevant. This requires maturity, realization of the competitive challenges, and reconsideration of the negative connotations associated with being a cost center.