Gartner Says Bad Financial Decisions by Managers Cost Firms More Than 3 Percent of Profits
ARLINGTON, Va.--(BUSINESS WIRE)--Dec 20, 2018--Chronic occurrence of poor operational decisions by midlevel managers is eroding margins and costing firms upward of 3 percent of profits, according to Gartner, Inc. 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.
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Figure 1: Frequency of Exceptions to Operational Decision Rules. Source: Gartner (December 2018).
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 (see Figure 1).
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.”
More information on the characteristics that define decision support experts can be found here: https://www.gartner.com/smarterwithgartner/reduce-the-staggering-costs-of-poor-operational-decisions/
More data and detailed analysis is available in the ebook Transform Finance Business Partnering (free registration required). Gartner’s full research on the effectiveness of switching to a decision support model is available to Gartner for Finance Leaders clients.
About Gartner for Finance Leaders
Gartner for Finance Leaders supports senior finance executives with their most critical priorities. Gartner offers a unique breadth and depth of content to support clients’ individual success and deliver on key initiatives that cut across finance functions to drive business impact. Learn more at https://www.gartner.com/en/finance/finance-leaders.
Gartner, Inc. (NYSE:IT), is the world’s leading research and advisory company and a member of the S&P 500. We equip business leaders with indispensable insights, advice and tools to achieve their mission-critical priorities today and build the successful organizations of tomorrow.
Our unmatched combination of expert-led, practitioner-sourced and data-driven research steers clients toward the right decisions on the issues that matter most. We are a trusted advisor and objective resource for more than 15,000 organizations in more than 100 countries — across all major functions, in every industry and enterprise size.
To learn more about how we help decision makers fuel the future of business, visit gartner.com.
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SOURCE: Gartner, Inc.
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PUB: 12/19/2018 04:17 PM/DISC: 12/20/2018 09:02 AM