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7 January 2019 | ITSM
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Bad Financial Decisions by Managers Cost Firms More Than 3 Percent of Profits
CFOs need to realign support around specific financial decisions, not stakeholders...

Chronic occurrence of poor operational decisions by midlevel managers is eroding margins and costing firms upward of 3 percent of profits, according to Gartner. As digital and other business transformations (such as merger and acquisition [M&A]) drive a greater volume and variety of operational decisions, it is vital to the organization’s bottom line that CFOs ensure those decisions are financially sound.

CFOs seeking to better support these managers should redefine the role of their finance business partners — those assigned to support decisions from business unit managers — to more specialized positions focused on individual decision types.

“Managers tell us that they have faced a significantly higher volume of financial decisions over the past three years,” said Randeep Rathindran, research vice president at Gartner. “This increased volume has exposed the lack of rigor employed by most midlevel managers in reaching material decisions that impact the bottom line.”

Gartner surveyed 469 business decision makers and 128 senior finance executives globally across various industries as part of its 2018 study. Sixty-one percent of respondents noted an increase in operational decision volume, with 57 percent indicating that these types of decisions materially impact business profitability. In summary, the volume of decisions with material business impact has grown, and those decisions are being made with a high rate of exceptions to operational decision rules put in place by finance.

Growing Decision Volume Exposes Broken Model

The analysis also revealed that most business managers responsible for making such exceptions are operating in a vacuum. Twenty-two percent don’t consider a single financial implication when making such a decision. These factors translate to a company with $5 billion in revenue sacrificing upward of 3 percent of earnings through poor decision making across the thousands of material business decisions it will face each year.

“The current model of financial business partners aligning to stakeholders lacks the level of expertise needed to provide support on the specific decision types faced by midlevel managers,” said Mr. Rathindran. “Unfortunately, 77 percent of companies we surveyed are still aligned to the stakeholder-based model.”
Redefinition, Not Reorganization

In order to plug the leakage of margin and profits associated with poor financial decisions, Mr. Rathindran outlined a new model that provides managers support tailored to each specific type of financial decision they encounter. The transformation to a decision-expert model can be phased in with as little as 20 percent of a company’s financial planning and analysis team. It requires no additional placement of finance team members with business units compared with a traditional approach.

“Focusing on changing behaviors of finance business partners is the most effective and fastest route at providing the type of support managers need to make effective financial decisions,” said Mr. Rathindran. “Finance departments can start small and see an immediate impact. When they evolve to a decision-support model these finance organizations can more than double their effectiveness in making appropriate financial decisions.”

For additional information on how to reduce the cost of poor operational decisions click on the link https://gtnr.it/2yxLw1x.

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