Dr. Deniz Caglar, Namit Kapoor, Thomas Ripsam
November 16, 2012
Functional organizations in major companies are facing dramatic change. Businesses are becoming more focused around capabilities, and demanding that leaders of functions play a more strategic role. With less stable environments and more intense competition in many markets, there is a premium on agility and flexibility, and increasing emphasis on performance results. These pressures are forcing many functions to boost operational excellence even further, usually while reducing costs.
The net result is a golden opportunity for HR, IT, finance, operations, R&D, marketing, sales, sourcing, and other functions and shared services. Instead of striving to be “best in class” in everything they do, functions can become “fit for purpose”: changing their portfolio of activities to focus primarily on those that are strategically important to the enterprise or that add high value.
But given the day-to-day transactional needs of the business and the long-range in-depth efforts needed to build distinctive capabilities, how can a functional leader take on this new strategic role? The new functional agenda addresses this dilemma. It has three elements: (1) establishing priorities in line with the company’s overall strategy and the enabling role of the function, (2) aligning the operating model to deliver value in line with those critical priorities, and (3) allocating resources accordingly. For functional leaders, this new role places a high premium on interpersonal skills and strategic insight — which can be a primary source of success not just for the function, but for the enterprise as a whole.
If you are a functional leader, your role today is more challenging than ever before. Your most important work, on differentiating capabilities, is combined with that of other departments. In many cases, you share authority instead of maintaining unilateral control. You need a level of credibility and integrity high enough that you can counsel business unit leaders, even telling them hard truths — for example, when their priorities conflict with those of the overall enterprise.
As companies become more coherent, you may increasingly be called on to help build or develop distinctive capabilities (“Reframing the Finance Agenda”). That may mean shifting abruptly from a service bureau orientation, where your role is to fulfill every request, to a more strategic approach, where you help set and maintain priorities and sometimes have to say no. Even as its leaders espouse greater coherence, your organization may not move smoothly in that direction — and if it does, the leaders will still need to figure out how to maintain a decentralized decision-making system that has served the company in the past.
The finance function is typically thought of as a constraint on expansion costs, not as an enabler of growth. But at a large CPG company, leaders in finance became champions of a growth agenda. It started with a conventional cost-cutting move: In the wake of the Great Recession, the company’s leaders asked finance to cut 20 percent of its operating costs by doing more with less.
The top finance team met to consider the measures, and soon realized that it could deliver greater value to the business in other ways. This company was known for its successful brands, based on a strong product appeal that it continued to develop, which allowed it to dominate several CPG categories. This was the basis of its value proposition. It was also known for its ability to grow through acquisition. However, the decentralized culture, in which business units had long operated with their own separate support functions, had left “mini-pyramids” of functional support that had little to do with one another and competed for the company’s resources.
After comparing their expenses to those of other functions, the finance leaders resolved to raise their productivity, and to provide better support for the company’s frequent acquisitions, particularly in the areas of due diligence and integration. The leaders met to design a new, leaner operating model for the function, incorporating new metrics for effectiveness and value delivery. This new model included the outsourcing of a variety of financial activities such as standard financial reporting, and the development of a shared-services capability for all the company’s financial planning and analysis activities, based on service-level agreements made with the heads of all the business units. This gave finance an unprecedented high level of accountability for the business units it served.
Thanks to resources freed up under this initiative, the finance function was able to regroup. It began to take on an advisory role, helping business units think about where they should channel their investments for growth and how to manage and control costs. In this new capacity, the finance department regularly consulted with the heads of the business units on key business decisions they had to make. This was particularly helpful in the course of making and integrating acquisitions, a key element of the company’s strategy.
Today, regular surveys suggest a high level of satisfaction among the function’s internal clients and the heads of the business units. Because finance has stepped in to actively manage business unit costs, the cash available for reinvestment can be measured more accurately. The function’s larger role in the acquisition process provides the company with better due diligence and integration, and a clearer picture of the return on the investment made in each acquired company. One critical factor was the effort to include the business managers in early conversations about finance’s strategic role and operating model. That enabled the finance department staff to work closely with the business unit staff to understand their needs and how the finance function could best meet those needs. It also enabled the company to overcome the reluctance that many people felt to share information and services across business unit boundaries.
A well-designed and well-executed functional agenda makes it easier for you to play this role. If you can establish a genuine functional agenda, in line with your company’s essential advantage, you will not be operating alone. The process reinforces a higher degree of alignment between the corporate center, the local business leaders, and your own team. It allows you to undertake the difficult step of focusing your efforts on distinctive capabilities, and helping to bring the firm’s strategy to life. As you gain practice in saying no to multiple priorities, and focusing on the few most critical capabilities, you enhance your own ability to lead. When the company moves in the direction of a capabilities-driven strategy, and needs your function to take part wholeheartedly, you and your team will be ready.