Beyond Boundaries: A New Role for Finance in Driving Business Collaboration

Executive summary
In an increasingly global economy, collaboration with other businesses is becoming more widespread and more important to a company’s business strategy, whether to control costs, enter new markets, or expand product and service offerings. Accordingly, the finance function is being called upon more and more to evaluate and monitor an entire range of different business relationships with third parties, from traditional sourcing and procurement agreements to business process outsourcing to alliances and joint ventures in sales and marketing, R&D, and production and delivery.
In June 2008, CFO Research Services (a unit of CFO Publishing Corp.) conducted a research program among senior finance executives in the United States, Europe, Asia, and Australia to examine these shifts. Through an electronic survey and a series of interviews in each region, we looked at what kinds of alliances companies are forming, and how finance sees itself working with internal and external partners to establish and assess successful alliances. Our research revealed three major themes:
Companies are managing performance and risk beyond traditional business boundaries. We found that the vast majority of companies use third-party business alliances as part of their business strategy—regardless of how big the companies are, where they are located, where they do business, or what business they are in. In addition, we found that finance typically is closely involved in evaluating business opportunity and risk, and in helping to implement and manage these relationships. We also found that finance executives see their involvement growing even more over the next two years, as much of corporate performance depends on the successful execution and mitigation of risk in these business partnerships.
Finance’s role in building trust and strategic communications is being elevated. Finance’s expanding role calls for an expanded set of education, communication, and collaboration skills as well. The finance executives in our study say that one of the most important factors for a successful alliance is to develop trust in working relationships. Thorough and fact-based communication, grounded in a common understanding of objectives and transparent metrics among all the parties involved, is critical in building the trust necessary for a successful partnership. Consequently, finance executives are fi nding that they really are in the communication business with both internal and external partners.
Dedicated business and IT resources are important for managing alliances well. Finally, we found that finance executives report they are more effective at developing and managing alliances when they have resources formally dedicated to alliances and technology that supports their decision making. Companies that dedicate an individual or a team to be responsible for alliances typically are better able to identify, evaluate, and execute alliances than are companies without a dedicated resource. And companies that have standardized their IT platforms for finance systems report that their finance functions are more involved with, and are more effective at, developing and managing alliances.
Managing performance and risk beyond traditional business boundaries
In a world increasingly reliant on networks of electronic connections to dissolve barriers and strengthen relationships, the use of business collaborations is on the rise for many companies. CFO Research Services conducted a research program to examine how senior finance executives see finance’s role changing as companies increasingly form these networks of business relationships. In this study, we defi ned a business alliance as any type of formal arrangement or agreement a company has for working collaboratively with external partners to execute its business model. These arrangements may include partnerships, joint ventures, licensing agreements, co-development arrangements, contracted services, outsourcing, preferred vendor programs, and other types of relationships that allow a company to tap external expertise to provide a value-added business activity. While businesses have always relied on other companies for supplies or services, we found that, today, the number and importance of these relationships are greater than ever. The vast majority of finance executives in our survey (89%) say that third-party business alliances are an important part of their business strategy, and slightly more than half (51%) expect their companies to have more alliances in two years’ time than they do today.
About one-quarter (24%) of the companies in the survey can be considered to be active practitioners—those whose finance executives agree strongly that alliances are important to their business strategy. These companies use alliances at far higher rates than others: 66% of the respondents from active practitioners report that their companies have more alliances now than two years ago, compared with only 35% for everybody else; in addition, 71% of the most active practitioners expect their companies to have more alliances in two years’ time, compared with 45% for everybody else. (See Figure 1.)
Business collaborations are on the rise—the use of alliances is not limited by how big a company is, where it does business, or what business it is in.
For these active practitioners, collaboration is at the core of their business model. "We proudly, and sometimes jokingly, say that one of our core competencies is being a good partner," says Bharat Doshi, executive director and group CFO of Mahindra & Mahindra Limited, an Indian industrial giant that last year had revenue of $6.7 billion. Mr. Doshi notes his company has been executing substantial and successful business alliances for more than six decades, commenting, "Maintaining relationships with alliance partners is in the DNA of the company."
However, the growing importance of business alliances is not limited to these active practitioners. As shown in Figure 1, even among those who did not "strongly agree" that alliances are important to their companies’ business strategy, 45% still see their companies entering into more alliances two years from now. And all of the companies in our survey use a wide range of collaborative arrangements to accomplish many different business objectives. The use of alliances is not limited by how big the companies are, where they do business, or what business they are in.
Collaboration is important across the board
The very largest companies in our survey (those with more than $10 billion in annual revenue) are more likely to be active practitioners than companies smaller than $10 billion; higher percentages of finance executives from the largest companies agree strongly that alliances are important to their business strategy and anticipate growth in alliances over the next two years.
But respondents from midsize companies ($500 million–$1 billion in annual revenue) seem to be somewhat more active than others in identifying and evaluating collaborative opportunities. They report that they are involved in assessing alliance risk and developing alliance agreements more frequently than their peers at other companies. They also tend to rate themselves more frequently as being excellent in identifying and evaluating alliance opportunities—35% of respondents from midsize companies give their finance staffs high marks in this area, compared with 27% of respondents from the largest companies (more than $10 billion in annual revenue) and only 12% of respondents from companies in the $1 billion-$5 billion range.
Business collaboration is not restricted to particular industries: for every type of arrangement we asked about—from preferred vendors to joint ventures—more than half of the survey respondents in each industry segment reported that their companies employed that type of alliance at least occasionally. But collaboration appears to be particularly ingrained in two of the industry sectors: health care/life sciences, and business/ professional/information services. Practically all of the respondents from both sectors (more than 90%) say that alliances are an important part of their business strategies. Interviews with health care executives provide insight into why such relationships are so commonplace in the industry. (See "Reducing costs and complexity in the health care industry," page 6.)
Collaboration takes many different forms
The alliances established by the companies in our study take a variety of forms—everything from formal joint ventures to outsourcing routine administrative tasks, such as payroll. The use of the different types of collaboration is fairly well distributed—each kind of alliance we asked about is employed by at least 40% of the companies in our survey.
Preferred vendor relationships and business process outsourcing are most often cited as being frequently employed in all regions (the United States, Europe, and Asia/Australia), while exclusive sourcing arrangements and joint ventures are cited least often. This difference may refl ect the relatively straightforward nature of preferred vendor programs and outsourcing agreements—they are just easier to do. For example, deciding whether a company should be in the real estate or payroll business is relatively straightforward compared with assessing an alliance involving marketing or R&D. Often, it is also easier to fi nd the right partner for these types of services nearby; 45% of respondents note that their administrative activities are primarily domestic in nature, and potential partners may be found just around the corner rather than halfway around the globe. (A notable exception may be in China, where international alliances may be more common than domestic ones. See "Growing pains in China," page 7.)
Companies around the world report that they are establishing alliances in all areas of business activity: product and service development, production and delivery, sales and marketing, and administration. Alliances for administrative activities are seen as somewhat less important than alliances in the other areas, but companies are by no means neglecting collaboration in this area. Administrative alliances can be especially useful as companies look to control costs and focus resources on their core competencies.
Reducing costs and complexity in the health care industry
The health care/life sciences industry shows the most growth by far in its use of collaborative arrangements, with 71% of respondents from this sector saying they have more alliances now than two years ago. According to these respondents, within the past two years their companies have established collaborative relationships of every type at much higher rates than any other industry sector in our study. And this trend is likely to continue: 90% of the health care/life sciences executives in our survey expect their companies to increase the number of alliances they have over the coming two years.
In our interviews, one representative from the health care industry discussed how health care providers form purchasing groups that give them greater leverage when negotiating discounts with manufacturers, distributors, and other vendors. This allows even relatively small health care fi rms to gain advantages previously limited to only the largest organizations. According to the Health Industry Group Purchasing Association, there are more than 600 health care organizations in the United States that participate in some form of group purchasing.
"The thing that’s interesting about health care providers is that we can [form purchasing groups] on a national perspective," says Phil Geissinger, executive director of primary-care operations for CMC-North- East Physician Network, a North Carolina hospital and clinic. "We can be in our system here and somebody that’s in Atlanta and somebody in Florida can all be part of that alliance. It is basically purchasing at the local level but negotiating on a global scale." Concerns over increasing costs and increasing competition in the health care industry may be refl ected in these companies’ signifi cantly higherthan- average use of alliances to cut costs (82% vs. 48% for all sectors combined) and to focus on competitive advantage (64% vs. 41%). The complexity of regulatory requirements, supplier relationships, and business models—not to mention operating activities—throughout the industry makes it diffi cult, if not impossible, for a single organization to house all the capabilities it needs. "We cannot afford all of the expertise on an in-house basis," says Mr. Geissinger. "Thus, the more alliances we have, the more we can leverage those relationships."
Because health care providers are so regional in scope, they may have advantages over other organizations when it comes to negotiating and assessing alliances. "I think our industry has a lot more [alliances] because of the fact that you do not have inter-state competitive relationships," says Mr. Geissinger. "So I can pick up the phone and call somebody in Atlanta and say, ‘What do you think about vendor X?’ And they are willing to share all of their information because it does not affect them other than they’re sharing information."
Companies collaborate for many different reasons
The companies in our survey seek out collaboration for a wide variety of reasons; no one rationale or objective dominates. (See Figure 2, page 8.) Of the top four reasons respondents cite for having established an alliance within the past two years, two target growth (gaining access to new customer segments, gaining access to technology or expertise) and two target effi ciency (improving production and delivery, achieving cost savings).
This refl ects the two main reasons for entering into an arrangement with another company—either to do something the company can’t do alone (extending its reach into new markets or into additional products and services) or to do it cheaper or better than the company can itself.
For example, Mr. Doshi at Mahindra describes his company’s successful partnership with Ford Motor Company, which lasted for almost a decade and in which each partner capitalized on the strengths of the other. "Ford wanted accelerated entry into India [following liberalization], and we were looking for a partner for passenger cars," he explains. "We had been manufacturing the four-wheel drive and SUV but had never made a passenger car, and we wanted to learn how. And they wanted to gain an understanding of the Indian market, as well as a manufacturing facility to make the Ford Escort their fi rst product in India."
Another example comes from the transportation industry and illustrates the opposite end of the spectrum, where a company looks to alliances for a level of expertise in a fi eld that is not related to its core products or services. As Kevin Schick, senior vice president and CFO at Con-way Inc., a $4.7 billion freight transportation and logistics services company based in San Mateo, California, notes, "Some of these disciplines—like claims adjudication—have become so complex that there was just no way we could keep up with all the accountability, controls, checks, and balances. It just made good sense to stick to what we do best in terms of transportation and logistics and work those aspects, and in some of these other areas [worker’s compensation and casualty claims assessment], defer to outside providers who have the expertise."
Growing pains in China
The Chinese market may be poised for growth in partnerships as the country continues to develop its internal business infrastructure. Many Chinese companies already have alliances with international businesses, such as for the manufacturing of products that are then sold in the United States under the brand of a company that is based elsewhere. However, many services that are provided via partnership in other nations have yet to be developed in China.
"Many of the disciplines in China are new," says Erick Haskell, CFO for greater China for sporting-goods manufacturer adidas, which had more than $16 billion in worldwide sales in 2007. "For example, with law you don’t have hundreds of years of legal training to rely on [here]. Yet the country is just growing so fast and demand is growing so fast for these kinds of things, they can’t develop the people quickly enough."
While China goes through these growing pains, Mr. Haskell fi nds that he is constantly surprised at some of the types of challenges finance must manage. "In all my experience in the United States, no retail company would insource the performance of their inventory in the stores," he says. "In China, there is no opportunity to outsource this. It is all done internally and usually by the finance department. We will sit down and argue with people every night and do inventory in retail stores, which is something I have never seen elsewhere or thought would be possible."
Scott Goble is the CFO of Alliance Flooring, a Chattanooga, Tennessee, retail-licensing group representing more than 450 retail fl ooring locations across the United States with more than $1 billion in annual sales. He comments, "I try to outsource where possible so that we can concentrate more on our core functions."
However, Colin Storrie, CFO of Qantas Airways Limited, Australia’s largest airline, sounds a caution about forming an alliance for the wrong reasons. "If you haven’t got control either over the fi nancials or the process, it is not a good idea to give it to someone else," he warns. "If you don’t have a good handle on your own costs and specifi cations, controlling them when they’re in someone else’s hands only makes it that much more diffi cult. You end up outsourcing the problems. Some of where we’re seeing relationships go wrong is where we’ve got a problem on our hands, and we try to give it to somebody else and expect them to sort it out." Mr. Storrie concludes, "Our principle has always been if we have a process or a function that we want to outsource, we have to make sure that we understand it well, we understand the economics of what’s being performed, and it is a process that is under control."
Collaboration is strong and growing in all regions.
Even fi rms that have long been wary of venturing outside their corporate boundaries now see collaboration as essential in today’s business environment. "The core business of Nokia is being owner of its own manufacturing supply chain," says Javier Pineyro, a senior controller for risk management based in the United States for the Finnish wireless giant, which had $75 billion in sales in 2007. "But these days they realize that this is a different game, and you cannot have in-house all these skills and capabilities.... Rather than waiting for people to come to us, we’re actually seeking out opportunities in the United States, Asia, and Europe."
A global phenomenon
Finally, collaboration is strong and growing in all the regions we targeted in our study, with 85% of respondents from Europe, 90% from the United States, and 93% from Asia/Australia saying that alliances are important to their companies’ business strategies. Alliance activity in Asia/Australia may grow faster than in the other two regions, especially as companies in countries such as India, China, and Australia seek the economic advantages of business relationships with their counterparts in Europe and North America as well as with Pacifi c Rim countries closer to home. In Asia/Australia, 63% of executives in our survey expect their use of third-party alliances to increase over the next two years, compared with 50% in the United States and 46% in Europe.
The respondents from Asia/Australia also have the highest percentage of alliances formed to gain access to new customer segments (60%), whereas U.S. companies, for example, are more likely than companies in the other two regions to collaborate with others simply to cut costs. Our survey shows that U.S. companies tend to stay at home more often for administrative activities and for sales and marketing activities, but third-party relationships in these two areas are just as important to them as to their peers in Europe and Asia/Australia. It may be that U.S. companies have more opportunity to form domestic alliances, given the relative size and stage of development of the U.S. economy.
Overall, however, we see little distinction in responses among the three regions. The increasing importance of collaboration truly appears to be a global phenomenon.
Doing the deal right, or doing the right deal?
As collaboration between companies becomes more widespread, the demands on finance grow as well. In this regard, the finance executives in our study see themselves as having a critical responsibility: making sure the alliance works.
In our survey, finance executives indicate how involved they are in activities needed to develop and manage alliances. Their list, ranked from involved most often to least often, is seen in Figure 3. Not surprisingly, the areas where finance is involved most frequently—monitoring performance, assessing risk, and developing metrics— are largely the things that can be measured, the traditional realm of finance.
Strategic fi t is paramount
But the fact remains that one can’t know the right things to measure without knowing the strategy behind the numbers. In a different survey question, finance executives say that misaligned strategic objectives and poorly defi ned strategic objectives are two of the top four challenges their companies face in establishing successful alliances. (See Figure 4.) They recognize that strategy must drive execution— making sure the engine is running smoothly without knowing where you’re going is just a waste of gas.
One problem finance executives note in interviews is that proposals for alliances or partnerships sometimes are based on nothing more than a desire to work with a particular company or get access to a hot, new technology. The idea for a new alliance can come from anywhere. Although more than half of all respondents in our survey (56%) say their companies’ alliances originate at the corporate level, the other 44% say alliances originate with the business units. "Quite often it happens that the business-line people who are interested in the alliance will approach the managing director of the company," says Mahindra’s Mr. Doshi.
A key to successful collaboration is "searching for win-win, not win-lose or even win-neutral results," advises one CFO.
"Someone will tell me, ‘This is a great vendor. We ought to work with them,’" comments Phil Geissinger, executive director of primary-care operations for CMC-NorthEast Physician Network, a North Carolina hospital and clinic. "[My response is], ‘Okay, how do you know them?’ ‘Oh. Well I just met them last week at a conference.’" In which case, it is up to finance to work toward developing the business case for this specifi c alliance, so that decisions can be based on fact, not feeling or anecdotal information.
The finance executives in our interviews underscore the folly of developing an agreement with a partner without knowing why the alliance is being undertaken or what both sides hope to get from it. Martin Nov�k, CFO of ? CEZ Group—the largest power generator in the Czech Republic, and among the ten largest in Europe— notes that, when considering a new partnership, "what immediately raises a red fl ag is real non-compatibility of the objectives. On the other hand, if both parties have compatible objectives and the joint venture is the way to achieve what they both truly want, then the probability of succeeding is very high."
One finance executive in our survey, responding to an open-text question, notes that a key to success is "searching for win-win, not win-lose or even win-neutral results." Mr. Schick at Con-way explains: "We realize they [i.e., potential partners] have to run their numbers and see what kinds of returns there are. We realize that they’re in business to make money, just like we are, so there’s just a healthy respect on both sides." If there isn’t an upside for both parties, the alliance is all but guaranteed to fail. That’s because one party will quickly realize there is no reason for them to contribute to it.
Getting in the game early
Finance must fully understand the strategic objectives underlying an alliance in terms that make business sense—that is, in terms that can be used to measure the impact on the two businesses—and may even participate in the formation of those objectives to help alliances succeed. For this reason, in many of our interviews the finance executives stressed the importance of being involved earlier rather than later. "It is important to be involved early enough, to be involved in the whole business model," says J�rg Vandreier, CFO of IDS Scheer AG, a German provider of business-process management software and services with 2007 revenues of $616 million. "This lets us really focus on what is the benefi t to the partners, and what is the benefi t to us." Mr. Vandreier says being involved from the start allows finance to make the most of an alliance in terms of IDS Scheer’s P&L.
Johann Murray, CFO of Hilton Grand Vacations Club (HGVC), which operates time-share resorts for Hilton Hotels, notes that letting finance weigh in early on bottom-line issues gives other units an idea of how much time and effort they should be investing in a business relationship. The alternative, which happens all too frequently, is having corporate or business units trying to decide whether or not working with another company was actually a good thing after the effort had already been expended. Being excluded from the front end means finance is frequently asked to decide if the numbers work without being given the full context of the problem.
One senior finance executive (who asked not to be identifi ed) said this is a regular problem for him: "The most diffi cult part is people coming to us with preconceived notions, looking to us to support what they’ve already decided they’re going to do. What they really want is for us to fi nd the numbers that justify this concept."
Mr. Storrie at Qantas makes a similar point: "That’s why you want to make sure you’re in there with the business when the whole thing develops as opposed to coming in at the back end and just saying, ‘No. This doesn’t meet our fi nancial criteria or this doesn’t meet our technical or business or strategic objective.’ When you get involved at the back end, that’s where the business units get upset because they’ve invested a lot of time, and we get upset because it’s almost too diffi cult to change the momentum of the particular project."
But finance needs to involve itself judiciously. "You can get too many chefs in the kitchen," cautions Robert Cotton, senior director of finance at BMC Software, Inc., a Houston-based provider of business software and services with $1.8 billion in revenues. Mr. Cotton and others believe that it is up to the business unit originating the alliance to make the case for it, and that the finance role is to review the business cases and arguments made by the operational or marketing departments, provide fi nancial expertise, and act as advisor.
Even when ideas for collaboration originate within the business unit, our interviewees note that it is important for finance staff to be involved early in the process. For example, at WSP Group plc in the United Kingdom, Malcolm Paul, the group finance director, describes the evaluation process at this global design, engineering, and management consultancy. Any joint venture over a certain size requires signoff from either the CEO or the CFO. Even though Mr. Paul reserves his personal involvement until the end of the evaluation process, his finance staff works closely with business managers to develop the case for or against a proposed project and delivers a robust package of information on which he bases his own "yes/no" decision. "It’s a mixture of operational and finance people who are fully involved from the minute [the evaluation of a proposed alliance] starts," he says. "I get a full business case, and a full fi nancial out-turn. [My role is] as a checker, an approver, a tester. I am the guy who says, ‘Well, how does this work? You explain it to me, and [then we can decide] if we want to do it.’"
Finance’s role in assessing "the right deal" does not end once the relationship is established, however. The leading finance organizations are also involved with monitoring the performance of alliances and ensuring that they keep making business sense for the partners. The executives we talked to recognize that the world changes around them, and sometimes so does the rationale for partnering.
The leading finance organizations use the same type of fact-based assessment of strategy and performance to continually monitor the usefulness of alliances. "Because we’ve always done it that way" is no reason to continue with a relationship that has outlived its usefulness; in many companies, it is up to finance to pull the plug. "If something does not make economic sense, then the chances of survival are reduced," says Mr. Doshi of Mahindra. Things always change—the economics of the alliance, the strategies of the partners, the performance of the partner—and Mr. Doshi notes that finance must continuously keep on top of the situation and recommend changing the alliance structure or even discontinuing the alliance to adapt as circumstances dictate.
Elevating finance’s role in building trust and strategic communications
According to BMC’s Mr. Cotton, finance’s strength lies in its ability to use the facts to identify information gaps and help fi ll them in. "On the R&D side, you can get a little emotional with, ‘Hey, I really want to build this product,’ or ‘I want to do this project,’" he says. "We [in finance] can take the role of unbiased, unemotional third party, listen and evaluate without a pre-set agenda. We don’t write code. We don’t know how this all comes together. We can understand the dynamics of the proposed product, quantify the possible impact to performance targets, etc. Finance should be saying, ‘But it seems to me, here are your gaps or here are some problems that you’re not talking about, so how do we address these?’ Thus, being a partner rather than arbitrator."
Mr. Doshi at Mahindra also comments on the value of keeping focused on the facts. "The CFO has the job of bringing objectivity to this discussion in terms of deciding whether an alliance continues to make fi nancial sense," he says. "And also at what point is the company overstretching"; that is, in helping to distinguish what a company or a business unit is well prepared to do, and what may strain the fabric of the organization’s abilities.
Understandably, finance sometimes fi nds itself at odds with business units that may seek to stake out their own territory. "In general, people think that you will be a more short-term, black-and-white kind of person," says Nokia’s Mr. Pineyro. "They think that you will not understand qualitative things like brand awareness, brand preference, or segmentation."
The finance executives we talked to are eager to correct this misapprehension. "It takes a village to raise a child," notes Mr. Murray of HGVC, "and it takes a village to run a company. Everybody [in the company’s other functions] is an expert in his or her own area of specialty, but it is very important to get everybody involved in the front end because everybody looks at problems from different angles."
For this reason, finance’s ability to communicate well— both internally (with other functions and business units) and externally (with partners)—is a critical success element. It is common sense that all relationships—business or otherwise—live and die by how well those involved communicate, and our survey results back up this view. Some 93% of those surveyed say communication between partners has at least a moderate impact on the success of alliances, and fully 60% of the respondents say it has a substantial impact. (See Figure 5, next page.) Common strategic objectives also appear high on the list; these are the only two selections for which the percentage of respondents saying these issues have a "substantial" impact is higher than the percentage saying they have a "moderate" impact.
However, finance seldom seems to get credit for its communication skills. Communication is perceived as a "soft" skill, not a quantifi able one. It is an expertise that many in management seem to think resides in other departments, such as marketing. For most business units, communicating is primarily about talking or writing.
For finance, effective communication means something more—communications are much more likely to be judged on the basis of whether or not they are analytically sound and verifi able. Finance is constantly asking if the record supports the claim. This may help explain why finance executives in our survey tend to view their ability to communicate with other internal functions as being excellent more often than they do other abilities associated with developing and managing alliances. (See Figure 6, page 16.)
Because finance has to make sure of the connection between words and performance, it has a leg up on other parts of the business. Finance’s effectiveness in communicating with partners is grounded in the facts. "The numbers tell the fi nancial story to give you the insight as to how the alliance is working or might work in the future," says Mr. Murray. "This is clearly an advantage over those business units that do not have or do not understand the records and numbers."
Mr. Storrie at Qantas comments, "I don’t think it’s productive to just say, ‘This is the way that it is, and that’s it.’ I think you always have to consult with the business and make sure that you’ve got a healthy relationship. You want to make sure that the relationship is constructive enough so that the communication fl ows freely between the two groups." He explains how the airline’s matrix organization aids finance’s ability to communicate effectively: "We have a small central [finance] group, but we also have a very strong presence down in the line businesses. The finance functions in the line are very close to the businesses, and they’re dealing with them on a dayto- day basis. [So when a difference arises,] generally we will consult with the line managers and explain why we have a difference. In some cases, it can be that they’re just not aware of some of the other implications of what we’re doing. [Finance] gets a view right across the group, whereas a business unit might only specifi cally understand what they’re doing in their part."
The more communication is verifi ed by the facts, the better the relationship with external partners as well. The survey responses indicate that the ability to have faith in your partner is a make-or-break item for collaboration. Given the opportunity to tell us in their own words what they consider the vital success factor for alliances, finance executives in our study most often cite trust. In an open-response question, one survey respondent put it succinctly when asked what was needed to assure a successful partnership: "Trust, trust, trust."
The basis for a good working relationship and trust is information. Do the companies agree on the objectives for the alliance? Are the partners willing and able to share risk as well as rewards? Is it a win-win—equally benefi cial to both partners? As Mr. Nov�k, the CFO at the Czech energy company ?CEZ, explains, "You know, it’s very important to understand where [the partner is] coming from, where they see the value of the joint business. It’s all about open communication— you have to discuss things in depth so that you are perfectly aware of what the other party expects, and you just have to sit down and [align] those expectations. And then do the deal in the end. That’s how it works."
Mr. Doshi at Mahindra puts it this way: "You help build credibility and that’s where finance can play a greater role. In a situation of crisis of confi dence and trust, finance can act as the glue by being transparent."
Filling the information gap
However, our survey also reveals a worrisome problem when it comes to assessing and monitoring collaborations: Many companies seem to be making decisions in the absence of truly reliable numbers. Indeed, our survey shows just how often companies lack robust and comprehensive data on which to make decisions. Only 3 out of 10 respondents (30%) say they use a rigorous set of metrics when looking at an alliance’s fi nancial performance. Even fewer say they use a rigorous set of operational metrics, such as error rates, product quality, customer satisfaction, and process speed. In qualitative issues—such as ease of doing business, improved managerial focus, and corporate or brand reputation—the number drops further. In fact, for qualitative assessments more respondents say they use few, if any, metrics than say they have a rigorous set of metrics. (See Figure 7.)
The problem is underscored by the relatively high percentage of companies that evaluate alliance risks only informally. To make sure their companies are doing "the right deal," finance executives need to know what assumptions are underlying any proposed alliance, and what risks can threaten those assumptions. Yet a large number of companies in our survey lack formal, documented processes for evaluating such basic categories as fi nancial or regulatory risk. (See Figure 8, next page.) Other areas of risk management fare even worse.
Few companies in our research program are well equipped to construct a comprehensive and holistic analysis of performance and risk associated with alliances. The consequences are underscored by HGVC’s Mr. Murray: "At the end of the day, it’s hard to put a cost on tarnishing your image."
As noted earlier, some companies—the active practitioners— are simply better at collaboration than others. These companies also tend to be good at the information game. They report that they use formal, documented evaluations in all risk categories at much higher rates than others do. They also use rigorous sets of fi nancial, operating, and qualitative metrics to evaluate alliances at substantially higher rates than others. (See Figure 9.)
Our survey shows that two factors correlate to better use of information and more effective decision making in developing and managing collaborations: one is whether or not a company has explicitly designated resources for the responsibility of managing alliances; the other is whether a company has standardized the IT systems its finance function uses to gather data and make decisions. Finance executives in our study show that they are more effective at developing and managing third-party relationships when they have resources formally dedicated to alliances and technology that supports their decision making.
A dedicated resource makes a difference
Having a dedicated resource—a person or team—responsible for an alliance from planning through execution is positively correlated with several measures of how well a company manages its working relationships with other companies.
Three-quarters of respondents say responsibility for alliances at their companies is centralized in some way. This result holds true whether a company originates alliances primarily at the corporate level or at the business unit level. One-third of respondents (33%) report their companies have a dedicated team focusing on alliances, and another 17% say their companies have designated an alliance offi cer or other individual to take responsibility for alliances. One-fi fth (21%) say alliances are the responsibility of the executive team at their companies.
Our study shows that finance executives develop and manage third-party relationships better— and consider a wider range of opportunities—when the resources and technology are in place to support effective decision making.
Companies employing some form of dedicated management or oversight of alliances report establishing collaborative relationships of all types more often than companies without dedicated resources, and they also consider a wider range of opportunities. The finance functions at these companies consistently are more involved in alliance activities, and typically use formal, documented evaluations of alliance opportunities more often. They are also more likely to conduct qualitative evaluations of alliances.
Respondents from these companies rate their finance functions as either "adequate" or "excellent" in all activities at higher rates than do their peers at companies without dedicated resources. They also indicate that they manage alliances more effectively.
The power of consistent information
There is a difference between centralization and standardization of responsibility for alliances, however. Most of the executives interviewed for this report say that even when responsibility is centralized, the process and the people involved in it usually vary according to the dictates of the situation. (See "Hitting a moving target," page 21.) At Nokia, for example, all the signifi cant alliances are examined at the corporate level, but the actual owner of the relationship may vary according to the business unit involved. "There is a group of people sitting in Helsinki [Finland] who are like the base point for every task force involved in that alliance activity; however, many or all participants in that task force might be sitting around the world," explains Mr. Pineyro. "But, in many cases, they are just making the checks and balances of the activity. They might not really be the owner of the business or the alliance."
The fact that each alliance is unique only increases the need for information that is as standardized as possible. In order to assess any part of an alliance—from doable to done—finance has to be assured that it is not in a position of comparing apples and oranges. Doing that requires an IT platform that is standardized across the enterprise.
Companies that have standardized their IT platforms for finance systems report that their finance functions are more involved with and are more effective at developing and managing alliances. First of all, these companies are much more likely to agree that they have the IT systems and software solutions they need to support alliances. Seven out of 10 (71%) survey respondents from companies with standardized IT platforms say their companies have the right software solutions in place to support alliances, compared with only 51% of respondents from companies without a single platform. The companies with standardized IT are also more likely to say that they are able to implement or integrate the IT systems needed to support alliances.
Hitting a moving target
What makes assessing alliances so challenging for finance is the fact that no two are really alike. This means that being asked to assess the risk on an alliance often doesn’t mean the same thing twice.
"It is hard to establish, in my opinion, a standard form because the goals are so different," says Scott Goble of Alliance Flooring. "It’s not always a direct value or profi t-maximizing proposition on the table. Sometimes we’re going to do things just because they’re right for our membership. Not every decision criterion falls neatly within the constraints of traditional fi nancial analyses. Forcing such analyses as a matter of form is a time-waster in a best-case scenario and leads to poor decisions and costly delay in worst cases."
Assessment can also mean assessing ROI. What is the risk that a company will be wasting its money? This is frequently the point on which finance and marketing tangle the most. Perhaps to its own surprise, finance is fi nding that it can pay to accept some very soft measures of success.
Kevin Schick of Con-way points to his company’s marketing agreement with NASCAR (the National Association for Stock Car Auto Racing), which he was not happy about at fi rst. Marketing argued that the sponsorship deal had several soft benefi ts, such as increased visibility and building morale among Con-way’s truck drivers who have a strong affi nity for NASCAR. Mr. Schick’s fi rst reaction was to want proof that those things were worth the price. Eventually, he came around and decided the returns were worth the risk.
"There’s no question, and quite honestly, I have to admit that our drivers and their families seem to really get engaged in NASCAR," he says. "In a case like that, you’re not going to box us in with hard numbers. I have to recognize the fact that you can’t put everything into a balance sheet or a P&L and glean all the results from it."
Mr. Goble says that standardizing the process works only when you are doing the same things over and over, such as when you conduct credit checks. But activities such as acquisitions or major third-party relationship-building require "a very open mind. Once you document a process and say that we’re going to do A through Z, someone is going to become married to that concept and you’re going to have a diffi cult time divorcing it in order to allow for the unique analysis necessary," he says.
Aside from the capabilities of the information systems themselves, finance executives from companies with standardized IT platforms also report more frequently that finance is "always involved" with the entire range of tasks associated with implementing and managing alliances. And these companies are more likely to consider, evaluate, and implement a complete range of alliances than companies that haven’t standardized finance’s IT platforms. Finally, companies with standardized IT platforms much more frequently rate their finance functions as being "excellent" at the complete range of tasks involved with identifying, establishing, and managing alliances.
These trends suggest that companies with a better handle on managing the information they collect and use also are better equipped to apply that information to evaluate their alliances. The better a company is at collecting and analyzing the relevant data, the more likely it is to pursue and establish alliances of all kinds, and the more likely it is to feel comfortable that it is making good decisions.
Conclusion
"When we’re looking at any alliance or any supplier, we always ensure that we have the right to have a look at their systems and processes and controls. Otherwise, it’s a bit of a black box."—Colin Storrie, CFO, Qantas Airways
"It’s about education. It’s about explaining the bigger picture, about explaining to [your business partners] how their piece fi ts into the overall whole."—Johann Murray, CFO, Hilton Grand Vacations Club
Finance needs to be part of the strategic discussions around alliances in order to fulfi ll its assessment and monitoring responsibilities. Key to finance’s ability to do this is what might be called "hard" communication—the ability to verify the accuracy of what it is told, and to use those facts to bring everybody onto the same page.
The current global economic instability means organizations are having to quickly adapt to mercurial business conditions. This uncertainty could increase companies’ reliance on alliances to provide as-needed skills, resources, services, and products. Even if specifi c areas are—or become—less volatile economically, such stability is unlikely to diminish the ubiquitousness and usefulness of alliances of all types.
Every alliance an enterprise looks at requires finance to do additional work by assessing the potential partnership, negotiating its terms, and then monitoring it. This job is made easier when finance comes into the alliance discussion as early as possible; however, other units are frequently hesitant to bring finance on because of preconceived notions about what finance does or is willing to do.
Survey respondents say fi nancial risk is the area that is most often subject to a formal, documented process (54%), followed by regulatory risk (48%) and operational risk (44%). The relatively high percentage of companies formally documenting operational risk suggests the need for increased operational expertise or knowledge on the part of finance. In this way, finance will be able to come up with new, creative, and responsible methods for assessing situations and opportunities. Only by approaching peers on their own terms will finance be able to educate them on the necessity of an expanded role and communicate analyses clearly and convincingly.
Finance’s real value in developing and managing alliances depends on the quality of the information it uses and communicates.
Clearly, something has to change if finance is to get the information it needs and the access to strategic-level discussions it deserves. That change must involve how other business units view what finance brings to the table. This perception will not change on its own: finance has to show it is able to work closely with business units and external parties in a variety of situations. Such challenges will sometimes push it outside of its traditional comfort zone of assessing fi nancial risk.
Finance’s success in establishing itself in this role is enhanced when it is seen as being the keeper of the "real" numbers—the measures that make the most difference for the business and its strategy. Our study fi nds that finance’s real value depends on the quality of the information it uses and communicates, and the best information comes when a team or person dedicated to handling alliances can work with consistent data provided by a standardized IT platform.
Sponsor’s Perspective
Tear Down this Wall, Mr. CFO!
Prepared by Jonathan Becher, Senior Vice President of Marketing at Business Objects, an SAP company
Executive Summary
The title is a reference to the historic moment when U.S. President Ronald Reagan beseeches the USSR’s Secretary General Mikhail Gorbachev to "tear down this wall" and end the Cold War, prophetically ushering in decades of global productivity through collaboration across national boundaries. Similarly, business leaders now need to step up and tear down the barriers that inhibit corporate performance today—those that separate boardroom strategy from execution in the trenches and those that prevent a company from taking advantage of its business network for faster co-innovation, better customer experience, and quicker market access in emerging regions. As primary custodians of corporate performance, CFOs must help make finance a forward-looking strategic function, closing the loop between strategy and execution across the business network. IT can play a crucial role in boosting performance when strategic planning is tied to insights from optimized processes and effective management of risks across the business network.
Managing Performance by Closing the Loop Between Strategy and Execution
Robert Kaplan and David Norton, in an article in the January 2008 issue of Harvard Business Review, state that 60% to 80% of companies fall short of the success predicted from their new strategies. Strategic planning and operational execution have historically worked in isolation, often driven through different people, information, and processes. Strategy without synchronized execution has led to wasteful corporate maneuvering, while fl awless execution in the absence of a good strategy has led many companies towards perilous decline. Insights and risks from operational processes are not taken into account, or action across the company is not properly aligned with a carefully crafted business strategy.
As the CFO Research Services study highlights, most companies are also evolving to a networked model, in which they rely on their partners for product co-innovation, outsourced manufacturing, third-party logistics, and alliance channels for sales. While closing the loop between strategy and execution is challenging enough within a company, it becomes crucial to success when companies expand traditional business processes in R&D, sales, operations, manufacturing, and finance to their partners, alliances, suppliers, and customers. In that ecosystem, strategy and execution must be planned, executed, monitored, and improved across a business network for maximum corporate performance.
Managing Governance, Compliance, and Risk
In business networks, companies have to manage higher risk for higher performance. Understanding risks holistically and mitigating them effectively requires visibility, trust among business network partners, and formal and documented methods. As this report highlights, finance professionals have traditionally paid more formal attention to fi nancial, regulatory, and operational risk. Workforce risks, such as segregation of duties; market risks, such as rising global commodity prices; and reputation risks, such as product recalls, have not received the same level of formal scrutiny. They could be managed implicitly within a company because they were obvious, but as more and more of the risks come from outside the core company, they must be formalized and managed proactively with business partners. The Mattel executives who suffered through a recall due to lead-based paint in toys built by their suppliers can testify to the importance of risk management in business networks. Companies need a unifi ed information foundation to manage compliance requirements, automatically monitor risks, promote company values, and build sustainable operations across the business network.
Moving Forward with a New Role for Finance
Finance has long played a crucial role in cost control and corporate reporting. CFOs have helped line of business executives manage their bottom line by negotiating procurement terms based on past vendor performance. And they have been the rock-solid foundation for monthly, quarterly, and yearly performance reporting. While important, these roles have been backwards-looking, concerned with lagging indicators of corporate performance and largely standardized into fi nancial shared services. To provide a competitive edge, successful CFOs are elevating their role to that of the Chief Performance Offi cer, driving performance forward by proactively managing strategy and planning functions across their business networks. Since corporate performance increasingly depends on loyal customers and revenue from alliances, fast-emerging regions, and new channels, the focus for CFOs is also shifting from pure cost control to sustained profi table growth. Managing enterprise performance is the new imperative for finance professionals in this global networked economy. It requires a unifi ed foundation for information, supporting collaborative decision making across teams with smooth fl ows for both structured and unstructured data and the ability to optimize processes across the business network.
Role of IT and SAP’s Unique Value
Finance needs to leverage IT, not only to simplify and standardize business processes that accelerate end of quarter close, but also to deploy the corporate strategic plan and monitor its execution proactively. To accomplish these tasks, transactional investments in enterprise resource planning and other enterprise applications need to be supplemented with investment in an information management platform to integrate enterprise performance and governance, compliance, and risk. SAP helps finance professionals align execution with strategy by delivering an IT solution that marries process execution holistically with strategy development, planning, and management of risk. It is our fundamental belief that SAP and Business Objects, an SAP company, are uniquely positioned to help close the performance gap and ultimately transform the way the world works by connecting people, information, and businesses.

Mauricio Urrea Ospina