Finance Must Embrace Digital or Risk Being Left Behind

The face of the finance function is changing every day but do we really understand what this means in reality? I love to mentor young professionals and offer them advice that can help them propel their careers forward. One of the many questions I often get asked is “With all the technological advancements taking place, what does this mean for current and future finance professionals, as well the finance function as a whole?”

A lot has been written about the current digital revolution taking over specific jobs performed by humans and making them redundant. One of the jobs being accounting and finance. No wonder finance professionals are worried whether they will still be in employment in the next five years, ten years or not too distant future.

Think of robotics, artificial intelligence and machine learning. These new technologies are taught to replicate human decision making and perform rules-based, repetitive activities.

Traditionally, finance professionals have joined the finance organization via the accounting route. An individual would go to university, earn a Bachelors in Commerce, upon graduating register with a professional accounting body such as ACCA, CIMA, CPA and CMA. Undergo a three-year training program and bingo, your finance career is birthed.

Fast-forward to the current digital age. The finance landscape has significantly changed. Rapid environmental changes, shifting customer behaviours and technological breakthroughs are all turning business models upside-down and upending conventional wisdom. This new operating model demands finance professionals to have a different skill set.

Having technical competences alone is no longer a hundred percent determinant for success.

We now live and conduct business in a hugely connected and better informed world. Thanks to social media and IoT. Social media is allowing us to stay in touch with colleagues hundreds of miles away from us. Through IoT, buildings and other items are now technologically connected allowing data to be gathered, exchanged and analysed to generate key decision-making insights.

Cloud is Driving Finance Transformation

Cloud-based applications are enabling CFOs to do more with less, at the same time modernizing and transforming finance. These solutions have the capability to integrate external data and optimize decision-making. They allow finance executives to have full data visibility, identify correlations and trends, as well as key drivers of operational performance and financial outcomes.

One example of cloud-based solution that is making waves is Syft, a cloud analytics platform that directly links into your existing accounting cloud software and instantly generates easy to interpret graphs and reports for your business.

The challenge for many CFOs today is unlocking critical business insights from their data. The insights they are looking for lay buried in disconnected, legacy ERP systems that are struggling to keep pace with today’s information needs of the business. Most of these legacy systems operate in silos and do not communicate with each other.

In the ongoing digital revolution, integration is the new information paradigm. Where silos were the norm, organizations today must seek to share critical data among business operations to manage costs and coalesce company strategy.

Not only does cloud integrate external data, it also simplifies the cost structure of the business, help forecast with greater precision and potentially close books faster. In addition to having analytics embedded within the applications, these cloud-based financial systems are designed from the ground with the end-users’ real-time information requirements in mind.

This is different from the traditional ERP systems that lack customer specifications and customization, and are build for standard adoption. In today’s information age, organizations have different information needs, specific to their strategic direction and are not keen on adopting the herd mentality.

Investing in cloud computing and SaaS often results in reduced finance and IT costs mainly because of reduced up-front capital expenditures. With cloud-based applications, the focus shifts from capital expenditures to operational expenditures (subscription-based) as there is no need to have the financial system set up on business premises.

Unlike traditional, on premise financial systems which require the software providers’ IT support team to visit your offices to service or upgrade the system, cloud-based platforms are easily updated remotely allowing you to always work with the latest version, with current features and functionality.

This way, you avoid getting billed for call-out fees and other unnecessary servicing costs.

Reinventing the Finance Function’s Wheel

Technology alone is not the silver bullet, it is an enabler and empowers finance professionals. Rather than look at the ills of this new digital age, why not look at the opportunities presented? Higher demands are being placed on finance to transition from a back office reporter of the past to a trusted business advisor.

In most companies, finance is spending considerable time and effort gathering data and getting to the right numbers instead of analyzing what the numbers mean. In these organizations, a lot of emphasis is placed on transactional processing and reconciliations as opposed to insightful analysis.

Thanks to the digital revolution, finance has an opportunity to move up the value chain. But what does this digital transformation really mean? Does this mean entirely changing what finance does within the business? No. Finance is a decision support function to the business and will always remain so.

What digital transformation means for finance is that the function should take stock of its current deliverables, evaluate priority areas and establish where value should be delivered most, and how, arguably by leveraging new technologies.

This also involves building upon the existing talent and skills. Individuals with a strong technical background still have their place within the function. But what we are saying is that the organization’s talent base must be fit for purpose in this digital age, and aligned to areas of value creation.

Having a finance workforce that is tech savvy, diverse, connected, curious about how the business works, asks the right operational and commercial questions, and understands the application of disruptive digital technologies to drive automation and insight will differentiate great finance functions from those that are simply good.

Build a Positive Business Case for Digital Investment

Companies that have fully grasped the opportunities presented by the current digital revolution are allocating significant resources to IT budgets. The future finance function will have robotics and automation at the core. It is therefore advisable that CFOs jump on the train before it passes through their station.

Just because your organization is not investing in digital does not mean that your competitors are also sleeping. Lessons can be learnt from the demises of Kodak, Blackberry, Borders and Nokia, only to mention a few. These companies failed to set pace in a rapidly changing technological environment and they all paid dearly for their slumber.

Thus, to avoid risking their organizations disappearing overnight, CFOs must build a robust strategic business case for investing in digital and the advantages of harnessing its power. This will help secure the much-needed buy in from senior management. This later group wants to understand why it is critical for the organization to transition to the current digital ecosystem.

If the CFO is able to articulate the complexities the business is currently facing and how they can be addressed by investing in digital, then getting the thumbs up from senior management will not be very onerous.

This is a make or break time for many organizations. The ball is in your court, to either maintain your old-fashioned systems or inadequate business processes or invest today in modern systems for future strategic success.

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Rethinking the Annual Budgeting Process

Human beings are creatures of habit. Once they have mastered certain habits, especially bad ones, it is extremely difficult to let go. Even though we are fully aware that the immediate, medium-term or long-term consequences of our bad behaviours are dire, we still cling unto them. Could this be because of our ignorance or maybe lack of understanding of what is at stake?

The annual budgeting process has been around for a very long time, and organizations across the globe have been using budgets to allocate scarce resources, monitor and manage performance. In a perfect stable world, the annual budget process works. Unfortunately, a stable economic environment is a thing of the past.

Volatility is the norm today

In the majority of organizations that operate an annual budgeting cycle, the final budget is fixed in nature, covering a specific time period. Finance executives and business managers spend a significant amount of time inputting and debating the final budget. As soon as the final budget figures are agreed, IT department uploads the budget on the company’s accounting and finance system. Nothing changes after this, except comparing actual performance to budget.

The challenge for many finance executives is which approach to use to prepare the budget. Base plus or zero base? Many make the grave mistake of using prior year’s actuals as the base for formulating the current year’s budget and then make arbitrary adjustments. This approach is acceptable in an environment where market conditions are stable, predictions are easy to make and key budget assumptions remain valid for the entire budgeted period.

Unfortunately, volatility is the norm in today’s global economy. Increasing global pressures, uncertainty, ever-changing consumer behaviours and disruption are all rendering initial key budget assumptions invalid by the time the final budget is completed.

The result is often an outrageously inaccurate budget with little management commitment and minute relevance to the organization’s strategic plan.

This new dynamic global economy calls for modern approaches to budgeting, planning and forecasting. Organizations need to be adaptive, ever ready for unpredictable events and quickly responsive to changing marketing conditions.

In his book Thinking, Fast and Slow, Daniel Kahneman talks about the Knowing Illusion.

The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do.

What we see is all there is. We cannot help dealing with the limited information we have as if it were all there is to know. We build the best possible story from the information available to us, and if it is a good story, we believe it.

Paradoxically, it is easier for us to construct a coherent story when we know little, when there are fewer pieces to fit into the puzzle.

The fact that we think we have a clearer understanding of the past does not automatically mean that we are capable of comfortably predicting and controlling the future. Learning from the past is a reasonable thing to do, but it is also important for us to understand that this can have some dangerous consequences.

If we lack knowledge of all the information there is to know, the limited information we have on past performance can mislead us during budgeting and planning processes and negatively affect future outcomes.

Link Budgets to Strategy

Despite the widespread challenges of the annual budgeting process and prominent rise of the beyond budgeting proponents, the annual budget still has a place in the hearts of many finance executives.

They are not yet ready to ditch the budgeting cycle completely, it is too risky for them to run the business without a financial plan.

Rather than ditching the budgeting process entirely, implementing driver-based budgets and rolling forecasts can help organizations address the challenges of the traditional budgeting approaches.

Although most of the variables in the budget are financial, it is important to also take into consideration non-financial information as this is key to developing an understanding of business performance drivers and constraints.

Very few organizations make an attempt to link budgets with their strategy, in fact the planning process is influenced more by politics than by strategy. Leading organizations are using the Balanced Scorecard to strategically allocate resources.

Linking budgets to strategy helps management and their subordinates identify the organization’s critical success factors and how they relate to the KPIs used to measure company success. This in turn, will help them design initiatives needed to close the gap between current performance and desired performance.

Aligning spending with strategy also helps fund only those initiatives deemed strategic and with the potential of propelling the organization forward. This is in direct contrast to the base plus and zero base approaches which allocate resources on the basis of chart of accounts line items, resulting in the funding of non-strategic initiatives and wastage of resources.

Implement rolling forecasts

Compared to traditional budgets which cover a fixed period, rolling forecasts allow organizations to get a vision of the future and support improved decision making. By using rolling forecasts, the company will be able to project performance four to six quarters ahead.

Each quarter the plan is reviewed, and key decision makers are able to understand problems, challenges and trends sooner than later, and change directions or fund strategic projects based on current economic conditions. Instead of reacting to changing business conditions, executives will become more proactive in their approach.

One of the advantages of rolling forecasts is that they are driver based. Drivers help eliminate detail when creating a realistic expectation about the future resulting in managers focusing on what is vital for the success of the organization.

With time, the drivers are evaluated to determine if they are still a key predictor of higher performance. If not, new drivers will be identified and selected for monitoring.

As volatility and uncertainty continue to increase, organizations need to be prepared always in order to navigate successfully towards the future.

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Current State of Enterprise Risk Oversight

A recent publication, Global Risk Oversight, by North Carolina ERM Initiative, in partnership with the Chartered Global Management Accountant ( CGMA ) provides insights on the current state of enterprise – wide risk oversight, including identified similarities and differences in different parts of the world.

Here are some key findings, with emphasis added:

  • Organizations all around the world perceive an increasingly complex risk environment.
  • Risk management practices appear to be relatively immature cross the globe. Around 30% or less of organizations indicate they have ‘complete’ enterprise risk management ( ERM ) processes in place. Only about 25% of the survey respondents describe their organization’s risk maturity as “mature” or “robust”.
  • Most organizations struggle to integrate their risk management processes with strategic panning. Despite the fact that most strategies maybe impacted by a number of risks, only about 50% of organizations around the world “mostly” or “extensively” consider risk exposures when evaluating new strategic initiatives. 
  • There is a lack of detailed risk oversight infrastructure in most organizations. Only a few organizations have formal risk management policy statements and frequently update risk reports.
  • Around 80% of organizations have not conducted any formal training risk management training for their executives.
  • There is increased pressure on management to strengthen risk oversight. Depending on the geographical location of the organization,  this pressure is coming from either the board of directors, the CEO or the audit committee.
  • Lack of sufficient resources to invest in ERM and the perception that there are more pressing competing priorities have been identified as the biggest barriers impeding the progress of maturing the organization’s risk management processes.

In light of these findings, the authors of the report recommend that:

  • Senior executives and boards of directors honestly and regularly assess their organization’s current approach to risk oversight in the today’s changing risk environment.
  • Management genuinely consider whether the process used to understand and evaluate risks associated with the organization’s strategies actually delivers any unique capabilities to manage and execute their strategies.
  • Organizations appoint a risk champion such as a Chief Risk Officer (CRO) or create a management-level risk committee in order to help strengthen the risk management function and ensure all risk management processes are appropriately designed and implemented.
  • Organizations spend time analyzing the vast amounts of data they have to generate insights about emerging risks that may impact their organizations’ strategic success.

Overall, the report is a good read and a great starting point for improving enterprise-wide risk oversight.

It helps senior executives ask important questions when evaluating their organizations’ overall approach to risk oversight. However:

  • Although the authors mention regular updating of the risk register. I would add risk management is not about list compilation,  otherwise organizations might find themselves building risk lists that lack any insight for effective decision making. It is about identifying and evaluating those key risks with the potential of derailing the organization’s strategic success and finding effective ways of mitigating any losses. Furthermore, intelligent risk decision-making does not look only at the downside of risks but also at the opportunities found in taking calculated risks.
  • There is no mention in the report about offering risk management training to middle-level and lower-level employees, only to senior executives.  The tone at the top and culture will determine if the organization succeeds at maturing risk management processes. Identifying and managing enterprise risks should be everybody’s responsibility within the organization. Thus, I believe there should be a common risk language throughout the organization.
  • Appointing a risk champion to strengthen risk oversight is critical. However, the individual appointed must have a deeper understanding of the business, its critical performance drivers and the ability to partner with the rest of the business. He or she must also be able to deliver the necessary risk training required.
  • Clear communication channels should be established to enable free flow of risk communication from top-down and bottom-up. People should not be scared to raise red flags or emerging risk issues to senior executives. Although the board of directors ultimately holds the risk oversight responsibilities to shareholders and other stakeholders of the business, if they receive inappropriate risk reporting from the bottom, the information they will feed to these interested parties will also be inadequate.
  • Risk management should be ingrained in the DNA of the business. Risk conversations should be about supporting strategic objectives achievement and enhancing business performance, as opposed to being a box-ticking exercise all the time.

Do the survey findings reflect the situation at your organization? If so, what are you doing to improve this situation?

I welcome your comments and views.

 

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Savvy CFOs are Using Data Analytics to Mitigate Risks

Data analytics has shifted from being “just a fad” to a business necessity. Once considered the playground of marketing, data analytics has entered the mainstream stream business. Companies are no longer investing in data and analytics with the sole purpose of aiding marketers and drive revenues.

Rather, they are also exploring the opportunities of data analytics application in risk management.

The risk landscape is changing fast and this is driven mostly by increased volatility, heightened economic and political uncertainty, intense regulatory complexity, high-profile data breaches, rising employee fraud, shifting consumer habits and preferences, and increased competition.

As a result of these fundamental changes the strategic conversation around risk is changing too. Thus, business leaders should embrace risk as a tool used to create value and achieve higher performance. It is no longer something to only fear, minimize and avoid.

Applying data and analytics to an organization’s risk efforts plays an important role in strengthening internal controls. Implementing stronger controls is essential for avoiding and reducing substantial financial and reputational losses.

Companies that have previously placed little value or emphasis on strengthening internal controls have learned the hard way, and for many, the wake-up call came too late.

High-profile Data Breaches

The number of cyber attacks and ensuing data breaches is at alarming rate. Hackers are targeting companies across all industries and stealing treasure troves of data for criminal proceeds. Recently, a global cyber attack “WannaCry” halted service delivery and brought businesses and countries to their knees, locking people out of their data and demanding they pay a ransom or lose everything.

In the wake of these massive data attacks, companies are waking up to the realization that they need to strengthen their cyber resilience programs.

Investing in data analytics is one way of achieving this, and CFOs are uniquely positioned within the organization to drive the analytics efforts. Although data is the oil of the new digital economy, finance executives must look at data in two ways – as a source of risk and as a means to manage the risk.

Real-time Monitoring of Data

This is essential for reducing the potential of data breaches and better protect strategic data of the company. The CFO can help monitor the company’s data by performing real-time data-flow analysis and outlier analysis.

The former involves tracking the location of data at different times during a business process. Internet of Things (IoT) has brought about new ways of collecting and storing large quantities of data sets.

For instance, sensors are being installed in machines, clothing items, delivery vehicles, wearable devices, company products etc and these minute devices are capable of transmitting the data to an internal server for further analysis and insight generation.

Majority of the data hacking incidents happen at night when business have shut down for the day. It is this period that companies are more prone to cyber breaches.

By regularly conducting data-flow analysis, personnel responsible for data security will be able to detect any unusual data queries being made on the company’s database during a certain period, and compare that number with trends over the last month, quarter, year or longer.

If a trend is identified, this should act as a starting point for asking specific questions around data security and trigger responses.

Outlier analysis, mostly used by credit and debit card companies and other financial institutions, helps identify anomalies in the customer’s transaction history. Based on the historical transactions of the credit or debit card holder or customer over a period of time, the company is able to develop a profile for each and every customer.

Suppose one of your clients resides in Location A where he or she mostly transacts from, one day you notice that soon after recording a transaction in Location A another large sum transaction is recorded in Location B within a short period of time and the commuting distance between A and B is long making it impossible for your customer to be in one place at one time, this transaction must immediately be flagged up as an outlier and tell you that something is unusual.

Thus, as the purchasing history data of your customers increase, more focus should be placed on real-time outlier analysis. Thanks to technological innovation, today’s computers have massive computing power to store and perform this critical analysis on very large datasets.

Make Use of Both Structured and Unstructured Data

Structured data is easy to analyze because it is highly organized and predictable. Unstructured data is essentially the opposite, it takes more effort and time to compile.

However, much of the company’s data is unstructured, and this where CFOs can uncover perils and act almost immediately to avert hazards.

Thus, as social media networks continue to grow in use, finance executives need to find meaningful ways of combining data from multiple sources, regardless of location or format, for analysis.

It is through this combination and analysis of disparate datasets that finance is able to make informed analysis and provide improved decision support.

Many brands have suffered mishaps because of poor or misaligned social media strategies. For instance, a negative tweet was allowed to go viral before the company could hardly respond leading to damaged reputations.

Thus, having a coherent and well executed social media plan will help you detect any external threats to the company’s reputation. One negative tweet has the massive potential to make you lose your key customers and shut door.

In high performing companies, CFOs are taking advantage of new technologies and keeping an ear on the ground in order to hear what is being said about their companies on social media platforms.

This new software has the capabilities to gather and combine data from various social media platforms concerning the company’s products, services, competitors etc.

They have also deployed teams to provide round-the-clock monitoring of social media activities.

When this data is analyzed and insights gleaned, the company can reach out to the message source, tell its side of the story and resolve any differences. Better more, the company is also able to trigger a response ahead of any negative story.

Retail companies are making use of image-recognition software to detect product issues while they sit on market shelves and ensure these errors are corrected well in advance. Using their smartphones, sales reps can snap photos of the company’s products. The software then makes an instant visual analysis of the photos leading to corrective measures being taken.

Email Risk and Fraud Prevention

As employee fraud continue to skyrocket, email use, in its unstructured form, is getting special attention. If fraud perpetrators are not detected well in advance and their plans allowed to flourish, the organization stands to lose hundreds if not millions of dollars.

It is therefore imperative that companies invest more time and resources analyzing the email patterns of their employees. For example, real-time monitoring of patterns in the metadata of employees’ email communications can help you reveal risks before they take centre stage.

You need to look at clues such as – Who is the email being sent to? What is the subject and the nature of the content? Is the email high priority or low priority? Who is copied and blind copied? What time of the day is the email sent?

Investigating such information can help you monitor incoming and outgoing email traffic of specific groups or individuals, locate high risk areas that you need to look into and also establish if restricted company information is being released to the public either accidentally or on purpose.

The success and power of data analytics in achieving value-adding risk management depends heavily on the quality and preciseness of the questions asked, the organization’s ability to gather data that addresses these questions, the integrity of the data gathered and the ability of users to draw insights from the data in an objective manner.

Before investing in data analytics software, first identify the challenges your business is currently facing and ask the critical key performance questions that you want answers for.

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Defining and Evaluating Business Risks

Having an effective enterprise risk management (ERM) program that helps to measure, monitor and manage risks is no longer a nice to have but a must.

Organizations regardless of which industry they operate in are increasingly facing strong headwinds that are forcing them to rethink the way they run their businesses, build new capabilities, implement agile strategic responses and approach risk management more seriously.

New technologies, increased economic and political uncertainty in emerging markets, slowing global growth, commodities price decline and Brexit are some of the issues posing immense pressures on organizational decision makers and value chains.

In this environment, objectively defining risk and measuring its impact on the business is very imperative. This is critical for designing and implementing effective mitigation plans, creating value and improving business performance.

Benchmarking is not always the answer

Benchmarking is one of the popular tools used by decision makers to improve processes and ultimately business performance. So often business managers make reference to benchmarking information to gauge their organization’s performance against the “so called best” in the industry.

However, the fact that every business and organizational structure is unique in their own special ways, care must be taken when using benchmarking. No two businesses are exactly the same in all aspects.

Data is critical when measuring risk. Without the data, the whole process becomes pure speculation. In today’s digital economy and information age, data collection is dynamic, allowing businesses to continuously evaluate risks. However, the data type, quality, quantity and method of gathering varies by organization, process, and functionality.

Thus, in order to benefit from benchmarking, decision makers need to first clearly understand the methods used to gather the benchmarking information, the integrity of the gathering process, and how this relates to their organization’s specific situation.

Identify the risk

Identifying the risk events is one of the most critical attributes required to perform a successful risk assessment exercise.

The challenge for many people is that they consider the risk identification process as a “listing” exercise of all the things that might go wrong in any given time period.

The objective of enterprise risk assessment is not to maximize the number of key risk indicators (KRIs), but rather to take a holistic view of risk across the enterprise and prioritize resources and efforts on those risks deemed critical to the business.

Identified risks must be those significant to the business and have the potential of adversely derailing successful strategy execution. Thus, it is imperative that risks and strategic planning are clearly linked with some type of appropriate risk response.

What is the probability of occurrence?

The probability of occurrence should determine whether the identified risk(s) is/are worthy of management, control, or not. Determining this probability is not a subjective or guessing exercise.

Instead, data analysis is a critical part of the process as this provides factual information to base upon. Data is one of the most valuable assets for an organization today. Businesses that are able to leverage data and analytics in their risk assessments are uniquely positioned to better run their operations and achieve strategic, operational and financial success.

Make sure the data used in the analysis is accurate, reliable and real-time as this is critical for both performing an objective/fact-based risk assessment and presenting a truer reflection of the situation.

In today’s data and analytics world, organizations can take advantage of new technologies and incorporate predictive analysis in their data-based risk assessment models. Making strategic decisions based on information provided by backward-looking and reactive models will lead you and your business to unwanted territories.

Predictive models are forward-looking and allow business managers to be proactive. They help you identify trends and patterns, plan for the future with greater certainty and implement agile responses.

Consider the impact of the risk event(s) on the business

Unfortunately, for many organizations, risk management is a box-ticking exercise with little emphasis placed on overall impact on the business. People do not understand the impact of identified risks on the overall achievement of objectives and business performance.

Furthermore, risks today are interconnected. One risk event can lead to a chain of risk events, and if not properly mitigated, the exposure to the business is big. It is therefore imperative that you clearly understand the impact of aligned risks that occur as a result of the original risk event taking place on the achievement of objectives.

Being knowledgeable about these risks helps design and implement an effective ERM program that prioritizes identification, assessment and management of those risks considered significant to cause havoc to the business and negatively affect performance.

Build a good foundation

Designing and implementing a successful ERM program is not once-off or short term business objective. Instead, it is a continuous strategic initiative for the long-term success of the organization.

Laying up a good foundation starts with the organization clearly defining its ERM strategy, identifying key risks to the business and utilizing an effective set of KRIs.

If properly designed, these KRIs will help you to calculate the probability and also evaluate the impact of more than one risk across different aspects of your business. The focus is not on managing individual risks, but rather,  taking a holistic view of risks across the enterprise to ensure success.

Senior management commitment towards ERM is also required to ensure middle and lower level employees continuously recognise risk management an important strategic imperative critical for driving performance.

I welcome your thoughts and comments.

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