7 - Structure & Shape of the Finance Function Flashcards
The traditional role of finance has been to…
generate info such as financial reports, mgmt account & report on org’s risks and controls.
The contemporary role of finance involves…
Taking info that has been generated (often automatically) & analysing to create insights which add value. The communicate to decision makers.
Mintzberg believed that…
All orgs can be analysed into 5 components according to how they relate to the work of the org & how they prefer to coordinate.
Mintzberg: strategic apex
Drives the direction of the business through control over decision making e.g. board of directors
Mintzberg: technostructure
Drives efficiency through rules and procedures e.g. HR sets employee rules
Mintzberg: Operating core
Perform routine activities of the org in a proficient and standardised manner. The workers who get the actual work done.
Mintzberg: Middle line
Perform mgmt functions of control over resources, processes and business areas.
Mintzberg: Support staff
Provide expertise and service to org.
Outline what Mintzberg diagram looks like
Base = operating core
Connected to strategic apex via middle line
Technostructure & support staff on sides
Mintzberg configuration: simple structure
Strategic apex is dominant, little middle line. Effective in small entrepreneurial orgs where need flexibility. No formal structure & little planning. Control by direct supervision.
Mintzberg configuration: machine bureaucracy
Technostructure is dominant. Control by rules and procedures, highly standardised. Hierarchical structure likely. Good for stable environ where focus on improving perf not solving problems.
Mintzberg configuration: professional bureaucracy
Operating core dominant. Processes too complex to be standardised so control exercised via training, individual expertise and professional ethos. Common in prof firms and hospitals.
Mintzberg configuration: divisionalised
Middle line dominant: org too large/complex to be managed as one = split into divisions. Control via perf measures such as profit. Each division could itself be a machine bureaucracy.
Mintzberg configuration: adhocracy
Support staff dominant as only group providing continuity. Innovation critical & work project based. Teams with mix of skills, few formal controls, work complex & ambiguous. e.g. TV production company.
Mintzberg configuration: Missionary
Little structure or formal control but held together by shared set of values & strong culture. Effective in start-ups / campaigning groups.
State 3 traditional org structres
- Functional
- Geographic & divisional
- Matrix
Functional structure =
employees are grouped by specialism such as finance or marketing.
What’s key aspect of functional systems?
Formal communication systems to ensure info is shared.
Geographic structure =
org arranged according to geographic area.
Matrix structure =
org uses cross-functional teams focusing on a specific product/customer/project. Good for project based orgs.
Which of Mintzberg’s configurations is the matrix structure similar to?
Adhocracy - both good for project based work.
1 pro and 1 con of matrix structure
Pro: very innovative as diff expertise and ideas work together
con: difficult to manage
Name 2 main types of contemporary org structures
- Boundaryless
2. Shamrock
Boundaryless orgs =
Focus on flexibility - minimise or eliminate formality and chains of command to focus on speed and flexibility.
State 3 key types of boundaryless orgs
- Virtual
- Modular
- Hollow
What is a virtual boundaryless org?
Geographically dispersed individuals, teams, companies or stakeholders. No physical premises - org only exists electronically.
What is a modular boundaryless org?
Break manufacturing process into modules which are then each made by bis or production outsourced.
What is a hollow boundaryless org?
Split activities into:
- core: strategically important = kept in-house
- non-core: not strategically important = outsources
Another name for Shamrock org
Flexible firm
Shamrock orgs are defined as…
A core of essential executives and workers supported by outside contractors and part time help.
Why has there been a rapid increase in use of part-time/temporary contracts of employment?
Driven by pressure to reduce personnel costs/overheads. Allows rapid downsizing in recession and can save on benefits such as pensions, health insurance & holiday pay.
Name 4 parts of Shamrock org
- Professional core
- Self-employed
- Contingent workers
- Consumers
Shamrock org: professional core
Professionals, technicians and managers whose skills define the org’s core competence.
Shamrock org: self-employed
Supplement prof core. Self-employed professionals or technicians or smaller specialised orgs which are hired on a contract on a project by project basis. Paid in fee for results, not salary for time.
Shamrock org: contingent workforce
Their employment derives from external demand for the org’s products. Perform low level, routine jobs.
Shamrock org: consumers
Some orgs enlist consumers to do some of their work e.g. fast food restaurants get consumers to clear their own tables.
Other types of org: flatter structures
Fewer layers of mgmt to enable faster response times.
Other types of org: horizontal structures
multi-functional project teams and multi-skilling. Flexible.
Other types of org: ‘chunked’ and ‘unglued’ structures
Smaller, more flexible units created within overall structure.
Other types of org: output-focused structures
Focus on results rather than processes.
Other types of org: jobless structures
org uses changing pool of freelancers e.g. deliveroo.
What 2 things does an org need to consider as it grows?
- Scalar chain
- SPOC
These determine basic shape of org.
Scalar chain =
How many levels/layers in org.
SPOC =
Number of employees per manager.
Scalar chain & SPOC for ‘taller’ orgs
Taller org = more layers & narrower SPOC
Delaying an org means…
Reducing number of mgmt levels from bottom to top
Horizontal integration =
Developing competitor or complementary activities.
Vertical integration =
Org expands backwards or forwards within its existing value network & therefore becomes its own supplier or distributor.
Backwards vertical integration =
become own supplier
Forwards vertical integration =
become own distributor
Alliances =
where an org works with external entities.
Joint venture =
A new, shared org (50:50) is set up by 2 or more firms which each retain an independent entity.
Licensing =
the granting of permission to another company to manufacture or sell a patented product in return for a fee.
License agreement vs franchise
Franchise = a common form of licensing agreement. Licence more restrictive - legal agreement to sell a certain patented product, franchise more of a relationship.
Franchise =
franchisee manufactures or distributes a product/service which the franchiser retains control of the brand and marketing.
Consortia =
Short term legal entities to deliver a particular product.
Agents (type of alliance) =
Use of agents can be effective as a distribution channel where local knowledge and contacts are important.
Strategic alliances =
Sharing of resources and activities across 2 or more org to pursue strategies. Contractual agreements to work with each other - similar to joint ventures but no separate company is formed.
Traditional finance structure
Hierarchical = triangular shape with large base as finance needed lots of low level staff to generate info. Mirrors traditional hierarchical structure at org level.
How have technology/globalisation changed the traditional hierarchical finance structure?
Segregated: top & bottom halves of triangle split.
Bottom half of triangle in segregated finance structure + 2 groups who sit here
Routine work transferred to shared service centres = centralised. Accounting transactions teams + analysis reporting teams.
Top half of triangle in segregated finance structure + 2 roles here
Value add tasks - insights, data manipulation. Separated from rest of finance function & continued to work in bis specific areas. Detailed analysis + business partnering.
What finance org structure has the digital age led to?
Pentagon/diamond structure
Explain base of pentagon/diamond structure
Base has been eroded by automation of lower level processes.
What implication does pentagon/diamond finance structure have for succession planning?
Usually, staff would enter at base and work their way up. But now fewer staff taken on at lower levels to promote to senior levels over time.
Explain ‘central bulge’ of pentagon/diamond structure
Due to higher value services of financial professionals being performed by COEs or share service centres which consist of multi-disciplinary teams.
Explain ‘flat top’ of pentagon/diamond structure
Consequence of collaborative financial leadership. This is where CFO and their senior team work alongside CEO.
What is Level 1 (top level) of pentagon structure called?
Strategic leadership = senior finance team.
What is Level 2 of pentagon structure called?
Strategic business partnering = partnership for value to influence and share how the org creates and preserves value.
What is Level 3 of pentagon structure called?
Digital COEs = technical specialists providing insights in their respective areas = insight generation.
What is Level 4 of pentagon structure called?
Smart finance factories = managing processes & applying accounting rules to assemble & extract data = data extraction.
Level 1 Pentagon: type of system
governance & oversight
Level 1 Pentagon: outcome
Oversight
Level 1 Pentagon: Gartner model
predictive, descriptive & cognitive
Level 1 Pentagon: technology
AI, prediction tools, all stages of BI system.
Level 1 Pentagon: role of accounting
enabling value creation by ensuring oversight, governance, and allocation and provision of resources.
Level 1 Pentagon: focus
quality of strategic decision making; risk mgmt; capital & resource optimisation.
Level 1 Pentagon: main competencies
business, people and leadership skills.
Level 1 Pentagon: CIMA/CGMA
CPD/CPE
Level 2 Pentagon: type of system
engagement or interaction.
Level 2 Pentagon: outcome
foresight
Level 2 Pentagon: gartner model
diagnostic, predictive, prescriptive
Level 2 Pentagon: technology
AI, visualisation, final stages of BI system.
Level 2 Pentagon: role of accounting
shaping/enabling how value is created through interaction.
Level 2 Pentagon: focus
quality of decision making; judgement; trade-offs and learning.
Level 2 Pentagon: main competencies
business & people skills
Level 2 Pentagon: CIMA/CGMA
Strategic level CPD/CPE
Level 3 Pentagon: type of system
Interpretation or sense-making
Level 3 Pentagon: outcome
insight
Level 3 Pentagon: gartner model
diagnostic
Level 3 Pentagon: technology
AI, NLP, middle stages of BI system.
Level 3 Pentagon: role of accounting
Narrating in greater detail; beginning to shape how org’s create and preserve value.
Level 3 Pentagon: focus
Compliance (interpreting rules); quality of analysis; telling machines what to do; effectiveness.
Level 3 Pentagon: main competencies
technical & business skills.
Level 3 Pentagon: CIMA/CGMA
Mmgt level
Level 4 Pentagon: type of system
Recording
Level 4 Pentagon: outcome
Hindsight
Level 4 Pentagon: gartner model
descriptive
Level 4 Pentagon: technology
OCR, RPA, early stages of BI system
Level 4 Pentagon: role of accounting
Gather info for narration; narrating how org creates and preserves value.
Level 4 Pentagon: focus
quality & integrity of data; training machines to do a better job; efficiency.
Level 4 Pentagon: main competencies
technical accounting skills
Level 4 Pentagon: CIMA
Operational level.
How have reconfigurations changed finance org?
Role of finance changed: narrow focus on traditional areas of expertise (financial reporting, budgeting) —> supporting and improving decision making through providing insights. Also help improve processes and info flows.
Which of 4 basic activities of finance is the focus due to reconfigurations?
Analysing for insights
Shared services centres (SSCs) =
centralise operations the previous existed in >1 part of org.
SSCs AKA
Internal outsourcing
SSCs used in what kind of orgs?
Very large global orgs that previously structured by product/area and had separate finance function for each acting autonomously. Now centralised to serve entire org.
SSCs affect what level of finance activities?
Routine mgmt and accounting services.
2 drivers of SSCs
- Globalisation = increased need to centralise
2. Advances in info tech (automation) = enabled it to happen
SSCs support which of the 4 basic finance activities?
Assembling info
5 benefits of SSCs
- Cost savings on HC & premises
- Standardised processes = consistent, fewer errors
- Select single best practice = improved service
- Improve control and quality
- Consolidate info systems
4 risks of SSCs
- Insufficient resources to establish them
- HR issues: redundancy costs, impact on morale
- Consolidating systems costly, time consuming, complex
- Language, cultural & reporting requirements may not be understood by SSC when performing service for different countries.
Name some requirements to establish a successful SSC (9 total)
- Commit to continuous improvement
- Clear scope and delegation of responsibility
- Clear vision of role of SSC in role
- Everyone buy in to the change
- Support from those with exp of the change
- Ensure org robust after change
- Strong, customer focused culture
- Integrate with other change initiatives
- Senior mgmt committed
Outsourcing =
an org sub-contracts business activities to external providers.
Lonsdale & Cox: state 3 types of competence with regards to outsourcing
- Core competences
- Complementary competences
- Residual competences
Core competencies: description + outsource?
Fundamental to firm’s competitive advantage = do not outsource.
Complementary competencies: description + outsource?
Technically complex = can outsource, but only to a trusted outsourcer with who the org has a close working relationship with.
Residual competencies: description + outsource?
Routine roles = can be outsourced as a basic, arms-length transaction.
4 pros of outsourcing
- Reduces costs as external provider EOS
- Enables significant structural change through radical transformation or business process re-engineering
- Access to expertise & resources that org doesn’t have
- Finance concentrate on becoming bis partners
5 cons of outsourcing
- Investment in managing relationship w provider
- Disruption & resistance to change
- Loss of control
- Increased risk of loss due to theft or damage through data breaches
- Loss of internal knowledge & expertise
Service level agreements (SLAs) =
legally binding contracts made between customer and outsource partner that set out the agreed level of service to be provided. Some of cons of outsourcing can be mitigated by SLAs.
What kind of areas do SLAs cover?
Description of service; targets to be met; response times to queries; expected recovery times following disasters; complaints procedure; info & reporting procedures; cancellation procedures.
What is a key factor in outsourcing decision?
TRANSACTION COSTS
Transaction cost = & what do they arise from?
a cost incurred by an org as a consequence of having a business activity performed by a 3rd party. Arise from activities associated with the arrangement such as creating product specifications, managing quality and co-ordinating delivery and manufacturing operations.
How does standardisation affect transaction costs?
Standard products have lower transaction costs
3 categories of transaction costs
- Search & info costs
- Bargaining costs
- Policing & enforcing costs
Williamson’s names for in-house and outsourcing options
Hierarchy solution = own assets/employ staff directly + make yourself
Market solution = enter into contract to buy assets from outside org = outsource.
3 factors of transaction cost theory & whether they make hierarchical/market solution more likely.
- Uncertainty in bis environ = difficult to arrange LR contracts = in-house
- Infrequent work = outsource
- Asset specificity: highly specific to transaction = in-house as transaction costs high
Williamson: which of 3 factors is main concern for in-house/outsourcing decision?
Asset specificity
Define site asset specificity
Some sites such as factories are immobile = specific to a location.
Define physical asset specificity
Customised assets or those with limited other uses have lower alternative use values = more specific to task.
Define human asset specificity
Workers acquire knowledge or skill specific to their role. This has higher value within the activity (therefore within org) than outside it.
Define brand name capital specificity
Brand name may become so associated with an activity/process that it cannot be used in other activities or for other customers.
Define dedicated asset specificity
Similar to physical asset specificity but relates to assets acquired solely to work undertaken for a specific CUSTOMER.
Define temporal asset specificity
Activities involving perishable goods are time specific = alternative processor unlikely to be found in time if the current supplier fails.
Business process re-engineering (BPR) =
An org transforms business processes, often re-designing them from the ground up.
How do Hammer & Champy describe BPR?
The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as cost, quality, service and speed.
What Q might an org pose for BPR?
If we made our product/service for the first time today, would we do it the same or differently?
Hammer & Champy: 4 key themes of BPR
- Process reorientation: focus on resources, tasks & constraints
- Creative use of IT
- Ambition
- Challenge and break rules - think radically
Relocation(offshoring) =
migrating some part of an org’s activities to another country.
2 methods of offshoring
- Still do in-house
2. Outsource to foreign company
2 motivations for offshoring
- Take advantage of available expertise
2. Reduce costs (salary rates)
Which of the 4 basic finance activities does business partnering support?
- Advising to influence
2. Applying for impact
3 aspects of strategizing the finance function
- Draw insights from info, not just communicating it
- Use technical knowledge to evaluate & guide decision making
- Constructively challenge business initiatives = sparring partner
One way to think of strategizing the finance function is…
finance scorekeeper (recording values) –> score maker (generating value)
