Why Finance Transformation Matters in Global Manufacturing
Our analysis of 500 of the world’s largest manufacturing companies shows more than 30 percent had negative average economic margins over the last five years. In effect they were destroying capital.
Moreover, our ongoing global benchmark research, involving more than 860 companies to date, shows that changing business drivers and the ever-increasing complexity of global operations are making business improvement through transformation even harder year over year.
How should companies respond? While there is rarely one recipe for the “secret sauce” that goes into a successful business improvement and transformation, there is a growing recognition that finance is an indispensable ingredient. Financial management holds the key to resolving some of the most intractable problems and capitalizing on the valuable opportunities facing global manufacturers today. Through a process often known as “finance transformation.”
Finance transformation: defined as an umbrella concept that focuses on improving performance, stewardship and control of the company by enabling chief financial officer (CFOs) and their finance organizations to have greater impact on strategy formulation and execution across the enterprise — companies have begun to realize the value of fi nance in transforming their business operations.
Companies are paying a steep price for shortcomings in financial management across a range of areas:
- Meeting investor expectations for profitable growth. Thirty-two of the 100 largest manufacturers listed on United States stock exchanges had a negative average economic margin over the last five years.
- Reaping the rewards of globalization. We estimate that more than 85 percent of the world’s largest and most complex manufacturers are unable to maximize the returns on their global investments. Profiting from innovation. The link is missing between expenditures on research and development (R&D) and profitability.
- Transforming through services. While services are driving the growth of manufacturing industries, most companies are left behind when it comes to managing and prospering from the service business.
- Coping with structural cost. Established manufacturers are sitting with a time bomb in their laps — the inability to manage the growing burden of structural cost.
- Making M&A work. Few companies have found a way to consistently create value through mergers and acquisitions.
- Realizing returns on risk. While globalization, outsourcing and offshoring are increasing the enterprise risk for global manufacturers, most are challenged with just measuring risk, let alone controlling and managing it. Profiting from taking risk is yet another opportunity few companies are fully prepared to take on.