Trending Topics summarizes news, information and perspective on matters affecting businesses and business leaders today. This insight is being provided to keep you up to date on the latest developments and trends influencing these topics. These views do not necessarily represent the views and opinions of PNC. For additional research on these topics, please consult the sources cited in this article.

Looking for a spark of financial inspiration? Take the time to conduct a comprehensive review of operational efficiency opportu­nities. Cost-cutting is evergreen, but you could be overlooking opportunities to dig into the data, reexamine entrenched processes, or ask for insights from the front line. These ideas should keep you busy well into the next quarter.

Don’t Just Offload, Automate

Moving a rote task from internal resources to a service bureau or business process outsourcer is a time-tested cost control, but it may be leaving the core inefficiency untouched. McKinsey identifies six financial transaction areas where tasks can be mostly or entirely automated, listed in descending order of automation opportunities:[1]

  • General accounting operations
  • Cash disbursement
  • Revenue management
  • Financial controlling and external reporting
  • Tax
  • Financial planning and analysis

“By our assessment, the economics of automating many finance activities are already compelling — a resounding success in some areas, even if performance is mixed in others,” McKinsey writes.[1] Unlike a simple business process outsourcing relationship where the inputs and outputs remain largely the same and only the cost changes, automation provides the greatest benefits when paired with reengineered processes.

Reinvest Your Gains

Remember that the dividend of any operational efficiency effort should be tangibly reinvested somewhere in the organization.

Reducing waste in time, money or other resources is just half of the equation: You also need to redeploy them. For example, an Ernst & Young survey of private equity CFOs showed a clear trend: Successful firms reduce time spent on manual treasury, HR and operational tasks, and refocus that energy into advanced analytics, investor relations and business transformation.[2]

Optimize Continuously

Auditing margins and reviewing processes usually happen at discrete, scheduled times because human vigilance has its limits. Automated cognitive algorithms, a branch of artificial intelligence, can continuously monitor for deviations and identify waste, discrepancies or patterns that suggest room for improvement. Cash forecasting and liquidity management are promising, emerging targets for continuous optimization that can improve costs, vendor relationships or margins.[3] “The growth in structured data fueled by Enterprise Resource Planning (ERP) systems, combined with the declining cost of computing power, is unlocking new opportunities every day,” McKinsey writes.[1]

Know Your Term

There is nothing wrong with optimizing a short-term fluctuation. But your operational efficiency planning should take into account whether a benefit is likely to last. Simple cost optimizations are unlikely to be durable advantages over the long term, which is part of the reason that cost-only efficiency changes rarely deliver multiyear benefits.[4]

Consider the Labor Pool

Orient your efficiency drive around skills and personnel you have on hand. Low unemployment rates in developed nations including the United States create an extremely tight market for new talent.[5] Any operational efficiency push that requires skills you don’t already have may cost more in recruiting effort or delay than you bargained for.

Keep Looking Outside the Financial Organization

When you feel content that you have squeezed all the efficiency out of the financial organization, look beyond its four walls. That’s where the next big opportunities are. According to a McKinsey CFO survey, 41% of CFOs are already more engaged outside the financial organization than inside the traditional confines of their role.[6] Those who spend their time this way focused most on strategic leadership, organizational transformation and performance management — all areas ripe with opportunities to improve efficiency on a larger scale. That tracks with how CFOs see their efforts paying off. In the same survey, more CFOs cited strategic leadership than traditional finance work as their greatest value to the organization.

Fix What Hurts, Not Just What’s Broken

Automated operational efficiency is in vogue but can produce mixed results if automation creates its own inefficiencies by acting too quickly. For instance, check that predictive maintenance models in your organization focus on preemptive action not only when the chance of failure is high, but when the cost of inaction is also painful. PwC notes, “The key benefit to this approach is in targeting only repairs with the potential to significantly impact the operation. This enables efficiency improvements without substantially increasing the maintenance frequency, repair cost, and parts replacement cost.”[7]

Start a Conversation

Don’t let finding the budget for an outside consultant block your next operational efficiency effort. You might not need the help, because the most durable and glaring inefficiencies in your organization might be an open secret. Dan Morris, managing principal of transformation specialists Wendan Consulting, writes that employees often know exactly what is standing in the way of being more efficient. “Look at the way people work and look at how they could work faster and better. Talk to them about what slows them down and what drives them nuts about their workspace.”[8-9]

Communicate About Efficiency

McKinsey points out that the peskiest challenges in the decades-old hunt for unimpeachable efficiency come not from identifying gaps or proposing solutions, but in earning the trust and buy-in of employees.[10] This can happen when leaders fail to clearly communicate a compelling reason for making changes and employees can’t see an obvious explanation, like a severe downturn or a radical change in the regulatory or competitive landscape. Push too many efficiency campaigns at your team without a compelling story and a change management approach that includes active listening, and employees may tune out. “In such cases, ‘initiative fatigue’ and even distrust may set in,” McKinsey writes.

Shift from Efficiency to Performance

Boston Consulting Group (BCG) sees a transformational role beyond traditional efficiency for financial leaders, one that serves both cost containment and corporate performance. “For many companies, operational-improvement initiatives aimed at reducing the cost base are the most effective way to increase margins,” BCG writes.[11] In BCG’s view, financial leadership is uniquely well-positioned to monitor overall corporate performance, deftly juggling concern for cost, performance and shareholder expectations, even if the proposed changes look painful or radical. According to BCG, “As the only impartial business advisor, the CFO can use the lens of value creation to challenge the effectiveness of the current operating model and shape priorities for a target operating model.”

Ready to Help

At PNC, we combine a wider range of financial resources with a deeper understanding of your business to help you achieve your goals. To learn more about how we can bring ideas, insight and solutions to you, please contact your Relationship Manager or visit pnc.com/ideas.