Archives For Shell

Jamie Lyon

By Jamie Lyon, head of corporate sector, ACCA

We’ve been talking about finance transformation for some time. The early 1990s witnessed the first moves towards business shared service operations, and yet our programme of work suggests many finance departments are still in the early years of adoption; remarkably some haven’t even started yet.

You could be forgiven for thinking finance transformation should be an art that has been mastered by now. It hasn’t, because enterprise change is difficult and amongst many other things, it’s about people change. All the experience and all the evidence continues to point to massive change challenges in changing the finance enterprise to drive down cost (and yes, its still a cost play, contrary to what some may say), and improve efficiency and value. ACCA is currently leading a global programme of research on how finance functions can become more effective. Its smart finance function campaign seeks to understand what practices the CFO organisation is adopting to drive more value for the organisation. Finance transformation has been, and continues to be, one of the ways in which the value equation can be addressed. But truth be told, many enterprises and CFOs continue to struggle to deliver all the benefits once promised. So what goes wrong? Perhaps my colleague Deborah Kops of Sourcing Change hits the nail on the head: ‘One of the biggest challenges for finance leaders is acknowledging that there’s no set of regulations for change. Mastering what is often considered ‘soft stuff’ is key to transformation success. It’s generally not comfortable for a profession that lives by rules.’

ACCA’s think-tank on business and finance transformation, which includes senior executives from some of the world’s leading enterprises that has decades of change experience such as Deloitte, Shell, Accenture, Unisys, Pearson, and GSK, has just released its latest report on finance change, and identifies 10 key requirements needed for effective finance function change to take place.

They are:

  1. Establishing the vision – the criticality of spending time conveying the transformation vision and goal.
  2. Buy in – The importance of CEO and senior management support and sponsorship of the programme.
  3. Communication – The need for constant communication on what is changing and the rationale for change.
  4. Preparation – Ensuring finance teams are bought in and committed to the change, and having an effective plan to manage the change process.
  5. Resources – Access to adequate programme resources at each critical stage of the transformation process, from developing strategy to achieving ‘business as usual’ acceptance.
  6. Patience – Accepting that large finance transformation initiatives can be revolutionary and evolutionary with most change processes taking longer than expected.
  7. Organisation redesign – Remembering that redesign and use of finance shared services or outsourcing necessitates change in the retained finance function too – the imperative of changing the finance enterprise in its entirety.
  8. Maintaining middle management – Successful change management is key to retaining the middle layer of finance management that is critical to core processes. Yet all too often, middle managers’ numbers are aggressively reduced to justify a business case for shared services and outsourcing, or they are lost in the shuffle.
  9. Alignment between capability and ambition – Often finance leaders overstretch themselves to realise a vision that is way beyond their, or their enterprises’, ability to achieve. Being realistic about the organisation’s change potential is essential.
  10. Working within the culture – Those who implement complex, multi-scope, multi-geography finance transformation programmes, particularly in business-line-led organisations, will experience the greatest change challenges. Gauging the type of change the culture will allow is an imperative.

Find out more about our Smart Finance Function campaign at www.accaglobal.com/smart.

This blogpost was first featured in CFO World in July 2014 

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Risk and Black Swans

accapr —  25 March 2014 — Leave a comment

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Simon Constant-Glemas, VP Corporate and UK Country Controller at Shell

There are few industries more risky (in terms of the obvious risks, at least) than the oil and gas sector. These companies typically work in dangerous environments, often in unstable regions (in terms of both geography and politics) and are subject to the unpredictable variances of commodity prices and exchange rates. As a result, risk reporting is both a critical and contentious subject for the oil and gas sector, as was brutally illustrated by BP’s Deepwater Horizon disaster in the Gulf of Mexico in 2010.

The disaster focused everyone’s mind on risk and risk reporting, particularly in the extractive industries. There has definitely been an increased focus around risk since Deepwater Horizon, because it was such a significant event. That and the financial crisis have made everyone more risk-aware.

I am aware of investors’ desire for more information about risks, but a more considered approach should be taken. Addressing all possible risks in a risk report would be counterproductive – more comprehensive risk reporting doesn’t mean better risk reporting. We employ more than 100,000 people in 70 countries, so any risk that’s applicable to a large multinational would apply to us. It is much better to provide a concise overview of the key risks inherent in the business that are most likely to prevent the achievement of its objectives.

One area where risk reporting might be constrained is where disclosure could be perceived to damage competitive advantage. I don’t think competitive advantage is an issue – you can strike a balance between referencing risk and not giving away critical information. We need to be careful sometimes about things like risks around a particular transaction but the vast majority of the time some information will be in the public domain already and so, if necessary, a more generic reference can be made. Suggestions that companies should try to quantify the potential impact of major accidents and events, though, are more difficult to address.

The fundamental question is whether a risk report can ever helpfully highlight the risks of rare but catastrophic events – analysts argue that an attempt to quantify the financial impact of a disaster on the Deepwater Horizon scale would be useful but understandably, this is something that organisations themselves are reluctant to do.

It’s the Black Swan effect – it rarely happens but when it does, the impact is massive. The difficult conversations about Black Swan events do take place within a company, but specifically disclosing all of the details in a risk report is another thing altogether. If you put a dark lens on everything and, for instance, try to quantify what the financial impact of a very rare disaster could be, you could scare away a lot of investors.

The nature of black swan events means that it is difficult to think about what the impact of an event could possibly be, let alone put a reliable figure on it, but I strongly believe that a thorough consideration of everything that could possibly go wrong is an important part of good risk management, even if the full details are not disclosed publicly. I do wonder if enough thinking goes on around rare events – I suspect that not enough people considered the probability of the entire inter-bank lending system grinding to a halt overnight before the financial crisis happened.

The main problem discussing Black Swan events in a risk report is that the context of probability is difficult to get across. Ideally a risk report should contain enough detail to start the necessary conversation between stakeholder and management. The quality element of risk reporting comes down to the conversation about risk that takes place, and that conversation should start with the risk report. A detailed discussion about risk is more likely to come out in a discussion between the CEO or finance director and analysts and other stakeholders – the annual report is not really the place to go into that sort of detail.

It is these conversations that are the most valuable to stakeholders, and also why more frequent risk reporting would not be particularly helpful. A certain amount of risk is strategic and it would feel more like crisis management if risk reporting was carried out more frequently than it is today. The crystallisation of an emerging risk or emergence of a new risk would certainly warrant disclosure but risk reporting should not be confused with robust and timely management information.

There are parallels to be drawn here with the increased regulation faced by multinationals since the financial crisis. There has been a huge increase in it since the financial crisis and the question is whether that drives better risk management or not. There have certainly been unintended consequences – at Shell we are captured by criteria that are not intended for us, simply because we are large. In my view it has the potential to distract organisations from good risk management.

My main concern is the raft of new regulatory requirements could result in organisations seeing risk reporting as just another tick-boxing exercise, rather than driving better risk management. We have to be careful that we’re not reporting on risk in order to satisfy a process, but that risk management is used effectively as a way to differentiate the business. In the past risk management was focused on mitigation, but today it is part of adding value to the organisation.