The following is a guest post from Kelley Pruetz, principal research lead at APQC. Opinions are the author’s own.
Delegation of authority policies provides a framework for making many of an organization’s most important financial decisions. Effective DOA policies help to mitigate risk, ensure compliance and empower the right people to act on behalf of the business. When DOA policy is poor or confusing, organizations are at greater risk for errors or fraudulent activity, compliance violations and a confused decision making environment.
The American Productivity and Quality Center (APQC) recently surveyed more than 300 finance leaders to learn more about how organizations structure DOA policy, the types of challenges they face when they implement DOA policy and the practices that help make DOA policy more effective.
Here are the key findings in each of these areas and guidance for how CFOs can build a decision-making environment marked by trust, transparency and accountability.
Understanding DOA structures and their impact
Structure refers to the scope of decision-making authority and where policies sit within an organization. A majority of the organizations that we surveyed (59%) use a centralized DOA structure, which means that decision-making authority is concentrated at the top levels of the organization (such as with senior executives or a specific governing body).
About a fifth of respondents (21%) favor decentralized models, which distribute decision making power across different levels of an organization. For example, in this type of model, lower- and mid-level managers or regional leaders have the autonomy to make decisions within their scope of responsibility. Another fifth (20%) take a balanced approach that integrates elements of both centralized and decentralized structures.
The structure that an organization uses for its DOA policy is often a product of factors like the organization’s size, business strategy, and industry. For example, organizations in highly regulated industries like healthcare may need to use a centralized structure to comply with HIPAA regulations or other compliance requirements. Each type of structure has unique advantages and disadvantages, as shown in the chart below.
Common pitfalls in DOA execution
More than two-thirds of respondents (71%) told us that their organization’s DOA policy is effective. While it’s encouraging to see widespread effectiveness, it’s also the case that almost a third of surveyed organizations (29%) do not have an effective policy. What’s holding these organizations back?
Some of the most common pitfalls we discovered are:
- Trust and control issues (45% of respondents)
- Inconsistent follow-up (41%)
- Lack of clear communication (40%)
- Overloading employees (38%)
- Insufficient training (33%)
Two of the most concerning challenges are the prevalence of trust and control issues and a lack of clear communication. These are exactly the types of challenges a DOA policy is designed to address. Without clear communication and a foundation of trust, even the best-crafted policy will fail to achieve its purpose.
The CFO’s role
Carry out the five practices below to make DOA policy more effective, avoid some of the most common challenges and ensure alignment with the business.
- Define and document clear roles and decision-making limits. We found that creating clear policies and procedures is the most common way that organizations ensure compliance with DOA policy (65% of respondents). Establish well-documented policies that outline who has decision making authority, under what circumstances, and within what limits. Transparency helps to alleviate uncertainty and build trust.
- Enlist senior management as key stakeholders to ensure that the policy is supported and reinforced from the top down. Respondents who carry out this practice were significantly more likely to say that their DOA policy is somewhat or very effective compared to those who do not involve senior management (75% versus 59%).
- Leverage technology for compliance and transparency. Nearly three-fourths of respondents use technology like ERPs and human resource management systems for tracking and monitoring. Many tools available today help to ensure compliance by automatically flagging and stopping any transactions that fall outside of DOA policy.
- Partner with your HR or learning function to provide training on DOA policy, roles and responsibilities. Training helps to foster a culture of trust and accountability. When employees clearly understand the role they play in DOA policy, they can make decisions with greater confidence. Leaders can also more easily trust that employees are using authority in a responsible way that conforms to policy.
- Regularly review and adapt DOA policy. Reviewing and adjusting your policy regularly (at least semi-annually) helps ensure that it remains aligned with organizational needs and priorities. Fewer than half of respondents said they review semi-annually (41%), while more than a third (37%) carry out reviews on an ad-hoc basis (i.e., as needed). This increases the risk that policy will become out of date and grow ineffective over time.
Effective DOA policy drives better performance
When you play an active role as a finance leader in shaping DOA policy, that policy is ultimately more effective for you and your organization. Finance leaders told us that effective DOA policy, in turn, leads to benefits such as:
- Better decision making (67% of respondents)
- Increased productivity (62%)
- Higher organizational agility (53%)
- Reduction in bottlenecks (49%)
- Reduction in overlaps/conflicts in responsibilities (41%)
The practices described above will help you to achieve benefits like these while building a culture rooted in trust and accountability.
