Cartoon – Importance of Key Performance Indicators
Category Archives: Key Performance Indicators
Cartoon – Redefining Key Metrics
110 hospital benchmarks | 2020
https://www.beckershospitalreview.com/lists/110-hospital-benchmarks-2020.html?utm_medium=email
Hospitals across the nation compete in a number of ways, including on quality of care and price, and many use benchmarking to determine the top priorities for improvement. The continuous benchmarking process allows hospital executives to see how their organizations stack up against regional competitors as well as national leaders.
Becker’s Hospital Review has collected benchmarks related to some of the most important day-to-day areas hospital executives oversee: quality, finance, staffing and utilization.
Finance
Key ratios
Source: Moody’s Investors Service, “Not-for-profit and public healthcare – US: Medians” report, September 2019.
The medians are based on an analysis of audited fiscal 2018 financial statements for 284 freestanding hospitals, single-state health systems and multistate health systems, representing 79 percent of all Moody’s-rated healthcare entities. Children’s hospitals, hospitals for which five years of data are not available and certain specialty hospitals were not eligible for inclusion in the medians.
1. Maintained bed occupancy: 66.6 percent
2. Operating margin: 1.8 percent
3. Excess margin: 4.3 percent
4. Operating cash flow margin: 7.9 percent
5. Return on assets: 3.6 percent
6. Three-year operating revenue CAGR: 5.6 percent
7. Three-year operating expense CAGR: 6.4 percent
8. Cash on hand: 200.9 days
9. Annual operating revenue growth rate: 5.5 percent
10. Annual operating expense growth rate: 5.4 percent
11. Total debt-to-capitalization: 33.7 percent
12. Total debt-to-operating revenue: 33.3 percent
13. Current ratio: 1.9x
14. Cushion ratio: 21.6x
15. Annual debt service coverage: 4.7x
16. Maximum annual debt service coverage: 4.4x
17. Debt-to-cash flow: 3.1x
18. Capital spending ratio: 1.2x
19. Accounts receivable: 45.9 days
20. Average payment period: 61.4 days
21. Average age of plant: 11.7 years
Hospital margins by credit rating group
Source: S&P Global Ratings “U.S. Not-For-Profit Health Care System Median Financial Ratios — 2018 vs. 2017” report, September 2019.
AA+ rating
22. Operating margin: 5.5 percent
23. Operating EBIDA margin: 12 percent
24. Excess margin: 9.2 percent
25. EBIDA margin: 14.8 percent
AA rating
26. Operating margin: 4.4 percent
27. Operating EBIDA margin: 10.1 percent
28. Excess margin: 6.7 percent
29. EBIDA margin: 12.4 percent
AA- rating
30. Operating margin: 3.4 percent
31. Operating EBIDA margin: 9.5 percent
32. Excess margin: 4.0 percent
33. EBIDA margin: 10.4 percent
A+ rating
34. Operating margin: 1.6 percent
35. Operating EBIDA margin: 7.4 percent
36. Excess margin: 3.3 percent
37. EBIDA margin: 10.1 percent
A rating
38. Operating margin: 2.1 percent
39. Operating EBIDA margin: 7.6 percent
40. Excess margin: 3.3 percent
41. EBIDA margin: 8.6 percent
A- rating
42. Operating margin: 1 percent
43. Operating EBIDA margin: 7.8 percent
44. Excess margin: 2.5 percent
45. EBIDA margin: 8.3 percent
Average adjusted expenses per inpatient day
Source: Kaiser State Health Facts, accessed in 2020 and based on 2018 data.
Adjusted expenses per inpatient day include all operating and nonoperating expenses for registered U.S. community hospitals, defined as public, nonfederal, short-term general and other hospitals. The figures are an estimate of the expenses incurred in a day of inpatient care and have been adjusted higher to reflect an estimate of the volume of outpatient services.
46. Nonprofit hospitals: $2,653
47. For-profit hospitals: $2,093
48. State/local government hospitals: $2,260
Prescription drug spending
Source: NORC at the University of Chicago’s “Recent Trends in Hospital Drug Spending and Manufacturer Shortages” report, January 2019. Figures below are based on 2017 data.
49. Average prescription drug spending per adjusted admission at U.S. community hospitals: $555
50. Average outpatient prescription drug spending per adjusted admission at U.S. community hospitals: $523
51. Average inpatient prescription drug spending per admission at U.S. community hospitals: $756
52. GPO hospital spending on Activase: $210 million
53. GPO hospital spending on Remicade: $138 million
54. GPO hospital spending on Humira: $122 million
55. GPO hospital spending on Rituxan: $92 million
56. GPO hospital spending on Neulasta: $92 million
57. GPO hospital spending on Prolia: $85 million
58. GPO hospital spending on Harvoni: $83 million
59. GPO hospital spending on Procrit: $80 million
60: GPO hospital spending on Lexiscan: $64 million
61. GPO hospital spending on Enbrel: $60 million
Quality and process of care
Source: Hospital Compare, HHS, Complications and Deaths-National Averages, May 2018, and Timely and Effective Care-National Averages, May 2018, the latest available data for these measures.
Hospital-acquired conditions
The following represent the average percentage of patients in the U.S. who experienced the conditions.
62. Collapsed lung due to medical treatment: 0.27 percent
63. A wound that splits open on the abdomen or pelvis after surgery: 0.95 percent
64. Accidental cuts and tears from medical treatment: 1.29 percent
65. Serious blood clots after surgery: 3.85 percent
66. Serious complications: 1 percent
67. Bloodstream infection after surgery: 5.09 percent
68. Postoperative respiratory failure rate: 7.35 percent
69. Pressure sores: 0.52 percent
70. Broken hip from a fall after surgery: 0.11 percent
71. Perioperative hemorrhage or hematoma rate: 2.53 percent
Death rates
72. Death rate for CABG surgery patients: 3.1 percent
73. Death rate for COPD patients: 8.5 percent
74. Death rate for pneumonia patients: 15.6 percent
75. Death rate for stroke patients: 13.8 percent
76. Death rate for heart attack patients: 12.9 percent
77. Death rate for heart failure patients: 11.5 percent
Outpatients with chest pain or possible heart attack
78. Median time to transfer to another facility for acute coronary intervention: 58 minutes
79. Median time before patient received an ECG: 7 minutes
Lower extremity joint replacement patients
80. Rate of complications for hip/knee replacement patients: 2.5 percent
Flu vaccination
81. Healthcare workers who received flu vaccination: 90 percent
Pregnancy and delivery care
82. Mothers whose deliveries were scheduled one to two weeks early when a scheduled delivery was not medically necessary: 2 percent
Emergency department care
83. Average time patient spent in ED after the physician decided to admit as an inpatient but before leaving the ED for the inpatient room: 103 minutes
84. Average time patient spent in the ED before being sent home: 141 minutes
85. Average time patient spent in the ED before being seen by a healthcare professional: 20 minutes
86. Percentage of patients who left the ED before being seen: 2 percent
Staffing
Source: American Hospital Association “Hospital Statistics” report, 2019 Edition.
Average full-time staff
87. Hospitals with six to 24 beds: 101
88. Hospitals with 25 to 49 beds: 176
89. Hospitals with 50 to 99 beds: 302
90. Hospitals with 100 to 199 beds: 683
91. Hospitals with 200 to 299 beds: 1,264
92. Hospitals with 300 to 399 beds: 1,789
93. Hospitals with 400 to 499 beds: 2,670
94. Hospitals with 500 or more beds: 5,341
Average part-time staff
95. Hospitals with six to 24 beds: 52
96. Hospitals with 25 to 49 beds: 84
97. Hospitals with 50 to 99 beds: 141
98. Hospitals with 100 to 199 beds: 286
99. Hospitals with 200 to 299 beds: 472
100. Hospitals with 300 to 399 beds: 604
101. Hospitals with 400 to 499 beds: 1,009
102. Hospitals with 500 or more beds: 1,468
Utilization
Source: American Hospital Association “Hospital Statistics” report, 2019 Edition.
Average admissions per year
103. Hospitals with six to 24 beds: 408
104. Hospitals with 25 to 49 beds: 901
105. Hospitals with 50 to 99 beds: 2,097
106. Hospitals with 100 to 199 beds: 5,809
107. Hospitals with 200 to 299 beds: 11,241
108. Hospitals with 300 to 399 beds: 16,635
109. Hospitals with 400 to 499 beds: 20,801
110. Hospitals with 500 or more beds: 34,593
Tenet posts 3rd consecutive quarter of volume growth
https://www.healthcaredive.com/news/tenet-posts-3rd-consecutive-quarter-of-volume-growth/566597/
Dive Brief:
- Shares of hospital chain Tenet Healthcare rose more than 3% Tuesday morning after reporting its third quarter results Monday evening showing broad-based volume growth.
- Comparing hospital-to-hospital performance, Tenet reported a 3.6% increase in admissions and a slight uptick for inpatient surgeries (1.9%) and outpatient visits (1.6%).
- The Dallas-based company reported a net loss of $232 million for the quarter attributable to the company’s common shareholders, compared to a loss of $9 million a year earlier.
Dive Insight:
Tenet CEO Ronald Rittenmeyer touted the results on Tuesday’s call with investors and said the company is raising its outlook for the year based on the numbers.
“We had a very positive third quarter with performance improvement in each of our operating segments,” Rittenmeyer said in a statement.
It’s the third consecutive quarter of volume growth, executives said Tuesday.
Rittenmeyer attributed positive trends over the past few years to a strong leadership team. “Tenet is in a much different place than it was two years ago,” he said.
Same-hospital patient revenue grew 5.8% and surgical revenue increased 6.9% on a same-facility basis.
Commercial volume trends were also very positive, executives said.
Still, they said the company faced more than $50 million in unanticipated headwinds including closures and costs related to Hurricane Dorian, lower California provider fee revenues and costs related to a nursing strike at 12 facilities.
The company is raising its outlook for adjusted earnings per share for the year. It expects adjusted diluted earnings per share from continuing operations of $2.25 to $2.91 for the year.
The company’s other segments also showed growth.
Conifer, the revenue cycle management unit, reported adjusted EBITDA of $90 million, an 11% increase from the previous year period. Tenet announced earlier this year it will spin off Conifer into an independent publicly traded company by the second quarter of 2021.
USPI, the outpatient surgical business, has a steady pipeline of health systems willing to send patients to the outpatient facilities, executives said during the call. During the third quarter, the company added three health systems and expects to reach a total of seven by end of year.
Federal Reserve announces 2nd consecutive rate cut
The Federal Reserve cut interest rates by a quarter point on Wednesday, bringing the target range for the benchmark Fed Funds rate to 1.75%–2%.
Why it matters: The Fed’s 2nd consecutive rate cut reflects worries about the U.S. economy. The trade war and slowing growth around the world have made corporate executives more worried than they’ve been in years.
Hospital profitability up after significant declines in June, Kaufman Hall finds
Hospitals recorded profit improvements in July after posting significant year-over-year decreases in June, according to a report from financial advisory firm Kaufman Hall.
The firm found hospitals’ EBITDA margin rose 77.5 basis points month over month. Hospitals also saw their operating margins climb 105 basis points. Both measures marked the sixth month of improved hospital profitability out of the past seven months.
“While these trends generally are good news for the industry, the improvements do not necessarily mean that hospitals are achieving sufficient margins,” according to Kaufman Hall. “Also, margins of individual hospitals do not necessarily reflect those of overall health systems.”
Kaufman Hall noted that hospitals did see their volumes increase in July compared to June, which saw declines in patient volumes.
Read the full report here.
Cartoon – Modern Governance
The evolution of the CFO
CFOs are playing an increasingly pivotal role in driving change in their companies. How should they balance their traditional responsibilities with the new CFO mandate?
Podcast transcript
Sean Brown: If you wanted evidence that the only constant in life is change, then look no further than the evolution of the CFO role. In addition to traditional CFO responsibilities, results from a recent McKinsey survey suggest that the number of functions reporting to CFOs is on the rise. Also increasing is the share of CFOs saying they oversee their companies’ digital activities and resolve issues outside the finance function. How can CFOs harness their increasing responsibilities and traditional finance expertise to drive the C-suite agenda and lead substantive change for their companies?
Joining us today to answer that question are Ankur Agrawal and Priyanka Prakash. Ankur is a partner in our New York office and one of the leaders of the Healthcare Systems & Services Practice. Priyanka is a consultant also based in New York. She is a chartered accountant by training and drives our research on the evolving role of finance and the CFO. Ankur, Priyanka, thank you so much for joining us today.
Let’s start with you, Ankur. Tell us about your article, which is based on a recent survey. What did you learn?
Ankur Agrawal: We look at the CFO role every two years as part of our ongoing research because the CFO is such a pivotal role in driving change at companies. We surveyed 400 respondents in April 2018, and we subsequently selected a few respondents for interviews to get some qualitative input as well. Within the 400 respondents, 212 of those were CFOs, and then the remainder were C-level executives and finance executives who were not CFOs. We had a healthy mix of CFOs and finance executives versus nonfinance executives. The reason was we wanted to compare and contrast what CFOs are saying versus what the business leaders are saying to get a full 360-degree view of CFOs.
The insights out of this survey were many. First and foremost, the pace of change in the CFO role itself is shockingly fast. If we compare the results from two years ago, the gamut of roles that reported into the CFO role has dramatically increased. On average, approximately six discrete roles are reporting to the CFO today. Those roles range from procurement to investor relations, which, in some companies, tend to be very finance specific. Two years ago, that average was around four. You can see the pace of change.
The second interesting insight out of this survey when compared to the last survey is the cross-functional nature of the role, which is driving transformations and playing a more proactive role in influencing change in the company. The soft side of the CFO leadership comes out really strongly, and CFOs are becoming more like generalist C-suite leaders. They should be. They, obviously, are playing that role, but it is becoming very clear that that’s what the business leaders expect them to do.
And then two more insights that are not counterintuitive, per se, but the pace of change is remarkable. One is this need to lead on driving long-term performance versus short-term performance. The last couple of years have been very active times for activist investors. There are lots of very public activist campaigns. We clearly see in the data that CFOs are expected to drive long-term performance and be the stewards of the resources of the company. That data is very clear.
And then, lastly, the pace of change of technology and how it’s influencing the CFO role: more than half of the CFO functions or finance functions are at the forefront of digitization, whether it is automation, analytics, robotic processes, or data visualization. More than half have touched these technologies, which is remarkable. And then many more are considering the technological evolution of the function.
Sean Brown: In your survey, did you touch on planning for the long term versus the short term?
Ankur Agrawal: Our survey suggests, and lot of the business leaders suggest, that there is an imperative for the CFO to be the steward of the long term. And there is this crying need for the finance function to lead the charge to take the long-term view in the enterprise. What does that mean? I think it’s hard to do—very, very hard to do—because the board, the investors, everybody’s looking for the short-term performance. But it puts even more responsibility on the finance function in defining and telling the story of how value is being created in the enterprise over the long term. And those CFOs and finance executives who are able to tell that story and have proof points along the way, I think those are the more successful finance functions. And that was clearly what our survey highlighted.
What it also means is the finance functions have to focus and put in place KPIs [key performance indicators] and metrics that talk about the long-term value creation. And it is a theme that has been picked up, in the recent past, by the activists who have really taken some companies to task on not only falling short on short-term expectations but also not having a clear view and road map for long-term value creation. It is one of the imperatives for the CFO of the future: to be the value architect for the long term. It’s one of the very important aspects of how CFOs will be measured in the future.
Sean Brown: I noticed in your survey that you did ask CFOs and their nonfinance peers where they thought CFOs created the most value. What did you learn from that?
Priyanka Prakash: This has an interesting link with the entire topic of transformation. We saw that four in ten CFOs say that they created the most value through strategic leadership, as well as leading the charge on talent, including setting incentives that are linked with the company’s strategy. However, we see that nonfinance respondents still believe that CFOs created the most value by spending time on traditional finance activities. This offers an interesting sort of split. One of the things that this indicates is there’s a huge opportunity for CFOs to lead the charge on transformation to ensure that they’re not just leading traditional finance activities but also being change agents and leading transformations across the organization.
Ankur Agrawal: The CFOs of the future have to flex different muscles. They have been very good in really driving performance. Maybe there’s an opportunity to even step up the way that performance is measured in the context of transformation, which tends to be very messy. But, clearly, CFOs are expected to be the change agents, which means that they have to be motivational. They have to be inspirational. They have to lead by example. They have to be cross-functional. They have to drive the talent agenda. It’s a very different muscle, and the CFOs have had less of an opportunity to really leverage that muscle in the past. I think that charismatic leadership from the CFO will be the requirement of the future.
Sean Brown: You also address the CFO’s role regarding talent. Tell us a bit more about that.
Ankur Agrawal: Another really important message out of the survey is seeing the finance function and the CFO as a talent factory. And what that means is really working hand in hand with the CEO and CHRO [chief HR officer] over this trifecta of roles. Because the CFO knows where to invest the money and where the resources need to be allocated to really drive disproportionate value, hopefully for the long run. The CHRO is the arbiter of talent and the whole performance ethic regarding talent in the company. And the CEO is the navigator and the visionary for the company. The three of them coming together can be a very powerful way to drive talent—both within the function and outside the function.
And the finance-function leaders expect CFOs to play a really important role in talent management in the future and in creating the workforce of the future. And this workforce—in the finance function, mind you—will be very different. There’s already lots of talk about a need for data analytics, which is infused in the finance function and even broader outside the organization of finance function. The CFOs need to foster that talent and leverage the trifecta to attract, retain, and drive talent going forward.
Sean Brown: Do you have any examples of successful talent-development initiatives for the finance function? And can you share any other examples of where CFOs, in particular, have taken a more active role in talent and talent development?
Ankur Agrawal: An excellent question. On talent development within the finance function, a few types of actions—and these are not new actions—done very purposefully can have significant outsize outcome. One is job rotations: How do you make sure that 20 to 30 percent of your finance function is moving out of the traditional finance role, going out in the business, learning new skills? And that becomes a way where you cultivate and nurture new skills within the finance function. You do it very purposefully, without the fear that you will lose that person. If you lose that person, that’s fine as well. That is one tried-and-tested approach. And some companies have made that a part of the talent-management system.
The second is special projects. And again, it sounds simple, but it’s hard to execute. This is making this a part of every finance-function executive’s role, whether it’s a pricing project or a large capex [capital-expenditure] and IT project implementation. Things like that. Getting the finance function outside of their comfort zone: I think that’s certainly a must-have.
And the third would be there is value in exposing finance-function executives to new skills and creating a curriculum, which is very deliberate. I think technology’s changing so rapidly. So exposing the finance function to newer technologies, newer ways of working, and collaboration tools: those are the things I would highlight as ways to nurture finance talent.
Priyanka Prakash: Just to add onto that. A lot of the folks whom I talked to say that, very often, finance folks spend a large chunk of their time trying to work on ad hoc requests that they get from the other parts of the business. A big opportunity here is in how the finance function ensures that the rest of the nonfinance part has some basic understanding of finance to make them more self-sufficient, to ensure that they are not coming to the finance function with every single question. What this does is it ensures that the rest of the organization has the finance skills to ensure that they’re making the right decisions, using financial tools.
And secondly, it also significantly frees up the way that the finance organization itself spends its time. If they spend a few hours less working on these ad hoc requests, they can invest their time in thinking about strategy, in thinking about how the finance function can improve the decision making. I think that’s a huge sort of benefit that organizations have seen just by upscaling their nonfinance workforce to equip them with the financial skills to ensure that the finance team is spending time on its most high-value activity.
Sean Brown: Is this emphasis on talent focused only on the finance function? What I am hearing from your response is that it’s not just building up the talent within the finance function but embedding finance talent and capabilities throughout the organization. Is that right?
Priyanka Prakash: Absolutely. Because if you take an example of someone who’s in a factory who wants to have an investment request for something that they want to do at a plant, they will have to know the basic knowledge of finance to evaluate whether this is an investment that they need or not. Because at the end of the day, any decision would be incomplete without a financial guideline on how to do it. I think that the merging of your other functions with a strong background and rooting in finance can improve the quality of decisions that not just the finance function but other teams and other functions also make in the organization.
Sean Brown: Priyanka, your survey touches a bit on the topic of digital. What did you learn there?
Priyanka Prakash: Sure. This is one of those things that everybody wants to do, but the question that I’ve seen most of my clients struggle with in the initial phases is, “Yes, I have the intent from the top. There is intent from the finance and other teams on how to become more digital, but how do you actually start that process?”
There are four distinct kinds of technologies or tools that finance teams, specifically, could use in enabling their digital journey and transformation. CFOs have way too much on their plates right now. What this essentially means is that they need to invest time and a lot of their thinking into some of these newer, more strategic areas while ensuring that they keep the lights on in the traditional finance activities. The biggest tool that will enable them to keep the lights on as well as add value in this new expanded role is to take advantage of automation, as well as some of the newer digital technologies that we see.
There are basically four types of digital stages that we see as finance functions start to evolve. One is using automation, which is typically the first step. For example, “How do I move from an Excel-based system to an Alteryx one? How do I move from a manual transactional system to something that’s more automated, where my finance teams don’t have to invest time, but it happens in the background with accuracy?” That’s step one.
The second thing that we see as a result of this is you have a lot of data-visualization tools that are being used. This is very helpful, especially when you think about the role of FP&A [financial planning and analysis]. “How does my FP&A team ensure that the company makes better decisions? How do I use a visualization software to get different views of my data to ensure that I’m making the right decisions?”
The third one is, “How do I use analytics within finance? How do I use analytics to draw insights from the data that I might have missed otherwise?” This could be something in forecasting. This could be something in planning. But this could also be something that’s used when you compare your budget or your forecast. Your analytics could really help draw out drivers of why there’s a variance.
And fourthly is, “How do I then integrate this advanced-analytics philosophy across the rest of the company?” What this means is, “How do I integrate my finance and traditional ERP [enterprise-resource-planning] systems with the pricing system, with the operations, and supply-chain-management system? How do I integrate my finance systems with my CRM [customer relationship management]?” Again, the focus is on ensuring that the whole database is not this large, clunky system but an agile system that ensures you draw out some insights.
Sean Brown: Some have suggested the CFO is ideally suited to be the chief digital officer. Have you seen any good examples of this?
Ankur Agrawal: There were examples even before the digital technologies took over. In some companies, the technology functions used to report to CFOs. There are cases where CFOs have formally or even informally taken over the mandate of a chief digital officer. You don’t necessarily need to have a formal reporting role to be a digital leader in the company. CFOs, of course, have an important role in vetting expenses and vetting the investments the companies are making. That said, CFOs have this cross-functional visibility of the entire business, which makes them very well suited to being the digital officers. In some cases, CFOs have stepped up and played that more formal role. I would expect, in the future, they will certainly have an informal role. In select cases, they will continue to have a formal digital-officer role.
Sean Brown: It sounds like, from the results of the survey, the CFO has a much larger role to play. Where does someone begin on this journey?
Priyanka Prakash: Going back to the first point that we discussed on how CFOs should help their companies have a more long-term view, we see that this transformation is specifically here to move to more digital technologies. It’s not going to be easy, and it’s not going to be short. Yes, you will see quick wins. But it is going to be a slightly lengthy—and oftentimes, a little bit of a messy—process, especially in the initial stages. How do we ensure that there is enough leadership energy around this? Because once you have that leadership energy, and once you take the long-term view to a digital transformation, the results that you see will pay for themselves handsomely.
Again, linking this back with the long-term view, this is not going to be a short three-month or six-month process. It’s going to be an ongoing evolution. And the nature of the digital technologies also evolve as the business evolves. But how do you ensure that your finance and FP&A teams have the information and the analytics that they need to evolve and be agile along with the business and to ensure that the business responds to changes ahead of the market? How do we ensure that digital ensures that your company is proactively, and not reactively, reacting to changes in the external market and changes in disruption?
Sean Brown: Priyanka, any final thoughts you’d like to share?
Priyanka Prakash: All that I’ll say is that this is a very, very exciting time for the role of the CFO. A lot of things are changing. But you can’t evolve unless you have your fundamentals right. This is a very exciting time, where CFOs can have the freedom to envision, create, and chart their own legacy and then move to a leadership and influencer role and truly be a change agent in addition to doing their traditional finance functions, such as resource allocation, your planning, and all of the other functions as well. But I definitely do think that these are very exciting times for finance organizations. There are lots of changes, and the evolutionary curve is moving upward very quickly.
Sean Brown: Ankur, Priyanka, thanks for joining us today.
The new CFO mandate: Prioritize, transform, repeat
Amid a raft of new duties for CFOs, our survey suggests that finance leaders are well positioned to lead the C-suite agenda by championing transformations, digitization, and capability building.
Responses indicate that the opportunity for CFOs to establish the finance function as both a leading change agent and a source of competitive advantage has never been greater. Yet they also show a clear perception gap that must be bridged if CFOs are to break down silos and foster the collaboration necessary to succeed in a broader role. While CFOs believe they are beginning to create financial value through nontraditional tasks, they also say that a plurality of their time is still devoted to traditional tasks versus newer initiatives. Meanwhile, leaders outside the finance function believe their CFOs are still primarily focused on and create the most value through traditional finance tasks.
How can CFOs parlay their increasing responsibility and traditional finance expertise to resolve these differing points of view and lead substantive change for their companies? The survey results point to three ways that CFOs are uniquely positioned to do so: actively heading up transformations, leading the charge toward digitization, and building the talent and capabilities required to sustain complex transformations within and outside the finance function.
Changing responsibilities, unchanged perceptions
The latest survey results confirm that the CFO’s role is broader and more complex than it was even two years ago. The number of functional areas reporting to CFOs has increased from 4.5 in 2016 to an average of 6.2 today. The most notable increases since the previous survey are changes in the CFO’s responsibilities for board engagement and for digitization (that is, the enablement of business-process automation, cloud computing, data visualization, and advanced analytics). The share of CFOs saying they are responsible for board-engagement activities has increased from 24 percent in 2016 to 42 percent today; for digital activities, the share has doubled.
The most commonly cited activity that reports to the CFO this year is risk management, as it was in 2016. In addition, more than half of respondents say their companies’ CFOs oversee internal-audit processes and corporate strategy. Yet CFOs report that they have spent most of their time—about 60 percent of it, in the past year—on traditional and specialty finance roles, which was also true in the 2016 survey.
Also unchanged are the diverging views, between CFOs and their peers, about where finance leaders create the most value for their companies. Four in ten CFOs say that in the past year, they have created the most value through strategic leadership and performance management—for example, setting incentives linked to the company’s strategy. By contrast, all other respondents tend to believe their CFOs have created the most value by spending time on traditional finance activities (for example, accounting and controlling) and on cost and productivity management across the organization.
Finance leaders also disagree with nonfinance respondents about the CFO’s involvement in strategy decisions. CFOs are more likely than their peers to say they have been involved in a range of strategy-related activities—for instance, setting overall corporate strategy, pricing a company’s products and services, or collaborating with others to devise strategies for digitization, analytics, and talent-management initiatives.
Guiding and sustaining change
Our latest survey, along with previous McKinsey research,2 confirms that large-scale organizational change is ubiquitous: 91 percent of respondents say their organizations have undergone at least one transformation in the past three years.3 The results also suggest that CFOs are already playing an active role in transformations. The CFO is the second-most-common leader, after the CEO, identified as initiating a transformation. Furthermore, 44 percent of CFO respondents say that the leaders of a transformation, whether it takes place within finance or across the organization, report directly to them—and more than half of all respondents say the CFO has been actively involved in developing transformation strategy.
Respondents agree that, during transformations, the CFO’s most common responsibilities are measuring the performance of change initiatives, overseeing margin and cash-flow improvements, and establishing key performance indicators and a performance baseline before the transformation begins. These are the same three activities that respondents identify as being the most valuable actions that CFOs could take in future transformations.
Beyond these three activities, though, respondents are split on the finance chief’s most critical responsibilities in a change effort. CFOs are more likely than peers to say they play a strategic role in transformations: nearly half say they are responsible for setting high-level goals, while only one-third of non-CFOs say their CFOs were involved in objective setting. Additionally, finance leaders are nearly twice as likely as others are to say that CFOs helped design a transformation’s road map.
Other results confirm that finance chiefs have substantial room to grow as change leaders—not only within the finance function but also across their companies. For instance, the responses indicate that half of the transformations initiated by CFOs in recent years were within the finance function, while fewer than one-quarter of respondents say their companies’ CFOs kicked off enterprise-wide transformations.
Leading the charge toward digitization and automation
The results indicate that digitization and strategy making are increasingly important responsibilities for the CFO and that most finance chiefs are involved in informing and guiding the development of corporate strategy. All of this suggests that CFOs are well positioned to lead the way—within their finance functions and even at the organization level—toward greater digitization and automation of processes.
Currently, though, few finance organizations are taking advantage of digitization and automation. Two-thirds of finance respondents say 25 percent or less of their functions’ work has been digitized or automated in the past year, and the adoption of technology tools is low overall.
The survey asked about four digital technologies for the finance function: advanced analytics for finance operations,5 advanced analytics for overall business operations,6 data visualization (used, for instance, to generate user-friendly dynamic dashboards and graphics tailored to internal customer needs), and automation and robotics (for example, to enable planning and budgeting platforms in cloud-based solutions). Yet only one-third of finance respondents say they are using advanced analytics for finance tasks, and just 14 percent report the use of robotics and artificial-intelligence tools, such as robotic process automation (RPA).7 This may be because of what respondents describe as considerable challenges of implementing new technologies. When asked about the biggest obstacles to digitizing or automating finance work, finance respondents most often cite a lack of understanding about where the opportunities are, followed by a lack of financial resources to implement changes and a need for a clear vision for using new technologies; only 3 percent say they face no challenges.
At the finance organizations that have digitized more than one-quarter of their work, respondents report notable gains from the effort. Of these respondents, 70 percent say their organizations have realized modest or substantial returns on investment—much higher than the 38 percent of their peers whose finance functions have digitized less than one-quarter of the work.
Unlocking the power of talent
The survey results also suggest that CFOs have important roles to play in their companies’ talent strategy and capability building. Since the previous survey, the share of respondents saying CFOs spend most of their time on finance capabilities (that is, building the finance talent pipeline and developing financial literacy throughout the organization) has doubled. Respondents are also much more likely than in 2016 to cite capability building as one of the CFO’s most value-adding activities.
Still, relative to their other responsibilities, talent and capabilities don’t rank especially high—and there are opportunities for CFOs to do much more at the company level. Just 16 percent of all respondents (and only 22 percent of CFOs themselves) describe their finance leaders’ role as developing top talent across the company, as opposed to developing talent within business units or helping with talent-related decision making. And only one-quarter of respondents say CFOs have been responsible for capability building during a recent transformation.
But among the highest-performing finance functions, the CFO has a much greater impact. Respondents who rate their finance organization as somewhat or very effective are nearly twice as likely as all others to say their CFOs develop top talent organization-wide (20 percent, compared with 11 percent). Among those reporting a very effective finance function, 38 percent say so.
Looking ahead
It’s clear from the numbers that CFOs face increased workloads and expectations, but they also face increased opportunities. In our experience, a focus on several core principles can help CFOs take advantage of these opportunities and strike the right balance:
- Make a fundamental shift in how to spend time. To be more effective in their new, ever-expanding roles, CFOs must carefully consider where to spend their time and energy. They should explore new technologies, methodologies, and management approaches that can help them decide how and where to make necessary trade-offs. It’s not enough for them to become only marginally more effective in traditional areas of finance; they must ensure that the finance organization is contributing more and more to the company’s most value-adding activities. It’s especially important, therefore, that CFOs are proactive in looking for ways to enhance processes and operations rather than waiting for turnaround situations or for their IT or marketing colleagues to take the lead.
- Embrace digital technologies. The results indicate that the CFO’s responsibilities for digital are quickly increasing. We also know from experience that finance organizations are increasingly becoming critical owners of company data—sometimes referred to as the “single source of truth” for their organizations—and, therefore, important enablers of organizational transformations. Finance leaders thus need to take better advantage and ownership of digital technology and the benefits it can bring to their functions and their overall organizations. But they cannot do so in a vacuum. Making even incremental improvements in efficiency using digital technologies (business intelligence and data-visualization tools, among many others) requires organizational will, a significant investment of time and resources, and collaboration with fellow business leaders. So, to start, CFOs should prioritize quick wins while developing long-term plans for how digitization can transform their organizations. They may need to prioritize value-adding activities explicitly and delegate or automate other tasks. But they should always actively promote the successes of the finance organization, with help from senior leadership.
- Put talent front and center. Since the previous survey, CFOs have already begun to expand their roles and increase their value through capability building and talent development. But the share of CFOs who spend meaningful, valuable time on building capabilities remains small, and the opportunity for further impact is significant. Finance leaders can do more, for instance, by coaching nonfinance managers on finance topics to help foster a culture of transparency, self-sufficiency, and value creation.
Cartoon – Never has so little been Measured So Much
HENRY KOTULA 