Bad financial decisions cost firms 3% of profits
Poor financial decision-making processes mean bad decisions by mid-level managers are costing firms more than 3% of profits, and CFOs must do more to ensure they offer better support for specific types of business decisions, according to research from Gartner
21 Dec 2018
Gartner surveyed 469 business decision makers and 128 senior finance executives globally across various industries and found 61% reported an increase in operational decision volume. Over half (57%) said that these types of decisions materially impact business profitability.
Randeep Rathindran, research vice president at Gartner, said: ‘Managers tell us that they have faced a significantly higher volume of financial decisions over the past three years.
‘This increased volume has exposed the lack of rigor employed by most mid-level managers in reaching material decisions that impact the bottom line.’
The analysis also revealed that most business managers responsible for making such exceptions are operating in a vacuum. Gartner found 22% do not consider a single financial implication when making such a decision, and says this is equivalent to a company with $5bn (£4bn) in revenue sacrificing upward of 3% of earnings through poor decision making across the thousands of material business decisions it will face each year.
Gartner’s research showed an average 30% of decisions took place without proper consideration of the company’s own rules. That figure rose to 35% for pricing adjustment decisions, 33% for new marketing campaigns and 30% for decisions around product or service improvements.
Rathindran said: ‘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 mid-level managers.
‘Unfortunately, 77% of companies we surveyed are still aligned to the stakeholder-based model.’
Rathindran says companies should consider adopting a new model that provides managers support tailored to each specific type of financial decision they encounter, saying the switch to a decision-expert model can be phased in with just 20% 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.
The ‘decision experts’ are mid-level business finance staff who specialise in supporting a particular operational decision type.
They focus on one operational decision category and are independent of any one stakeholder. Their role is to institutionalise learning from past decisions to proactively develop new tools for operational decision making.
They provide proactive analysis before the business realises a decision needs to be made, and are accountable for improving decision outcomes -they do not have traditional financial planning and reporting responsibilities.
Rathindran said: ‘Focusing on changing behaviours of finance business partners is the most effective and fastest route at providing the type of support managers need to make effective financial decisions.
‘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.’
Report by Pat Sweet