NEW YORK – Turns out the trend toward globalization makes it riskier than ever to be a chief financial officer. According to IBM’s new Global CFO Study 2008, changes in the global marketplace can seriously undermine CFOs’ ability to make sound business decisions.

Traditionally, CFOs are responsible for their companies’ financial planning and record keeping processes, and have the financial authority to make appropriations and authorize expenditures. Not surprisingly, since CFOs work hard to ensure their organizations perform well and outperform competitors, they are typically closely attuned to and responsible for business-related risks.

In the new Study, IBM, working in cooperation with the Wharton School and the Economist Intelligence Unit, closely examined how current or ongoing events could shift CFOs’ relationship to and ability to deal with business risk. During the process of interviewing more than 1,200 CFOs and senior finance professionals, the study found cause for alarm.

For example, most CFOs prefer to let business units and geographies conduct finance activities in accordance with local preferences and specialized standards. However, the benefits of such an approach are compromised by expanding risks associated with increasingly dispersed and diverse global business efforts.

Such risks are nothing new. For example, consider how the Taiwan earthquake in September 1999, which disrupted processor, memory, and PC manufacturers for weeks, affected U.S. business partners. Vendors, including HP and Dell, were affected by shortages and higher prices of key components in the run up to the critical holiday shopping season, a situation that eventually affected many vendors’ bottom lines.

More recent events, such as the use of lead-based paint and other inappropriate materials in the production of children’s’ toys in China, offer stark examples of how the behavior of or misunderstandings by distant business partners can damage brands and reputations that companies have spent significant human and financial capital to build.

The IBM study’s participants seemed well aware of the dangers of expanding risk. Nearly two thirds (62 percent) of companies with annual revenues over $5 billion (US) reported encountering material risk events in the past three years. Of those, 42 percent reported not being well prepared, a number that was not particularly surprising given that only 52 percent of all participants said their companies have instituted formal risk management procedures.

Oddly enough, this anemic approach to risk management also has a significant material impact on a company’s overall financial performance. The two of the agenda items that ranked lowest in importance to CFOs (supporting/managing/mitigating enterprise risk, and driving information integration across the enterprise) turned out to be differentiators for companies that outperformed their peers in revenue and stock price growth.

Is there a solution to the expansion of risk? IBM’s study believes so, suggesting that CFOs and their companies would do well to institute enterprise-wide information integration and good governance via common data definitions, a standard chart of accounts, common standard processes and globally managed standards.

By following these guidelines, businesses would be well on the way to becoming what IBM calls Integrated Finance Organizations (IFOs). This is no new thing. In fact, IBM noted that organizations that have already embraced IFO principles enjoy nearly double the revenue growth rate of their peers.

Due to their central role in recognizing and recognizing the implications of risk, CFOs are in the position of becoming holders and providers of the “truth” regarding an organization’s real performance. Changing times may require changing roles, and by using the IFO blueprint suggested by IBM’s study, CFOs should be able to help their organizations better avoid and survive expanding risks in every corner of the globe.

Charles King is Principal Analyst, Pund-IT Research, which emphasizes understanding technology and product evolution and interpreting the effects these changes will have on business customers and the greater IT marketplace. This article first appeared in the Pund-IT Weekly Review.

This column was written by Charles King of ConnectIT

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