Back office can be an enabler of innovation and strategy and be more than a cost of doing business
In large and established businesses with global operations, back office functions like Finance (including Risk & Compliance), Procurement, Supply Chain, HR and IT traditionally have the tag of being a cost center and typically considered in strategic discussions only in the context of Cost Reductions or Cost Transformations agenda. This has meant that they play second fiddle to the customer facing or revenue generating business units thereby putting the back office functions in the unenviable role of playing catch up with other strategic priorities.
While this may be the case, I believe the top priorities/challenges any organisation face needs a greater level of partnership with the back office functions. Let's try and understand this by getting further into the business priorities.
What are the Business Priorities?
In trying to understand the top priorities of any organisation, I looked at it from two broad perspectives:A) Board Priorities
Without going into too much details, I found this summation of board responsibilities from Stanford Corporate governance Research Institute's Quick Guide on Board Duties & Liabilities quoted below very good:"The board of directors has a dual mandate: –
Advisory: consult with management regarding strategic and operational direction of the company.
Oversight: monitor company performance and reduce agency costs
"
With the above context, I came across research done of over 5000 board members by Harvard Business School's Boris Groysberg & Yo-Jud Cheng on the biggest challenges facing companies (HBR article on conclusions from the study ).
Based on the survey results, the top challenge for most of the boards is Attracting and Retaining top talent. Although everyone (not just leaders) in the organisation is responsible for attracting and retaining talent - the key processes, talent framework, benefits and overall employee experience is owned and delivered by HR supported by Finance (compensation, bank payments etc) and Procurement (employee experience of the workplace equipment, services, accessories etc.) (please note that all of these are back office functions).
As with the top challenge, most of the other challenges (like Regulatory environment, competitive risks, innovation etc) listed in the survey results need the back office functions to play a pivotal role while keeping in mind the strategic and operational direction of the company.
Hence it is fair to say Back office functions are key to addressing the Board Priorities and Challenges.
B) CEO Priorities
In the fourth quarter of 2018, Gartner conducted its annual CEO survey of over 473 CEOs and senior executives to identify their business priorities. Out of the 11 Business Priorities looked at, Top priority identified was Growth followed by IT related. One obvious immediate thought is - Does this mean there is an inherent conflict in the priorities of the board and the CEO ? Without delving deeply into this, I feel it wouldn't be when corporate governance works well and the board does justice to its role. (Some of the recent issues at WeWork, Uber etc were down to boards being subservient to the CEO's agenda rather than partnering with them for the long term).
As is evident from the Figure 1 in the Gartner press release, the greatest focus is on Growth (driven by access to new markets or as highlighted by Gartner "diversification.. by the application of digital business to offer new products and revenue-producing channels"). The digital business driving cost reductions and growth is the reason for IT Related to be in the 2nd spot on priorities. If digital business is the key driver of growth, it does need Back office functions to come together to build/partner for the digital platform (Build and connect the platform - IT; Identify right partners - Procurement; Up skill and acquire right skills - HR; Identify margin drivers and manage risk - Finance/Risk). Even for cases where the driver of growth is new markets, some or all of the back office functions have a key role to play. Here is my summary of the top priorities from the two studies along with the role back office plays.
Hence, Similar to the Board priorities, it is evident that most of the 11 CEO priorities need ownership and/or active partnership of the back office functions.
The Shift Needed - Playing Catch up to Playing as One Team
Forward thinking organisations are already ensuring that Back office functions have a key role to play in not just executing but defining strategic initiatives - moving them from a catch-up role. Startups, smaller companies and leading companies may not experience the challenges highlighted above since they already have a more strategic approach to back office functions. Also some of the digital companies do have IT, procurement and other back office functions as a key differentiator and hence core to their strategy.
Some of the key roles played by the back office functions in digital business are included below:
- Finance - Strategic role in new business models e.g. how do we price the new digital models while considering the risk to existing margins and business.
- Procurement - Agility in bringing new suppliers, temporary workers/skills in to build capability to deliver digital channels/products/services
- HR - Hiring the right talent, making the culture more nimble to address competition from digital natives
- Supply Chain - Agility in responding to customer demand with ecosystem play
- IT - Build and support digital platform to enable a digital business
In addition, some of the internal functions can be an enabler and test bed for new business models and/or new ways of working especially with newer technology use cases with blockchain, AI, chatbots etc. A great example of this is the growth of Amazon Web Services (AWS) moving from being the cost center (IT function) for the Amazon group to being the top contributor to Amazon's operating income (as per Amazon's 3rd quarter results).
In conclusion, CEOs and Boards have to consider their back office functions as partners to help the shift in their models and to stay relevant. This does require maturity, realisation of the competitive challenges and a reconsideration of the negative connotations associated with being a cost center.
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