Over the past several years big companies, both in the Fortune 1000 and S&P Euro 350, have struggled to consistently grow their earnings and revenue (see chart 1).
Managers’ aversion to risk, increased bureaucracy, and short-term responses to problems all contribute to this limp performance. Exacerbating this problem, the number of assurance functions (compliance, legal, internal audit, enterprise risk management, data privacy and so on) has doubled over the past 10 years. And without the proper coordination, this build up of people creating templates and sign-off procedures leads – however inadvertently – to slow decision-making and to an environment where managers focus solely on the downside of any risks, not the opportunities they present.
All audit departments should be aware of these problems as they try to understand how their function either supports or hinders growth.
Boosting revenue and earnings is difficult but it is in fact achievable. A closer look at the Fortune 1000 and S&P Euro 350 reveals that a select group of 60 have sustained long-term revenue increases and simultaneous margin improvements, outperforming their industry peers over two decades. One trait that these “efficient growth” companies share: they consistently make large, risky growth bets.
Essentially, these companies are better at managing the balance between risk and reward. And doing so has paid off; instead of focusing on incremental projects, these firms have been innovative — and even brave (see chart 2).
Chart 1: Sluggish growth
Chart 2: It pays to be brave Source: CEB analysis
Awareness of Audit’s Role
Efficient growth companies overcome some common issues that prevent positive results. These “anchors” hinder growth throughout Finance’s investment, portfolio review, and performance management processes (see chart 3).
Senior audit managers should ask themselves whther their department is doing anything to make these anchors any better or worse. For example, they should ask themselves whether their firm’s risk thresholds inadvertently discourage executives from taking the kinds of risks the firm needs in order to grow?
What’s more, as the number of assurance providers increases across the organization, they should think about how overlapping mandates and duplicative processes are causing slow decision-making and implementation of various tasks.
Chart 3: Common growth anchors that prevent bigger growth bets Source: CEB analysis
Audit’s Role: Helping Not Hurting
Audit can tackle this issue; the first step – as with the good physician – is to do no harm. Senior executive teams should make sure their company operates “aligned assurance,” which means the coordination of often fragmented assurance work streams, simplified assurance reporting, and streamlined oversight.
Audit should also play a role in providing assurance over risky projects without discouraging risk-taking altogether. For example, the audit team at one food company in CEB, now Gartner’s networks determines the scope of its audits based on the level of risk the business is willing to tolerate. This practice eliminates the time-consuming evaluation of low-risk areas so both Audit and the business can focus on what’s most important.
Audit teams can also go one step further by auditing the strategic assumptions that underpin a strategic planning process to help make sure the company’s strategy will in fact result in long-term growth. Teams that do this, however, must make sure they do it without slowing down decision making; don’t add another layer of bureaucracy.
The audit team at one multinational energy company in CEB, now Gartner’s networks provides assurance over company strategy by evaluating the key risks associated with business objectives, and testing assumptions and outputs to make sure that initiatives are actually contributing to their intended outcomes. They test these assumptions during the “sweet spot” period between strategy formulation and CFO approval, thus preventing disruption of the process.