How to measure performance.

• Author: Gunn, Robert W.
• Position: Finance Reshapes Its Corporate Role

For the first time, a benchmark is being established for evaluating the effectiveness of finance departments. It's based on a quantitative and qualitative study of 27 U.S. companies over the past three years.

Robert W. Gunn

Vice President

A.T. Kearny, Inc.

In a worrisome economy, companies need a sharp and sophisticated financial operation. This need has driven change in how finance is structured and how it operates.

Financial operations are moving out of the back room. Confronted by new technology, new competition, and a heightened concern for the bottom line, Corporate America is integrating finance into the fabric of its business. The result is a new strategic role for the finance department, and a new organizational structure to enable it to carry out that role.

What steps are some of America's leading companies taking to sharpen the effectiveness of their financial operation? That was the subject of a special panel at FEI's recent Current Financial Reporting Issues Conference.

Called "Organizational Strategies for the 1990s," the panel presented a blend of organizational concepts and how those concepts are being applied in a practical way. Are there benchmarks against which to measure the performance of the finance function? A review of the changing finance role in 27 companies suggests some answers. Also examined were how finance is helping General Electric achieve its productivity goals and how it is helping AT&T confront a new competitive environment.

The articles to follow were adapted from these three presentations.

What does the finance function contribute to U.S. business? Does it really make a difference?

Research conducted by my firm among 27 companies since 1987 shows that finance does make a difference. The finance function has a unique role to play, and it makes a unique contribution that can be measured.

Indeed, when finance plays an active role in management, we can see long-term benefits to the business in terms of earnings per share or an increase in shareholder value. But to identify what we call "functional excellence" requires an understanding of the management policies and practices that drive the numbers.

Three premises helped us to evaluate the impact of finance.

First, finance is the most important staff function; it sets the tone for all line/staff relationships. This premise comes from a 1986 survey of 71 CEOs conducted by the American Productivity Center. When asked to name the most important staff function, these CEOs identified finance at a rate better than three to one over the next most important function.

As a further reference, these CEOs were asked to identify their biggest challenge. They named three. First, developing staff effectiveness, as measured by business impact. How does an executive know he o she is getting a return for this investment? Second, finding quality people. That, we know, is one of the cornerstones of functional excellence. And, third, increasing productivity. Of course, it's harder to...