Research digest

THE CFO’S PERSPECTIVE

Most chief financial officers accept that procurement has become more strategic over the past three years, but a significant minority have yet to be convinced of the value it brings to their companies, according to global research by Aberdeen Group.

Three-quarters of CFOs agreed that procurement had become more strategic and 63 per cent said it had a positive impact on company competitiveness. However, 37 per cent said its impact was either neutral or negative (see chart, below).

Even though 30 per cent of CPOs report to a CFO, procurement struggles to gain access to the finance department. In 57 per cent of cases the relationship was ad hoc and based on budgeting matters, while only 24 per cent of CFOs had allocated a member of a cross-functional team to work with procurement. The finance team dedicated a resource to procurement in only 6 per cent of cases.

The main tasks CFOs wanted procurement to fulfil to help them achieve their goals were improving collaboration of the discipline with business stakeholders (30 per cent) and increasing procurement automation (26 per cent). Only 20 per cent of CFOs thought improving collaboration between finance and procurement was a core responsibility.

To improve the relationship between the two disciplines, both sides needed to develop a common language with clearly defined metrics and to align departmental performance objectives and bonus plans, the research concluded.

www.aberdeen.com

FINANCIAL FORECASTS

Inaccurate financial forecasting has a direct impact on a company’s share price and its strategic and operational choices, a global survey commissioned by KPMG suggests.

The research found that only 1 per cent of companies hit forecasts exactly over the past three years and only 22 per cent came within 5 per cent either way. On average, forecasts were out by 13 per cent (see chart, below).

Firms with forecasts within 5 per cent of the estimate saw share prices increase by 46 per cent over the past three years, compared with 34 per cent for those that were more than 5 per cent out.

Operational line managers, including those in the supply management function, prepared forecasts in 35 per cent of organisations, with the finance function taking responsibility in 27 per cent. There was a dedicated forecasting team in the finance department in12 per cent of cases.

www.kpmg.com

MERGERS & ACQUISITIONS

Mergers and acquisitions fail to deliver because companies omit to quantify intangible assets such as business culture and human capital, according to a study of European organisations by Hay Group.

The research revealed that only 9 per cent of business leaders at companies that had gone through a merger or acquisition considered the deal had achieved all of its original objectives. A major reason why the figure is so low, it claims, is a failure to consider intangible assets during either the due diligence or integration periods.

The biggest focus in the auditing process was on tangible assets such as financials (93 per cent) and IT (55 per cent), with cultural compatibility and human capital only chosen by 27 per cent and 21 per cent respectively (see chart, below).  Seventy per cent said it was too hard to conduct due diligence on intangible assets, even though 54 per cent admitted that neglecting to audit non-financial assets increased the danger of deals going wrong.

But 49 per cent demanded robust, mandatory reporting structures for business culture and human capital, the report added.

www.haygroup.com

SHAREHOLDER VALUE

Executives believe environmental issues such as climate change will have more impact on shareholder value than any other societal issue in the next five years, according to research by McKinsey.

Fifty-one per cent of the global executives questioned included environmental issues in their three topics most likely to gain public and political attention, while 48 per cent said this would also have the biggest impact on share price (see chart, below).

Thirty-two per cent saw the environment as an opportunity to increase shareholder value, against 25 per cent who viewed it as a potential problem. But this was down from 41 per cent and 18 per cent respectively in 2005, suggesting companies are becoming more fearful of making mistakes in this area.

The potential impact of the environment on share price was highest in Europe, where 53 per cent put it in their top three – a rise of 24 percentage points from 2005.

Other major issues that could affect share price were political influence (cited by 25 per cent) and healthcare or other employee benefits (24 per cent). But demand for more investment in developing countries almost doubled, from 9 per cent in 2005 to 16 per cent in 2007.

www.mckinseyquarterly.com

DECISION-MAKING

Sixty-one per cent of global executives believe management decision-making in their organisation is no better than moderately efficient, a study by the Economist Intelligence Unit suggests.

Seventy-eight per cent of executives thought senior managers made the wrong decisions at least some of the time, and 17 per cent said this was a frequent occurrence. The main causes of bad decision-making were poor implementation of projects (56 per cent) and insufficient data with which to make a decision (54 per cent). The most common cause of delay in making a decision was waiting for information to be updated (40 per cent).

www.eiu.com