Financial business partnering

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1 University of Groningen

MSc International Business and Management – specialisation International Financial

Management

University of Uppsala MSc Business and Economics

Financial business partnering

From origination to the creation of a competitive advantage

R.G. van Capelleveen, s1605747 Master thesis

July 3rd, 2013

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Abstract

The aim of this thesis is to explore the concept of financial business partnering, to propose a definition for it, to determine its origination and to examine its potential to lead to a competitive advantage within commercial multinational companies. Data has been gathered in the form of interviews conducted within three globally active commercial multinationals in the production industry that were already actively involved in financial business partnering. The research distinguished six elements of financial business partnering which lead to the following newly proposed definition: “(financial business partnering is) the concept in which the finance function cooperates with other departments, supports decision making elsewhere in the organisation with relevant information, becomes more involved in the business and challenges to enhance decision making in order to raise business performance and add value to the organisation”. The findings provide evidence for ‘globalisation’ and ‘changed market conditions’ as causes of the origination of financial business partnering, whereas the ‘emergence of shared service centres’ has been dropped as a cause. The results indicate that the advantage lies in the organisational and human capital resources and not in the physical capital resources. The resources were found to be valuable, rare, imperfectly imitable, and non-substitutable, and this research demonstrates that financial business partnering has the potential to generate a competitive advantage as well as a sustained competitive advantage.

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1. Introduction

Change is constant. Change is a normal part of evolution. It is essential to survival. Change is ever present in society and its organisations (McAllaster, 2004). The list of changes we face on a daily basis goes on and on and organisations need to adapt to cope with change. Change is also influencing the field of finance and the finance function within organisations.

The traditional contribution of finance is outdated (Gould and Fahy, 2005/2006: 20) and a transformation of the finance function is present. Today, the finance function has, according to Davis and McLaughlin (2009a, 2009b), two major roles: to report financial results while maintaining the necessary independence and to partner with (line) management to improve business performance. KPN, Philips, and Ahold indicated in meetings in October 2011 that their finance employees are becoming co-pilots1 and that their roles are changing. Also, Unilever has developed a culture in finance of business partnering (Tarasovich and Lyons, 2009: 29), as they confirmed on a meeting in March 20122. But they are not the only ones. In business, this concept of giving finance a partnering role is relatively new, but in academic literature it seems to be even newer as it has not been researched much yet. Not much is known about the partnering role of finance (Davis and McLaughlin, 2009a), nor about the concept of financial business partnering. There is little agreement on what business partnering is (Davis and McLaughlin, 2009b) and the concept lacks an agreed-upon definition. This thesis can therefore contribute to filling in this gap in academic literature and contribute to expanding the field of research.

The aim of this thesis is to explore the concept of financial business partnering, to determine its origination and to examine its potential to lead to a competitive advantage. The existing literature on the concept of financial business partnering has been examined as well as data gathered from interviews held in commercial multinational companies. A widely accepted definition of financial business partnering did not appear in the literature. The studied organisations are all global multinationals in the production industry and they are all actively involved in financial business partnering. The objectives of this thesis are to create a more thorough understanding of the concept, to research what caused it to come into existence, and to investigate if the application of financial business partnering can lead to a competitive advantage in commercial multinationals.

The current study aims to contribute to this field of research by proposing a definition and a new theoretical framework oriented towards analysing the potential of the concept of financial business

1_{Meetings in The Hague, Amsterdam and Zaandam on 10, 11, 12 October 2011.} 2

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6 partnering to lead to a competitive advantage. To do this, the following research questions have been formulated:

• What causes financial business partnering to come into existence?

• Can the application of financial business partnering lead to a competitive advantage?

The subject is narrowed down to financial business partnering between the financial department, general management, and other internal functions. Business partnering between organisations is excluded, as this lies beyond the scope of this research. The focus is particularly on the benefits on organisation-level and as a consequence the human resources view on business partnering is excluded. The creation of a competitive advantage is a benefit on organisation-level and therefore this focus is more in line with the research question. Finally, this research focussed on multinational companies and left out national companies. On a global basis, multinationals nowadays generate about half of the world’s industrial output and account for about two-thirds of world trade (Gooderham and Nordhaug, 2013: 7), representing the majority of the market. Even more important however, is their global presence that exposes them to new ideas and opportunities regardless of where they occur and that enables them to exploit these wherever they may occur (Gooderham and Nordhaug, 2013: 12-14). This makes it very likely that multinationals have started with financial business partnering before national companies do, have gained more experience with it, and are therefore more interesting to focus on.

For organisations it is highly interesting to know how to create a competitive advantage, as this means that they gain the ability to outperform other organisations because their managers are able to create more value from the resources at their disposal (Jones, 2007: 12). Whether or not financial business partnering turns out to be able to give an organisation a competitive advantage is therefore of importance to the management of every organisation.

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2. Literature

This section first discusses prior literature on the finance function. Next, the concept of financial business partnering is introduced. Later on, the changing roles of organisational functions are addressed and finally, the concept of competitive advantage is covered. To avoid possible confusion, the central concepts are defined in this section. These concepts are the finance function, financial business partnering and competitive advantage. The conceptual model that follows from this literature section is to be found in Appendix A.

2.1 The finance function

2.1.1 The finance function defined and its role in the past

In 1959, Robbins and Foster present a definition of the finance function in which one may note the historic attitude towards finance at the time. They quote their fellow scientists by defining finance as “that administrative area or set of administrative functions in an organisation which have to do with the management of the flow of cash so that the organisation will have the means to carry out its objective as satisfactorily as possible and at the same time meet its obligations as they become due” (Howard and Upton, 1953: 3-4 in: Dauten, 1955). This reflects that the discussion at the time was dominated by the balance-sheet approach, centred upon cash management and the financing of the long- and short-term requirements of business.

In 1967, the traditional notion of the finance function is described by Moag, Carleton and Lerner (1967) as simply the process of "managing cash and capital" or "planning and controlling profits". This definition is inadequate to describe the function of finance today. Even the distinction between “new” and “traditional” made by Fred Weston (1954) fails in doing this, as the perspective is still largely limited to the balance sheet (Robbins and Foster, 1959). The distinction made is between sporadic, long-term financing problems and the recurring short-term decisions. As Gould and Fahy conclude, the traditional contribution of finance is outdated (2005/2006: 20).

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8 According to Brealey, Myers and Allen (2008) the role of the financial manager, and therefore the role of finance within organisations, is to stand between the firm’s operations and the financial markets. The flow of cash from the investors into the firm and back to the investors has to be controlled. This drives the role of finance down to the two most basic questions: what real assets should the organisation invest in and how should the cash for the investment be raised (Brealey, Myers and Allen, 2008: 4)? In other words, the financial objective of the firm is to maximize the value of the invested cash (Brealey, Myers and Allen, 2008: 5) or to maximize the current value of the firm’s shares (Brealey, Myers and Allen, 2008: 14; Ross et al., 2008: 12, Hillier et al., 2010: 9). Just like Ross et al. (2008), Brealey, Myers and Allen mention day-to-day or short-term cash management as a third element of the function of finance (2008: 5).

Eiteman, Stonehill and Moffett (2010: 25) add to this that shareholder wealth maximization is a goal that is influenced by culture. Anglo-Saxon markets have a philosophy that a firm’s objective should be shareholder wealth maximization, but in other countries other stakeholders may carry substantial weight as well, for instance in the Rhineland model.

For multinationals, many financial factors that do not directly affect purely domestic firms have to be considered as well. Among these are foreign exchange rates, differing interest rates from country to country, different and possibly more complex accounting methods for foreign operations, foreign tax rates, and foreign government intervention (Hillier et al., 2010: 844; Ross et al., 2008: 867). Also, cultural and social differences and political risk play a role (Hillier et al., 2010: 846, 864; Ross et al., 2008: 867, 888; Eiteman, Stonehill and Moffett, 2010: 8). Even though both domestic companies as well as multinationals want to invest in projects that create more value than their costs and to arrange financing that raises cash at the lowest possible cost (Hillier et al., 2010: 844), the abovementioned factors contribute to what the finance function in the organisations under study, multinationals, nowadays is.

Although not all recently proposed roles of finance resemble each other literally, we can still conclude from Brealey, Myers and Allen (2008), Ross et al. (2008), Hillier et al. (2010), and Eiteman, Stonehill and Moffett (2010) that the function of finance at this moment is to create value from the firm’s capital budgeting, financing, and net working capital activities (Ross et al., 2008: 4; Hillier et al., 2010: 4). Brealey, Myers and Allen even literally state that “the secret of success in financial management is to increase value” (2008: 2).

2.1.2 The development of the role of the finance function

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9 and the finance function was usually staffed by controllers (Desai, 2008: 112). By now, the presence of a CFO in a multinational company hardly raises an eyebrow anymore. Below, the factors causing the emergence of financial business partnering are explained in greater detail.

First of all, due to globalisation the finance functions in large U.S. and European firms do not focus solely on cost control, operating budgets, and internal auditing anymore. Globalisation causes new opportunities and challenges to present themselves to CFOs (Desai, 2008: 108), for example the capital structure and profit repatriation policies of their companies’ subsidiaries. Another effect is that valuation and capital budgeting decisions must not only reflect divisional differences, but also the complications introduced by currency, tax, and country risks (Desai, 2008: 108). Moreover, global multinationals have created their own internal capital markets which they use in order to create a competitive advantage (Desai, 2008: 110). However, this forces the finance function to delicately balance the financial opportunities this internal capital market offers with the strategic opportunities and challenges presented by operating in multiple institutional environments, each of which has its own legal regime and political risks (Desai, 2008: 110). So to speak, finance experiences an urge to become more strategically engaged (Desai, 2008: 112).

Also, as (external) capital markets have become more global, there has been greater pressure for companies in all countries to adopt wealth creation for shareholders as a primary goal (Brealey, Myers and Allen, 2008: 27). As there is a greater focus on value creation, all parts of the organisation should contribute to this. This includes a pressure for finance to contribute as well, meaning that finance is being asked to make its contribution to add value to the organisation. Financial business partnering might be the way to satisfy this demand. Additionally, Desai (2008: 110, 111) confirms that value can be added through wise financing decisions and valuing investment opportunities, something that financial business partnering tries to reach by enhanced decision making. Nevertheless, financial business partnering takes place in both Anglo-Saxon as well as Rhineland model organisations, as they can both benefit from it, although their focus might differ.

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10 partners within their organisation or only as custodians of financial integrity (Seal, Garrison and Noreen, 2006)? Due to this development, the role of finance changed and it became clear that finance could contribute more by being a value-adding factor. Financial business partnering became the way in which the finance function tries to add value to their organisation.

Lastly, the conditions of the markets in which multinationals operate changed. External markets have become more demanding in terms of performance and disclosure requirements, giving the finance function a more prominent role (Desai, 2008: 112). As relatively more responsibility for the survival of the organisation lay with finance, finance needed to find a way to live up to that expectation. According to Osmer and Donaldson (2011), the crisis and the way in which it changed market conditions might have played a role as well. The recent economic commotion exposed most companies to heightened financial and commercial risks, causing finance teams to re-evaluate their role. Simultaneously, intense competitive pressures, volatile markets and tougher economic conditions provide the finance function with the opportunity to quicken their influence and bring benefits to the whole organisation (Osmer and Donaldson, 2011). By adjusting their role, finance could innovate, and this financial innovation can help the organisation to enhance enterprise efficiency and to capture gains from exogenous events (Baskin and Miranti, 1997) like the crisis and the changed market conditions. Therefore, these changed market conditions will be absorbed in the model as the third cause of the emergence of financial business partnering.

Mohan and Mackey (2010) mention globalisation, investor activism and competition as external market pressures and growth, customer intimacy and operational excellence as internal market pressures causing financial business partnering. However, as they do not give an explanation for or clarification of the factors that have not been mentioned in the reasoning based on Desai (2008), Brealey, Myers and Allen (2008), Seal, Garrison and Noreen (2006), Osmer and Donaldson (2011), and Baskin and Miranti (1997), they appear not to be soundly embedded in the scientific literature and therefore they will not be integrated in the model.

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2.2 The concept of financial business partnering

2.2.1 Financial business partnering defined

As a result of the developments mentioned in the preceding paragraph financial business partnering came into existence, according to the literature. However, there is little agreement on what financial business partnering exactly is (Davis and McLaughlin, 2009b), there are many recent discussions on what it means (Mohan and Mackey, 2010), and there is no clear commonly accepted definition of the concept. To be able to propose a definition like this, first several perspectives from the existing literature will be examined.

Ketchin and Runnacles (2006) define our subject by stating that “in business partnering, finance works closely with the rest of the organisation to ensure the best business decisions are made on a timely basis”. When this is done in the right way, finance becomes an integrated contributor to key business processes, like forecasting, target setting, capital investments, governance and risk management. According to these two authors, finance should be able to help business managers to make fact-based decisions wherever possible. Moreover, business partners in finance should challenge the decision making processes, providing transparency in results and estimates, and know when and how to say no. This already gives us a first glimpse at what financial business partnering is, but may not cover the whole concept.

Osmer and Donaldson (2011) claim that “financial business partnering is about supporting the business to raise standards in key decision areas, taking a forward-looking and commercial view supported by a rich consulting toolkit and high emotional intelligence to help articulate different options and influence decisions”. The financial business partner itself is then a finance function professional who works alongside other business areas, supporting and advising their strategic and operational decision making through insights that drive better business performance (Osmer and Donaldson, 2011). According to these authors, financial business partners function as a navigator at the side of the CEO and support him or her with information and analysis about the organisation’s position and course, contributing to strategic decision making and risk/performance management. Objectively challenging decision making is part of their job, in order to make sure that the business is managed in the long term interests of all stakeholders.

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12 (2006) when it comes to this, as they mention the board and management as well as marketing, operations, human resources, procurement, brand management, distribution, manufacturing, sales and research and development as parts of the organisation that finance partners with.

Hill and Svensson (2010) acknowledge that defining the role of a financial business partner can be the subject of much debate and come up with the statement that “in its simplest sense financial business partnering is turning information into business insight to drive shareholder value”. Financial business partners should constructively challenge the business and deliver real bottom-line savings, according to Hill and Svensson (2010). When the role of the finance function shifts from one of data analyser to one of trusted adviser and business partner, this will enhance business decision making and ultimately profitability. These authors see the finance function shifting into the role of a value-adding business partner, something which has not been mentioned in the definitions of Ketchin and Runnacles (2006) or Osmer and Donaldson (2011).

Gould and Fahy (2005) and Cullen and Patel (2007) follow Hill and Svensson (2010) in their belief that the finance function can add value through financial business partnering. Gould and Fahy (2005) say that finance should, besides reporting and controlling, help to develop strategies for managing for value and growth. Also, they should help other departments to move towards these goals. They aim for more strategic involvement of the finance function. Cullen and Patel (2007) declare that finance departments create value by providing proactive, business-aware support for strategic programmes and by advising operational managers. This way these managers gain insight into the issues the business is facing and can make evidence-based decisions (Cullen and Patel, 2007: 38). Moroney (2010) says that according to Greving and Ehrenhalt (2010) there are several ways in which CFOs and their finance teams are able to increase the value they add to their organisation by partnering with other departments to deliver solutions. In sum, many authors agree that financial business partnering actually can add value to the organisation. In addition to the authors already mentioned, support for this is given by Butcher (2009) and Harrin (2010) as well.

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13 function of the future (CIMA, 2011), the transition of finance towards financial business partnering does not seem so surprising anymore.

In contrast to Ketchin and Runnacles (2006) and Dilks and Kail (2010), Osmer and Donaldson (2011) express the necessity for the financial business partner to be free from the distraction of core finance work to offer this level of support to their internal customers. They speak of financial business partners that specialise themselves and are dedicated to one so-called solution area. Dilks and Kail (2010) seem to disagree with this and see financial business partnering as part of the job of certain financial staff members, as they spend time on data gathering as well as on analysis and insight activities. Ketchin and Runnacles (2006) mention both possibilities. All authors agree that the role of financial business partner is not fulfilled by one person, they all speak of several financial business partners within one firm. Hill and Svensson (2010) speak of financial business partnering teams. When comparing the different views existent in the literature, one can conclude that there are a few recurring elements in the definitions of what financial business partnering is. Table 1 provides an overview of the different views and the recurring elements that they have in common. These five elements are:

1. Cooperate with other departments

2. Support decision making elsewhere in the organisation with relevant information 3. (Challenge to) Enhance decision making

4. Raise business performance 5. Add value to the organisation

The findings of the field research will indicate if these five elements fully cover the concept of financial business partnering. Also, the interviews will indicate if some elements are missing in the literature or are obsolete and/or redundant. Considered that the elements are all from a recent date, the expectation is that they are still relevant. If needed, current elements will be dropped or additional elements will be included in the newly proposed definition. We will come back to this in chapter 5.

Element Quote and author(s)

Cooperate with other departments

Finance works closely with the rest of the organisation to ensure the best business decisions are made on a timely basis (Ketchin and Runnacles, 2006).

The financial business partner itself is than a finance function professional who works alongside other business areas, supporting and advising their strategic and operational decision making through insights that drive better business performance (Osmer and Donaldson, 2011).

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real bottom-line savings (Hill and Svensson, 2010).

There are several ways in which CFOs and their finance teams are able to increase the value they add to their organisation by partnering with other departments to deliver solutions (Greving and Ehrenhalt, 2010 in: Moroney, 2010).

Gould and Fahy (2005) mention the board and management as well as marketing, operations, human resources, procurement, brand management, distribution, manufacturing, sales and research and development as parts of the organisation that finance partners with.

Support decision making elsewhere in the organisation with relevant information

Financial business partners function as a navigator at the side of the CEO and support him or her with information and analysis about the organisation’s position and course, contributing to strategic decision making and risk/performance management (Osmer and Donaldson, 2011).

To create competitive advantage by supplying management with forward-looking, timely, high-quality and value-adding financial and controlling support, we will strive and prove to be an invaluable partner in shaping the strategy and persistently challenging operational excellence (Gould and Fahy, 2005).

Finance departments create value by providing proactive, business-aware support for strategic programmes and by advising operational managers. This way these managers gain insight into the issues the business is facing and can make evidence-based decisions (Cullen and Patel, 2007: 38).

Successful financial business partners can add value by supporting, but also by challenging decision makers (Butcher, 2009).

Financial business partners need to provide the right support for business decision making by acting as partners in the process (Harrin, 2010).

(Challenge to) Enhance decision making

Finance works closely with the rest of the organisation to ensure the best business decisions are made on a timely basis (Ketchin and Runnacles, 2006).

Business partners in finance should challenge the decision making processes (Ketchin and Runnacles, 2006).

Financial business partnering is about supporting the business to raise standards in key decision areas, taking a forward-looking and commercial view supported by a rich consulting toolkit and high emotional intelligence to help articulate different options and influence decisions (Osmer and Donaldson, 2011).

The shift of the finance function from one of data analyser to one of trusted adviser and business partner will enhance business decision making and ultimately

profitability (Hill and Svensson, 2010).

Raise business performance

The financial business partner itself is a finance function professional who works alongside other business areas, supporting and advising their strategic and

operational decision making through insights that drive better business performance (Osmer and Donaldson, 2011).

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profitability (Hill and Svensson, 2010).

Finance functions can help enabling businesses to capitalise on unfolding

opportunities and build a platform for long-term profitability and growth (Dilks and Kail, 2010).

Add value to the organisation

Financial business partnering is turning information into business insight to drive shareholder value (Hill and Svensson, 2010).

There are several ways in which CFOs and their finance teams are able to increase the value they add to their organisation by partnering with other departments to deliver solutions (Greving and Ehrenhalt, 2010 in: Moroney, 2010).

To create competitive advantage by supplying management with forward-looking, timely, high-quality and value-adding financial and controlling support, we will strive and prove to be an invaluable partner in shaping the strategy and persistently challenging operational excellence (Gould and Fahy, 2005).

Finance departments create value by providing proactive, business-aware support for strategic programmes and by advising operational managers. This way these managers gain insight into the issues the business is facing and can make evidence-based decisions (Cullen and Patel, 2007: 38).

Financial business partnering sees finance as a value-add function (Harrin, 2010).

Table 1: Overview of definitions of financial business partnering 2.2.2 Financial business partnering examined

The way the finance function works nowadays and in the near future differs from the way it worked before. Also, its responsibilities have significantly diversified (Hill and Svensson, 2010). In the past, the conventional finance function focused on reporting historic performance (Osmer and Donaldson, 2011). The present finance function that has adopted financial business partnering looks at how current choices may affect future performance, and challenges managers to drive better decision making (Osmer and Donaldson, 2011: 8). Besides lasting core activities like reporting, the finance function becomes more forward looking and more strategically involved. New activities may be, among others, to provide strategic insights based on industry and macro-economic trends and competitor dynamics and/or to examine operational performance through different lenses to bring new perspectives (Osmer and Donaldson, 2011).

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16 the business (Cooper, 2007). A split emerges between the top and bottom of the finance department. There is strategy and policy-making at the top, which are value-adding elements, and there are the transactional activities at the bottom, which tend to be clerical and manual (Hayward, 2003: 19). What is new as well is the changed focus of finance, from the traditional focus on reducing costs and improving efficiency towards value creation as a prime goal (Adecco and CIMA, 2010), and from cost reduction towards growth, better facilitating decision making across the business through business insight and analysis, and proactively drive improvement in operational performance (Mohan and Mackey, 2010).

Naturally, this alteration has advantages as well as disadvantages. There are many benefits that can be realised by implementing financial business partnering (Hill and Svensson, 2010) and these benefits are significant (Mohan and Mackey, 2010). Moreover, the upsides of implementing financial business partnering seem to be more abound than the downsides. The former will be discussed before the latter. Benefits that are significant and important are expected to become part of the definition of financial business partnering at some point, because the definition should reflect what financial business partnering as a concept and the new role of the finance function comprehend. Among the advantages are additional efficiency savings that can be realised (Hill and Svensson, 2010) and the identification and exploitation of a larger amount of new commercial opportunities due to the analysis of the broader business to support executive decision making (Cullen and Patel, 2007). These can be linked with the raised business performance as an element of the definition as well as with the second element, support decision making elsewhere in the organisation with relevant information. Financial business partnering brings benefits to the business in the form of widespread accountability for performance and improved information to inform decision making, while at the same time it brings benefits to finance by letting it become an integral part of the business providing the glue that holds together the performance management and improvement agenda (Mohan and Mackey, 2010). Both the second (support decision making elsewhere in the organisation with relevant information) and third element ((challenge) to enhance decision making) can be recognised in this. Finance is to a greater extent being seen as a valued member of the business which, in turn, has a positive impact on team morale and motivation (Mohan and Mackey, 2010). This shows a link with the first element, the cooperation with other departments.

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17 the changes that were made to the company’s bid process. The organisation learned how to avoid similar risks on potential future business, which will offer them a cost reduction of more than 100 million dollar in five years according to their own estimations (Hill and Svensson, 2010). Both the fourth (raised business performance) and fifth element (add value to the organisation) can be linked with this example of a benefit.

Furthermore, financial business partnering can enhance the communication and understanding between the finance function and the rest of the organisation. A recent survey by Sage (Cullen and Patel, 2007) showed that 27 per cent of UK managers had difficulty communicating with their finance departments, a figure that is far higher for finance than it was for other support functions. This demonstrates that there is room for improvement and that organisations can benefit from the implementation of financial business partnering. Mohan and Mackey (2010) go even a step further by stating that finance is an untapped resource when it comes to supporting the organisation with the right information at the right time to facilitate quick and informed decision making. They see efficiencies that can be achieved and time that can be freed up and reallocated to more value-added activities (Mohan and Mackey, 2010). Ultimately, implementing financial business partnering will even enhance profitability, according to Hill and Svensson (2010). Mohan and Mackey (2010) and Hill and Svensson (2010) hereby indicate benefits that can be linked with all five elements.

Butcher (2009) mentions that “the objective scepticism of finance, probing to ensure that plans are achievable, and that risks are understood, can add real value and bring a welcome level of assurance to the use of the data by putting it in the context of the business”. Where Butcher (2009) present this as an upside, others see this as a downside. In research from Adecco and CIMA (2010) the fear is expressed that this valuable objectivity may be compromised as finance becomes more closely entwined with operations. The risk of it becoming less objective however, depends on how you organise the finance function in relation to the rest of the organisation (Adecco and CIMA, 2010), creating an opportunity to restrict the depletion of objectivity. Another disadvantage may be that the investment made to introduce and use financial business partnering turns out not to be profitable, because it is a concept that requires significant investment (Mohan and Mackey, 2010).

2.3 Changing roles of functions

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18 As mentioned before, Davis and McLaughlin (2009a, 2009b) believe that finance now has two major roles: to report financial results while maintaining the necessary independence and to partner with (line) management to improve business performance. As communication takes place between two parties, this implies a change for general management and line management as well, namely increased communication with the finance function.

The immense growth in outsourcing of non-core functions in the late 1990s mentioned by Seal, Garrison and Noreen (2006) took place mainly in finance, human resources management and customer relationship management. Administration, IT and purchase were also quite common to be outsourced. Although outsourcing is not part of financial business partnering, it is a change in the role of these functions that has a common focus, namely a focus on their most value-adding work. The roles of these functions changed towards being a more value-creating element of the organisation, often due to a more competitive marketplace.

Osmer and Donaldson (2011) report, based on their research, that some organisations already fully embrace business partnering in finance, human resources and other functional areas. Hill and Svensson (2010) mention the possibility that financial business partners advise the marketing team on the return on investment of their marketing programmes, which implies a change in the role of marketing. Gould and Fahy (2005) provide us with a broad range of departments that experience the partnering relationship with finance, as mentioned before. However, if financial business partnering in practice restricts oneself to the functions mentioned in this paragraph remains to be seen.

2.4 Competitive advantage

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19 Wernerfelt (1984) defines firm resources as tangible and intangible assets which are tied semi-permanently to the firm. According to Daft (1983), firm resources “include all assets, capabilities, organisational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness”. Barney (1991) follows this view and in his article “Firm Resources and Sustained

Competitive Advantage” (1991) he goes even further than Jones, by introducing the concept of

sustained competitive advantage. In addition to his definition of a competitive advantage, a sustained competitive advantage should have a value creating strategy of which the current and potential competitors are unable to duplicate the benefits (1991: 102). By sustained he does not mean that the competitive advantage lasts a long period of calendar time, like Jacobsen (1988) and Porter (1985) do, but that it is sustained only if it continues to exist after efforts to duplicate that advantage have ceased, like Lippman and Rumelt (1982) and Rumelt (1984, in: Lamb, 1984) have in mind. This does not mean that it will last forever.

Barney (1991) identifies four indicators of the potential of firm resources to generate sustained competitive advantage, which are value, rareness, imitability, and substitutability. Each of these will be elaborated on. He argues that resources and capabilities that are both valuable and rare will attain competitive advantage. Resources and capabilities that meet these criteria and are simultaneously inimitable and not substitutable, generate sustained competitive advantage (Brahma and Chakraborty, 2011). This distinction is reflected in the model in Appendix A as well.

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20 strategies, but in a different way, using different resources. The sustained competitive advantage will then ceased to exist.

In this thesis the four indicators of Barney (1991) are used to construct a model that is applied to the subject of interest, namely financial business partnering. The model is built on the assumption that firm resources may be heterogeneous and immobile and is to be found in Appendix A. A more extensive explanation for these self-evident requirements can be found in Barney (1991).

Several researchers have examined which specific resources give rise to sustained competitive advantage (Brahma and Chakraborty, 2011: 9). They identified: human resources (Amit and Schoemaker, 1993), the skills of a company’s top management team (Jones, 2007: 206), response lags (Lippman and Rumelt, 1982), organisational routines (Nelson and Winter, 1982), organisational culture (Barney, 1986) and invisible assets which are difficult to imitate (Itami, 1987). Intangibles can be, for example, a company’s brand name and its corporate reputation (Weigelt and Camerer, 1988). However, effective coordination of resources also leads to a competitive advantage (Hill and Jones, 1998). Likewise, the ability to use structure and culture to coordinate and integrate activities between departments or divisions gives some organisations a competitive advantage (Jones, 2007: 207). Part of their success can be explained by the development of integrating mechanisms that allow departments to combine their skills.

Financial business partnering has close links with several of the aforementioned sources of competitive advantage. It can increase the effective coordination of resources through better cooperation between departments, it can enhance the skills of the top management team, it can create new and better organisational routines, enhance the value of human resources, and change the organisational culture. Therefore can be concluded that there is a theoretical foundation in prior research to expect that the application of financial business partnering can lead to an increased competitive advantage for organisations. Furthermore, Hill and Svensson (2010: 47) mention that for companies in all sectors, developing a finance function that can truly add value can be a significant factor in achieving and sustaining competitive advantage. Also, Mand and Whipple (2000) and CIMA (2008; 2012) believe that financial business partnering can lead to a competitive advantage.

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21 planning, controlling, coordinating systems and its informal relations among groups within a firm and between a firm and its environment (Tomer, 1987). Financial business partnering can be an organisational capital resource because it improves several of these elements, thereby outperforming the competition. Human capital resources include the training, experience, judgment, intelligence, relationships, and insight of individual managers and employees (Becker, 1964). Financial business partnering is linked with human capital resources as it comprises the integration of employees as well as departments, refined internal communication, the sharing of experience and judgment and the enhancement of insight. This way financial business partnering can lead to a competitive advantage. Physical capital resources include the physical technology which is used in an organisation, an organisation’s plant and equipment, its geographic location, and its access to raw materials (Williamson, 1975). In this thesis is argued that this category is less associated with financial business partnering and therefore its further potential to lead to a competitive advantage is not elaborated on.

Just like the four indicators of Barney (1991), the three categories of resources that Tomer (1987), Becker (1964) and Williamson (1975) propose are used to construct a model applied to our subject. The model is to be found in Appendix A. Physical capital resources as a category has a dotted line in the model because its potential to lead to a competitive advantage is less supported in the literature. All three categories are placed in the centre together with the term financial business partnering, because they are respectively possessed by the firm and take place within the firm.

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3. Methodology

3.1 Qualitative research method

This thesis used a qualitative research approach, which can be defined as “an array of interpretive techniques which seek to describe, decode, translate and otherwise come to terms with the meaning, not the frequency, of certain more or less naturally occurring phenomena in the social world” (Van Maanen, 1979). Or, more extensively, as “an array of interpretive techniques that seek to describe, decode, translate and otherwise come to terms with the meaning, not the frequency, of certain phenomena; a fundamental approach of exploration, including individual depth interviews, group interviews, participant observation, videotaping of participants, projective techniques and psychological testing, case studies, street ethnography, elite interviewing, documents analysis, and proxemics and kinesics” (Cooper and Schindler, 2006: 715-716). Qualitative techniques aim to increase the understanding of a topic, as opposed to quantitative research, which refer to the precise count of some behavior, knowledge, opinion, or attitude.

However, Wilson (1982) stated that “qualitative and quantitative approaches are complementary rather than competitive methods and the use of a particular method rather must be based on the nature of the actual research problem at hand”. McKinlay (1993, 1995) and Baum (1995) argued in a similar direction in the field of public health research. This suggests that the choice between qualitative and quantitative approaches should be determined by the appropriateness of the method for the issue under study and the research questions (Flick, 2006). Strauss and Corbin (1998) agreed with this, as they stated that the choice between a quantitative and a qualitative approach should be determined by the research question.

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3.2 Research process and data collection

As the concept of financial business partnering is relatively new from an academic perspective, this research started with an exploration. As is common with exploration, the first step was a search for published data (Cooper and Schindler, 2006: 63). An interpretivist research method has been used to understand different meanings and interpretations of the concept of financial business partnering. The prior published research is presented in the literature section, the analysis is presented in the following chapters. The remainder of the study has more the character of a formal study, with a specific research question (Cooper and Schindler, 2006: 140).

As a next step, people were sought out who are well informed on the subject, as proposed by Cooper and Schindler (2006). In line with grounded theory, which is elaborated on in the next section, organisations were added to the sample based on their expected level of new insights for the developing theory in relation to the state of theory elaboration so far (Flick, 2006: 126). So, sampling occurred according to the relevance of cases instead of their representativeness (Flick, 2006: 128). The data in the empirical part of this research has been gathered by conducting interviews. These were open-ended and unstructured interviews that have been conducted in different commercial multinational organisations. During the interviews data has been gathered on all three sub questions. An overview of the main interview questions is to be found in Appendix D. The choice for open-ended and unstructured interviews is determined by the character of the research questions and the novelty of the subject. Also, it helps to avoid irrelevant questions that could have been posed in a semi-structured interview. All interviews started by establishing what the concept of financial business partnering comprehends according to the interviewee. The remainder of the interview was more loosely structured so it can be customised to each participants’ knowledge. Miles and Huberman (1994: 16-18) distinguish between tight and loose research design and see loose research design as appropriate when new fields are being investigated and the theoretical constructs and concepts are relatively undeveloped. As this is the case with the concept of financial business partnering, the choice for a more loose structure has been made.

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24 than representativeness (Flick, 2006: 128) or generalizability. The interviewees all work in the finance department but at various management levels. This is to decrease the bias that might occur if employees from a single management level appear to have the same perspective on the concept due to their position. The interviews have all been held in the preferable face-to-face setting, with the obvious benefit of being able to observe and record non-verbal as well as verbal behaviour (Cooper and Schindler, 2006: 205). Also, the interviews have been held individually and have been recorded. In total 7 interviews are held in 3 multinationals. The participating companies were assured confidentiality and the participants were given the choice to remain anonymous.

3.3 Data analysis

3.3.1 Grounded theory

This research has adopted a grounded research approach because this is in line with the aim of interpretivism to achieve an in-depth understanding of a concept (Fisher, 2010), namely financial business partnering. Also, it is commonly argued that grounded theory is an effective research strategy for topics which have been subject to relatively little research and about which there is a scarcity of knowledge (Payne, 2007; McCann and Clark, 2003). Grounded theory can be defined as “a qualitative research method that uses a systematic set of procedures to develop inductively derived grounded theory about a phenomenon” (Strauss and Corbin, 1990: 24). According to this theory the general aim of qualitative research is theory development (Flick, 2006: 21) and the development and production of a theoretical framework (Peters and Wester, year unknown: 6).

It is an approach in research that is first described by Glaser and Strauss (1967) and later elaborated on by Glaser (1978), Strauss (1987), and Strauss and Corbin (1998). Most qualitative research refers to some part of the work of Strauss and his colleagues (e.g., Chamberlain, 1999), including this one. Initially Glaser and Strauss “invited their readers to use grounded theory strategies flexibly in their own way” (Charmaz, 2006: 9). However, since the 1990s Glaser in particular has become uneasy with diverse interpretations of the methodology. This eventually led to an ideological split between Glaser and Strauss during the 1990s (Dunne, 2011: 113). In 1990, Strauss and Corbin (1990, 1998) released their version of grounded theory of which Glaser (1992) argued that it was not grounded theory, but a new method, which he called full conceptual description (Walker and Myrick, 2006: 547).

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25 data and a literature review should only be done at a later stage in the research process. Glaser (1998: 67) has remained staunch in his position and found general favour from Nathaniel (2006) and Holton (2007), while Strauss revised his standpoint (Flick, 2006: 58). Strauss and Corbin (1998) propose an approach in which the researcher does review existing literature about the subject in an early phase in the research. Flick (2006: 58) supports this view and suggest to use theoretical, empirical as well as methodological literature in a qualitative study.

Advantages of the approach of Strauss and Corbin are, among others, that it can provide a justification for a specific research approach (McGhee, Marland and Atkinson, 2007; Coyne and Cowley, 2006), that it prevents the researcher from doing a study that has already been done (Chiovitti and Piran, 2003) while at the same time pointing out pertinent gaps in existing knowledge (Creswell, 1998; Hutchinson, 1993). On top of that, it can help to orient the researcher (Urquhart, 2007), contextualise the study (McCann and Clark, 2003) and reveal how the phenomenon has been studied to date (Denzin, 2002; McMenamin, 2006).

In this thesis the most recent perspective of Strauss is followed, due to the above-mentioned advantages and since the researcher brings knowledge from prior education into the field. Believing this can be ignored is unrealistic (Dunne, 2011: 117; Eisenhardt, 2002: 12; Cutcliffe 2000: 1480; Kools et al., 1996: 315) and naïve (Dey, 1999; Layder, 1998). A more detailed analysis of the differences between Glaser’s and Strauss’ perspective on grounded theory can be found in the article of Walker and Myrick (2006).

3.3.2 Theoretical coding

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26 some data detail but is necessary for efficient analysis (Cooper and Schindler, 2006: 443). In the axial coding process the categories are refined and differentiated. Relationships between categories and subcategories are established (Flick, 2006: 301). The third step, selective coding, is the most abstract phase of these three steps. It aims at identifying one central phenomenon and one central category with its related subcategories (2006: 302). According to Dey (1999) and Birks and Mills (2011), it is also possible to indentify more than one central category. Finally, theory development takes place. The three phases in the interpretation process are neither clearly distinguishable nor temporally separated; it is more an iterative process (Flick, 2006: 296; Walker and Myrick, 2006: 549). A disadvantage of this theoretical coding process is that it might be unclear when to stop coding and categorising. The theoretical answer to this dilemma is that it stops when theoretical saturation has been reached. This entails that further coding, categorising, and so on no longer provide or promise new knowledge (Flick, 2006: 303).

3.3.3 Qualitative Data Analysis software

The quantity and the unstructured nature of the gathered data require the use of computers in qualitative research (Fielding and Lee, 1991; Kelle, 1995, 2004; Richards and Richards, 1998; Weitzman and Miles, 1995). In this thesis the software programme Kwalitan 5.0 has been used, as this is specifically developed for qualitative analysis of open-ended, unstructured interviews in the tradition of the grounded theory approach (Peters, 2000: 2). Another reason to choose for this type of software is that it has made the use of analytic techniques like theoretical coding more explicit and more transparent. This increased transparency is seen as an increase in validity by some researchers (Flick, 2006: 354). Kelle and Laurie (1995) also link the use of Qualitative Data Analysis (QDA) software to an increased validity in qualitative research. Furthermore, QDA software fits best in a grounded theory research in combination with theoretical coding (Flick, 2006: 354). A limitation of this type of software is that it is not a method in itself. By combining it with a grounded theory approach this shortcoming will vanish.

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4. Data and findings

This section starts by presenting a description of the companies and participants under study. Then, the findings of the theoretical coding process follow.

4.1 Description of the data

4.1.1 Description of the companies under study

Company A is a global multinational which is specialised in the manufacturing of electronics devices made from fine ceramics. They research, develop, produce and sell their products worldwide, mainly in the telecommunication, automobile and multimedia markets. Their products can be found in, for instance, mobile phones, computers, game consoles, navigations systems in cars and flat-screen HD-televisions. Their clients are, among others, Apple, Ericsson, Sony Ericsson, Nokia, Motorola, Samsung and Panasonic. In the year ending on March 31st, 2012, Company A had almost 37,000 employees and consolidated net sales of around 585 billion Yen, which is almost 6 billion euro. (Corporate website of Company A, 2012). The interviews took place at their European Headquarter. Company B is a global multinational which produces dairy products in approximately 25 countries and sells them in over 100 countries. They produce, among others, cheese, butter, desserts, dairy drinks, milk powder, cream products for bakers and chefs, nutritional products for babies and toddlers, but also ingredients for the food and pharmaceutical sectors. The company has over 30 well-known brands. Also, they have their own research and development department. In 2011, Company B employed around 20,000 staff members worldwide and had a revenue between 8 and 12 billion euro (Corporate website of Company B, 2012; Corporate brochure of Company B, 2012). The interviews took place at their Global Headquarter.

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28 4.1.2 Description of the participants under study

Participant 1 works at Company A as a Director & General Manager and has responsibilities that are being described best as to those of a CFO Europe. He/She3 is the head of General & Administration, which means he is the head of the Finance & Accounting Department and the HR Department for Europe. He works at this company for 23 years now.

Participant 2 works at Company A as a Finance & Accounting Controller for the Dutch as well as the European part of the organisation. He reports respectively to his manager in the United Kingdom and to Participant 1. Also, he is heavily involved in the consolidation process of diverse European countries. He has worked for this company for 5 years now.

Participant 3 works at Company B as a Business Unit Controller. Currently he is moving from the function of controller for a business unit (three different countries) to being a controller in a more overarching role in which he has to oversee several business units. He has worked for this company for almost 6 years now.

Participant 4 works at Company B as a Finance Trainee. In his first assignment he introduced a new reporting format for several European countries. In his current, second assignment his responsibilities are best described as those of an assistant business controller and his work is mainly focused on the Netherlands. He has worked for this company for over 1 year now.

Participant 5 works at Company B as a Finance Director of an operating company in the category Cheese. Examples the main responsibilities of respondent 5 and his department are business control, reporting, adding value by examining relevant business models and plans, and monitoring long term goals. He has worked for this company for 2 years now. Before this, he was CFO at another commercial multinational production company for several years.

Participant 6 works at Company C as a controller and is responsible for the financial management in the water division. Furthermore, he gives asked and unasked advice to parties within as well as outside the organisation. His work is focused on Europe and North-America. He has worked for this company for over 13 years now.

Participant 7 works at Company C as a controller at one of the headquarters and for the largest holding within the organisation. Among his responsibilities are mainly financial, but also general, legal and facility matters. Subsidiaries from several continents are consolidated at this holding. He has worked for this company for 17 years now.

3_{For reasons of readability and confidentiality, some indications referring to gender are only used in one form}

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4.2 Description of the findings

As this research revolves around three main research questions, the structure of the remainder of the present chapter and the next chapter will follow these research questions. The categories and concepts that have been found in the process of theoretical coding will be discussed where they are most relevant. An overview of the 10 categories and their related concepts is to be found in Appendix C. Not surprisingly, the central phenomenon of the research turns out to be identical to the phenomenon under study: financial business partnering. The research led to a total of 115 segments, 88 different codes and 538 codes in total. Needless to say, not all codes resulted in a concept presented in Appendix C.

4.2.1 Defining financial business partnering

The respondents all gave a different description of what they thought financial business partnering was. Respondent 3 for instance described it as “becoming a co-pilot, finance becoming a part of the business and managing it. Being pro-active an playing a role in decision making.”4, whereas respondent 5 expresses it as “financial business partnering has two elements: financial means that we work within the finance function, based on financial numbers and our knowledge of those, the details and correctness of those. Partnering means sharing your insights with other business partners, the parties you cooperate with”. Respondent 1 refers to the transition of “not only putting together information, but also creating more discussion about financial matters and sharing it with partners within the company”. Respondent 6 mentions the expansion of the role of finance: “next to the reporting role that will continue to exist, finance will move to a role in which it advises and becomes a partner for others at all levels of the organisation and for all processes and participates in the decision making”.

All respondents but one mentioned at least five out of six elements identified in the literature section spontaneously (challenging was coded separately from enhancing). These elements are: cooperate with other departments, support decision making elsewhere in the organisation with relevant information, (challenge to) enhance decision making, raise business performance and add value to the organisation. The one respondent that did not mention at least five elements, mentioned four of them. As he did not have any external customers due to his position, he was not convinced of the added value of financial business partnering and therefore left two elements unconfirmed.

4

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30 On top of this, six out of seven respondents spontaneously mentioned another element, namely ‘more involved in the business’. Respondent 3 explains that "finance does not just stand by and watch, but it will act more proactively and play a role in the business. Finance is working towards being more involved in the business, having a part in business”. Certain meetings that were not attended by finance earlier, are joined nowadays. Respondent 4 advocates this development and prefers to be involved as a financial business partner from the moment a new idea arises. Also, respondent 6 adds that “financial business partnering comprises that finance becomes a discussion partner for all processes in the organisation and that it participates in the decision making of various issues that are about to happen. Way more than it used to in the past”.

A selection of the quotes providing support for the individual elements is presented in table 2.

Element Quote and respondent

Cooperate with other departments

“The cooperation and the information flow between finance and the operational business has improved, as both sides understand how important both sides are” (Respondent 7).

“There is cooperation between departments to determine actions after our gap-analysis. To see how we can improve, how we can reach our target and how we have to act in the market” (Respondent 3).

“With the arrival of financial business partnering it has become even more important to function as a discussion partner, a partner in dialogue, to all departments, to all colleagues, to all processes” (Respondent 6).

Support decision making elsewhere in the

organisation with relevant information

“We started making certain reports for the business units that we did not make before. Also, we design our reports in such a way that they provide the most added value for the recipients” (Respondent 2).

“We try to support other disciplines in a fact-based manner. Sometimes we found their plans, sometimes we try to make them change their minds” (Respondent 4).

(Challenge to) Enhance decision making

“I believe that a finance function that is more involved in the business can enhance decision making” (Respondent 3).

The fact-based thinking and argumentation of finance in financial business partnering can enhance decision making and improve discussions” (Respondent 3).

“It is not just from finance to sales marketing, but also the other way around. Because finance is also challenged to think outside the box and I think that if you have that at both sides, your organisation can only grow. You let each other work with a sharp focus and more perspectives come together” (Respondent 4).

Raise business performance

“A company can raise its business performance when its decision are of a higher quality” (Respondent 3).

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the best results” (Respondent 4).

“Financial business partnering leads to more business, more customer value, more customer satisfaction, cost reduction and eventually a raised business performance” (Respondent 1).

Add value to the organisation

“Partnering is supporting managers or responsible functions to perform at their maximum” (Respondent 5).

The added value can be found in making sure as a financial business partner that we are present at all relevant commercial meetings to check the presented plans, the assumptions being made, the risks, the opportunities, the elements of the business model being thought trough thoroughly, the weaknesses and the responsibilities being assigned. One has to be familiar with the details and get the discussion going” (respondent 5).

“The trend that finance has to become a discussion partner, has to interpret the numbers and see how they can add value is undeniably present”(Respondent 1).

More involved in the business

“...finance becoming a part of the business, not standing by and watch, but playing a part” (Respondent 3).

“as a financial business partner I prefer to be involved from the moment a new idea arises”(Respondent 4).

“financial business partnering comprises that finance becomes a discussion partner for all processes in the organisation and that it participates in the decision making of various issues that are about to happen. Way more than it used to in the past” (Respondent 6).

Table 2: Selection of quotes of respondents on how to define financial business partnering

When carrying out financial business partnering, organisations focus on or aim for different objectives. The generation of more business and more sales is mentioned, as well as the realisation of growth, an attempted increase of efficiency, cost reduction, cost control and the creation of economies of scale. Companies aim for more customer focus and customer value and carry out an internal integration between departments. They want to pay close attention on details and eventually maximize results by engaging in financial business partnering. One respondent also wishes to fulfil the requirement to comply with law and legislation in this manner. The aim that is mentioned most is the attempted increase of efficiency, or as respondent 4 expresses it: “financial business partnering can make meetings and consultations more efficient. Especially when everyone is involved and gives each other a peek into their engine room”.

Benefits and disadvantages

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32 growth can be realised through financial business partnering and business performance can be raised. On the other hand they see a cost reduction that can be realised. Furthermore they mention the benefits of challenged and enhanced decision making and an increase in financial consciousness in the rest of the organisation. Financial business partnering can help to maximize results and add value, according to the respondents.

Only a few disadvantages were given by the respondents and they were given far less often. The investment and the fact that it is currently very difficult to measure the exact benefit that financial business partnering will bring are perceived as downsides of the concept. Also the time consuming culture shift that has to take place and the dependency on the financial business partners that might arise, are seen as a drawback. Finally, one respondent finds the human factor of the concept a difficult aspect to deal with: “I am an advocate of financial business partnering and I believe it is the only way to run a business, but I do not think it is the perfect solution. In the end it is all manual labour and every staff member wants to stay motivated and have a meaningful job, a challenge and opportunity to develop. The local, human variation is essential as well, but can make things more complex”.

Partners

Financial business partnering

Financial business partnering

From origination to the creation of a competitive advantage

Abstract

Table of contents

1. Introduction

2. Literature

2.1 The finance function

2.2 The concept of financial business partnering

2.3 Changing roles of functions

2.4 Competitive advantage

3. Methodology

3.1 Qualitative research method

3.2 Research process and data collection

3.3 Data analysis

4. Data and findings

4.1 Description of the data

4.2 Description of the findings