Looking To Boost Finance’s Performance? Check Your Organizational Chart

Of all the levers that a CFO can use to drive performance improvements in finance, adjusting the organizational chart is probably not the first that springs to mind. Few finance chiefs spend much time poring over their department's structure unless they're new to the job or in the middle of an acquisition or IPO.

But there's a compelling case for finance leaders to examine how their function is structured and aligned with the business, according to a new study from KPMG LLP. Doing so can significantly improve the department's ability to manage risk, reduce costs, and partner effectively with the business.

Larry Melillo, director with KPMG's business performance services practice and author of the report, asked leaders in 34 finance departments a simple question: Why is your department structured the way it is?

"Certain structures seemed to make sense and have some sound business reasoning, but in other cases companies were structured in no sort of organized or thoughtful manner," reports Melillo. "They had simply evolved over time. No one had taken an active look at the organizational structure, and as a result inefficiencies crept in. Shadow organizations were apparent, where -- either for political reasons or sometimes just due to apathy -- certain structures that had outgrown their usefulness were still there as a legacy part of the finance and accounting organization."

The study identifies three principles for a more rational approach to finance organization design. First, the function's structure should adapt based on the business's risk profile. For example, after the passage of Sarbanes-Oxley in 2002, many companies separated their internal audit function from finance in order to promote objectivity.

Second, reporting relationships to the CFO should take into account key aspects of the business model. The department's structure sends messages to internal and external stakeholders, and finance executives should make sure they know what those messages are. For example, investor relations reports directly to the CFO in 64 percent of Melillo's sample. That arrangement indicates that the CFO is empowered to "speak to the business model," allowing the CEO to address more strategic and longer-term issues.

The research found some variability in the types and number of functions reporting to the CFO. Risk management, for example, reports to the CFO or treasury 24 percent of the time, to operations 38 percent of the time, and to the CEO in 38 percent of cases. On average, seven functions report directly to the CFO. "Some organizations may have less or more, and there may be very good business reasons for that," says Melillo. "If a company is relatively decentralized it may choose to have regional finance heads reporting to the CFO to add more control to the organization, and in that case the number could far exceed seven. And that would be appropriate. For an organization that's maybe a bit more centralized, the CFO may be looking for opportunities to reduce his or her span of control simply so that the finance organization doesn't become unwieldy."

The third principle of finance organizational design is that sourcing alternatives should be assessed to improve service levels and reduce costs. "As many finance functions are turning to shared services, or sometimes outsourcing, the organization's work is changing," notes Arun Kumar, principal with KPMG's business performance services practice and a contributor to the report. "That's leading to companies looking at how they should organize finance -- where the controls should be, where the business support should be."

The organizational effects of sourcing initiatives sometimes receive less attention than they should, according to Melillo. "Let's say you decide to outsource or move a lot of your transactional processing to a shared services model. You need to remake the structure in terms of: Who's going to be the one who owns governance for that organization? Where does that person reside? Is that controllership? Is that a direct line to the CFO? Or, if it's a regional shared services structure, to what extent does regional finance have ownership of that as opposed to corporate finance? It's something that may be an afterthought, but people should be thinking in terms of how governance and accountability for the shared services model are reflected within the organization's structure."

To read the full KPMG study, "Your Finance Organization: Time to Take Another Look?" click here.