“F” can be for future or failure – It’s your choice

We know the role of the CFO is evolving, but now post-Covid it’s do or die, says Herman Singh.

I have had the privilege of observing CFOs in action for many decades. I have done this more than 200 times as a board member at more than a dozen firms, and at other times it has been as a business unit lead, as a CEO or even as a strategic advisor.

This has allowed me to view the profession from a unique perspective, as a highly vested and discerning consumer of their services. This perspective over a few decades has allowed me to construct a view on where the profession has come from, where it is today and where it could possibly transition to.

Turbulent times
“We are living in an age of tremendous change” is perhaps the most overused understatement of the millennium. The rates of business failure are accelerating all around us from a variety of factors including that of the impact of Covid-19. CFOs have had a very rough time during the pandemic with challenges on the cost and revenue line, asset impairments, debt challenges and an increased volatility on almost all metrics.

The resultant declining share prices have turned rights issues for capital raising into an onerous exercise. Yet as Andy Grove, a co-founder of Intel, has stated: “Bad companies are destroyed by a crisis, good companies survive them, but great companies are improved by them.” The same could be said of CFOs, in fact. I have observed CFOs rise to this challenge well and indeed thrive, yet in other cases I have observed the exact opposite.

It's clear that some CFOs have redefined their role as the chief future officer, while others are languishing as the chief (reporter of) failure officer. Others have jumped ship mid-crisis or succumbed to the pressures. Many are fair-weather friends drifting from firm to firm as they seek out favourable winds only.

The role of the CFO will be quite different in the post-pandemic recovery period, which will be categorised by an environment undergoing rapid digital transformation with business model disruption, revenue cannibalisation, attacks from both tech giants and start-ups and industry commoditisation. This is all happening as the speed of business accelerates, compliance burdens increase, accounting standards advance rapidly, pressure for improved internal and external audit oversight rises, and business demands increase value add from what is perceived as an expensive cost centre.

Playing a weak hand
The cards that most CFOs are dealt are mediocre at best as they cope with the increased demand for digital financial planning and analytics with fragmented data, scattered resources and teams, scarce talent, weak systems, manual and inconsistent processes, and non-existent analytics.

A Bain survey indicated that more than 40 percent of CFOs had underlined strategic planning and budgeting as their biggest challenge area. Most CFOs are therefore prioritising automation over the next five years with urgency, starting with financial planning and analytics and strategic planning and forecasting, and then moving to budgeting, financial reporting, and control. This is as demands on the CFO grow for a business partner with increased focus on cost and profitability through real-time and flexible performance management.

The CFO has to make a quantum change from being a steward or operator of processes and data to becoming a catalyst and strategist providing insightful guidance. This requires that they adequately deliver efficiency and control to allow them to focus on execution of strategy and business performance.

The typical finance department spends 50 percent of its capacity on transaction processing, 25 percent on reporting, 20 percent on control and less than five percent on strategy. Technical and conformance or reporting skills will be the “hygiene” factors of the role going forward as the CFO and their teams take on more commercial roles.

This move will necessitate a greater focus on automation of the low value routine and transactional components of their role and a change in their operating model to one that is more user led or customer-centric. A more aggressive stance on data will be needed as they take control of data, its quality, and its analysis and retire outdated systems as they lead the charge into the adoption of more avant garde data and digital solutions.

Data is the core skill
CFOs will need to be able to catalyse new execution behaviours across the organisation to achieve strategic and financial objectives while at the same time creating a risk intelligent culture. Achieving this while providing financial leadership to business in determining the overall strategic direction will be a tall ask indeed.

The future CFO will need to be a data strategist well versed in the art of data architecture, analytics, visualisation and reporting. Thus far on the journey CFOs have been obsessed with historical reporting with a focus on descriptive and diagnostic reports: a focus on hindsight-based data collection, variance analysis and telling the board what happened and why.

The onward journey of CFOs will be towards Insight-based reporting interrogating what events may happen with a more predictive analysis focus. Leading edge CFOs are already moving to a strategic value adding role by advising excos and boards with foresight on how to make financial and strategic objectives happen through prescriptive analytics.

This will move CFOs away from data collection, reporting or even visualisation to a data science world of statistics, correlations, and regression as we augur in a new age where big data analytics, machine learning and astute simulations help guide future planning efforts. It is estimated that 84 percent of CFOs are still operating in a historical or diagnostic mode with 15 percent in a predictive mode while only one percent are in a world class prescriptive mode.

The Hackett Group last year estimated that the adoption of digital transformation of the sort intimated above over the next two to three years will result in a 75 percent improvement in the achievement of strategic objectives, an 86 percent improvement in financial performance (cost, quality, and cycle time), an 86 percent improvement in the finance service delivery model, and an 82 percent improvement in finance roles, skills profiles and needs.

Financial systems of the future
I like to liken this approach to a pilot of a commercial airliner. Their destination is agreed, a flight plan is logged, and they ensure that there are sufficient resources. They operate a checklist and eliminate routine work to the essential items only while operating a sophisticated dashboard that prioritises information and escalates burning issues timeously.

The pilot can perform simulations mid-flight to test options on height, speed and flight path to optimise the business outcome in terms of customer satisfaction, commercial outcome and safety. The CFO of the future will need to craft this intelligent system for themselves to be able to safely fly their businesses through the turbulent years that are no doubt ahead.

The future-oriented CFO will need to design Planning, Budgeting and Forecasting 2.0 with a focus on a process integrated to determine one set of numbers, with top-down targets and expectations clearly defined, with brutally honest rolling forecasts that take account of the decision and response lead times. They will manage risk and uncertainty with the sensitivity of key assumptions tested and contingency plans developed.

An emphasis on materiality, volatility, and controllability will result in a focus on key financials only while aiming for roughly right instead of precisely wrong predictions. Plans and forecasts will be built around key business drivers. Formal processes will exist to measure and manage forecast reliability to drive predictive accuracy. Technology will be fully exploited to eliminate spreadsheets completely and replaced with online tools.

This should facilitate a culture of empowerment and driving decision-making to the closest point to the customer. This process should be business driven, sponsored by the CEO, but owned and completed by the business owners.

Binding together reporting, analysis, planning and forecasting in this tightly coupled fashion turns a secondary business utility function into a formidable competitive weapon due to its ability to demonstrate agility and foresight.

The CFO of the future
The CFO of the future will be both innovative and disruptive. Their inquisitive and independent-minded nature will be augmented with an abstract thinking style. They will cut through bureaucracy with an entrepreneurial spirit and a willingness to take calculated risks due to their data-driven and informed decision-making.
They will be bold in leadership by taking the initiative and will test limits. Decisive while leading from the front, they will identify and overcome limitations. They will be collaborative and socially adept and will secure full 360 degree stakeholder support through the process.

Is this just a dream? No, one percent of firms are there already and soon this will become a requirement for getting into the game. Firms that lag while their peers spurt ahead will harvest the dire predictions of Andy Grove – they won’t survive the crisis. Those that adopt and embrace this vision will harvest the Vulcan greeting to “live long and prosper”.

This is an extract from Herman Singh's latest book "Upcycle your Career".