CFO

The CFO is pivotal to restoring public trust and that he or she has to serve as an important bridge between the CEO and the board on governing matters.

In addition the CFO must expand the role of economic corporate steward, daring to dissent when necessary, and must serve, in his or her strategist role, the CEO with effective insights on the affairs of the company and its businesses.

In a survey of CFO Europe, 71% of the CEOs reported, that their CFO is their closest business confident.

But the new CFO-mission is not an easy one. CFOs have to fulfil various, partly contradicting tasks in parallel. They have to

Re-establish corporate trust and business integrit

Protect the company’s bottom line

Enable for profitable growth and shareholder value creation

Do more with less (increase the efficiency and quality of financial operations)

1. Restoring corporate trust and business integrity through a world-class corporate financial infrastructure

After a series of corporate scandals (Enron, WorldCom etc.) trust of investors in corporations has sharply declined – a fact that is threatening a company’s capability to finance its activities and ultimately, its “license to operate”. The Chief Financial Officer (CFO) and the finance function is playing a leading role in restoring corporate trust and business integrity.

2. Protecting the bottom line through extended transparency and dynamic performance management

After the economic boom of the 1990s, when most companies focused on top line growth at nearly any cost, many corporate executives are facing today, in the actual global economic contraction, a major challenge: declining sales figures force them to reduce costs in order to protect their bottom line.

This is putting the CFO and his finance team into center stage.

But today’s highly competitive and dynamic markets require companies to do intelligent cost reduction - cost reduction that is not hurting their existing growth potential, intangible assets such as human capital, intellectual capital or customer and business partner relations, and that is not putting their future at risk.

For this, corporate executives, business managers and controllers require extended information about current performance and about future risks and new business opportunities – beyond the transparency the traditional P&L and Balance Sheet delivers.

CFOs must react by providing new analytic tools that deliver not only accurate and timely information on current financial performance, but also on its drivers across the entire business.

One of the main objectives is to enable for more accurate forecasts, not just of financial performance but also of the underlying business drivers. Rolling financial and business forecasts are forming the foundation for dynamic performance management that help managers and executive to achieve their company’s performance targets in a dynamic business environment.

3. Enabling for profitable growth and shareholder value creation in a challenging business environment

Today, value creation strategies based on M&A activities, as applied widely in the 1990s, have come to a limit: when assets exchange at full market price no value added is created.

Still in some cases M&A and financial dealings can create value, but only if combined with accuracy and discipline in the evaluation and integration phase.

For most companies however, shareholder value today comes from internally generated growth and/or resource, cost and capital efficiencies.

But efforts in both areas work out only, if applied continuously - quick wins are exceptions. This also requires accuracy and discipline – unique characteristics the CFO brings to the table in the corporate management team.

So it is no wonder, that CFOs are involved more than ever in (the more seldom) M&A activities, are playing a leading role in strategy planning and execution, and in long term efficiency and productivity management.

A best practice in strategy management and corporate performance management is a portfolio management approach that takes into account the entire bandwidths of risk/return and all operational value drivers on the business unit level below.

This requires much more transparency for corporate management of the business units risk/return prospects and their value drivers than the traditional budgeting and financial reporting approach. The CFO is called to establish this transparency and to implement the tools and procedures to enable top management to make better trade-off decisions and to make the link between corporate and business units more productive.

Also the ability to manage for internal growth requires a deeper cut into the business: CFOs have to help business mangers to understand the economics of their businesses in order to create profits and value. For instance, they have to help them to understand customer requirements from an economic perspective and to select the appropriate service levels and products accordingly (as a result, customers requiring low service might be guided to buy commodity products only online).

Resource and cost efficiency is usually the result of continuous optimization work rather than of a one off event. CFOs have to establish and implement the procedures and systems to make that happen – for instance through continuous benchmarking as part of the performance management process.

And finally CFOs have to make sure, that created value is properly communicated to the financial community so that it can be recognized by outsiders and is reflected in the company’s share price.

CFOs under pressure

As a result, the CFO, usually the senior corporate executives with the heaviest workload already, finds his agenda even more extended and the pressure is increasing.

But in order to be able to fulfil their new tasks, implement the required financial control, assure current and future financial performance, and reduce cost of finance and increase at the same time the productivity of finance, CFOs have to depart from how they ran their finance operation in the past. In addition, many companies have weaknesses in their existing finance operations.

Many companies have significant weaknesses in their financial operations

Many companies have focused their investments for business process and systems improvements/innovation in recent years on business operations (CRM, SRM, SCM). As a result, most companies have significant weaknesses in their financial operations and most CFOs are concerned to catch up:

They have little confidence in their ability to predict future financials performance and liquidity

They are using outdated, inefficient and not integrated budgeting tools

They have extended closing period

They have high levels of financial working capital bound in accounts receivables and bank accounts

They have high processing and service costs

According to a recent benchmark study of The Hackett Group, cost of world-class finance organizations is 2.4 times lower than at average firms (0.43 vs. 1.05 percent of revenue). This is creating a tough benchmark for many CFOs.

How to make it happen?

How can CFO’s achieve significant cost savings and provide high quality financial services at the same time?

Everything starts with better concepts. CFOs first have to come up with more intelligent process and organizational concepts for finance and then they have to find ways how to depart from where they are today in order to realize quick cost savings that free up resources needed for the next step.

Best in class companies do not spend more on technology than average companies to achieve cost efficiency and high quality financial services. In fact they spend even a little bit less (see figure 2).

The key to this is:

- more intelligent business,

- finance and IT concepts whereas business/finance concepts have to be the starting point – not technology.

Or, as Peter Drucker phrased it:

“A new information revolution I under way. […]. It is not a revolution in technology, machinery, techniques, software or speed. It is a revolution in CONCEPTS.

So far, for fifty years, Information Technology has centered on DATA – their collection, storage, transmission, presentation. It has focused on the “T” in “IT”. The new information revolutions focus on the “I”. They ask “What is the MEANING of information and its PURPOSE?”

Fixing the IT landscape problem in order to create the foundation of the new financial infrastructure

Already, most finance functions have made a significant shift – driven by investment in information systems and shared service centers – toward being less resource intensive, more efficient teams, particularly in the area of transaction processing, allowing increased emphasis on decision support. In the future, finance will be even leaner.

With many tasks delegated to business managers or handled by shared service centers or external outsourcers, the finance staff will act as coordinators and offer higher value, adding more strategic services.

Standardized, integrated processes and systems will be embedded within the business, and they will be available globally to users who can operate them without needing to be aware of where they are located and maintained.

The critical role of decision support may be fulfilled primarily by managers outside finance. Finance professionals will adopt a new training and coaching role to transfer appropriate skills and techniques. The result: finance will become more virtual (see figure 3).

When CFOs and their finance staff have outlined that vision and defined the appropriate programs they are often confronted with a critical problem: the existing IT landscape does not keep pace with this vision.

It even does not allow to move forward and to do the first step, because the grown IT landscape with too many different systems and a very heterogeneous portfolio of incompatible applications, data structures, interfaces etc. is binding to much IT resources.

As a result, IT is not able to support the new finance initiative in a satisfying way.

So many CFOs have agreed with their CIOs to fix the IT system landscape first.

The objective is clear: to consolidate ERP (Enterprises Resource Planning) other critical systems in the company in order to safe maintenance costs (reduce TCO – Total Cost of Ownership) and to leverage this process to consolidate also the finance organization, finance processes and reduce the number of different processes, data structures and interfaces.

The benefit can be significant. According to AMR Research, ERP consolidation can lead to an overall decrease in IT maintenance costs of 25%. Other sources report costs savings of even 30-50%.

Figure 3: Moving to a new financial infrastructure require companies to fix their existing IT landscape first

Figure 4: A finance transformation projects is first and foremost not an IT project – it starts and ends with business, finance and organizational concepts