TagFinance Transformation

Finance Transformation: From History Keepers to Future Story Tellers

The traditional role of the finance function is that of ensuring accurate processing, accounting and reporting of financial transactions. However, in today’s volatile, uncertain, complex and ambiguous economic environment, reporting on the past is no longer enough. New advanced technologies are disrupting business models at the speed of lightning. For example, digital innovations such as artificial intelligence, machine learning, collaborative technologies and advanced analytics are already transforming the traditional role of the finance professional. Routine accounting operations and transaction processes are getting automated freeing up time for finance professionals to focus more on value-adding activities.

In this second machine age, finance professionals have to adapt and embrace the opportunities brought by this new wave of technologies. Digital technologies have the potential of transforming the finance organization into an analytics powerhouse capable of deriving strategic insights from large data sets and improve decision-making processes. Gone are the days of producing reports that are backward-looking and performance variance reports that are lacking actionable insights and recommendations. In order to drive business performance and help inform decision-making, the finance function has to improve and increase its influence across the business. One way of doing this is initiating conversations with others in the business, ask the right questions, identify root causes of existing problems and provide solutions in a collaborative way.

In many organizations, the majority of senior finance professionals have an accounting background and because of the article-ship training they went through, most of them are inclined to a rules-based thinking. Everything has to add up and the level of risk taking is significantly low. Unfortunately, this mind-set is a hindrance to breakthrough performance.  In addition to their technical skills, today’s finance professionals must also develop a strategic mind-set. Successfully playing the business partnering role requires the finance professional to support the broader business strategy as opposed to focusing on narrow accounting objectives alone. in other words, finance has to drive business outcomes rather than simply report them.

To transition from history keepers to future story tellers, it is imperative that finance professionals have a clearer understanding of all the numbers they are reporting on. The value of analysis provided by finance is only as good as the business’ ability to interpret and act on it. If decision makers and other stakeholders lack trust and have no or minimal confidence relying on information supplied by finance to support decision-making, it means finance is failing to play its role. Finance needs to get deep into the numbers to really understand the various performance drivers of the business and ensure it manages the right things and sets the right goals.

Big Data and analytics are playing a critical role in helping organizations make sound decisions, improve performance and gain a competitive advantage. However, some organizations have been delusional to think that by collecting and storing huge data sets, they have found a killer recipe for success. Unfortunately, this is just wishful thinking. There is value in data when the right type and amount of data is collected, correctly stored, properly analyzed and insights gathered to inform strategic decision-making. By acquiring new analytical skills, finance professionals will be able to mine and analyze large data sets, bring out a story out of this analysis, provide an explanation of what has happened, what is driving the numbers, and how they affect the future.

If finance is to succeed in this storytelling role, the function has to definitely move from away from the practice of providing one view of the future. It is embarrassing, to say the least, that in today’s ambiguous and continually changing environment, some organizations are still relying on the annual budgeting process to manage and monitor performance.  The annual budget is static and cannot be relied upon. Using rolling forecasts and scenario planning can help the finance function overcome this problem. Finance ought to gain complete visibility into the performance of the business, be a problem solver and provide solutions to these questions:

  1. What happened?
  2. Why did it happen?
  3. What is going to happen?
  4. What should we do about it?

In other words, finance must be able to anticipate alternative performance scenarios by performing what-if-analysis, identify the triggers of each scenario, evaluate the business impact of each scenario and execute a contingency plan. Performing this exercise will help identify new business opportunities and the ways the business can profit from them, as well as weigh the potential risks and their financial,  operational and strategic implications.

There is nothing wrong in looking at history, since history also provides a platform for learning and a baseline for planning.  Although it is difficult to predict the future with certainty, decision makers cannot afford to run the business by ignoring future risks. Naturally, most finance professionals are risk averse and have a low appetite for risk. The problem with looking at only the downside of risk is that the business is bound to miss on strategic investment opportunities.

Finance professionals need to increase their appetite for risk, at the same time ensure this is not detrimental to the successful running of the business.  Instead of saying no most of the time, finance professionals have to embrace strategic risk taking and evaluate what opportunities are bound to be missed if the organization fails to align its risk and business strategies.

Having finance professionals who are storytellers requires a different talent acquisition and retention strategy. As most routine accounting operations continue to get automated, the organization needs to map out its current skills, document future finance skills need and identify the gap, design an effective talent strategy and execute on the plan. Also, the organization must strive to build a team around people with diverse backgrounds. For example, including people with social and behavioural skills can help the organization model changes in customer and competitor behaviour and describe the financial implications.

Is your finance organization doing enough to help you navigate through this VUCA environment?


5 Ways Finance Can Help Improve Company Profitability

Businesses in various industrial sectors are undergoing a fundamental transformation as a result of the effects of globalization, advancement in new technologies and increasing digitalization.  Apart from presenting a wealth of opportunities to help the organization soar to greater heights, these changes are also presenting a variety of challenges on the business model.

They are altering customer behaviours, placing increased pressure on existing markets and impacting financial performance.  In these trying times, the finance function is being called upon to help steer the organization in the right direction and improve profitability.

Popularly known as bean counters, accountants are now required to support business growth initiatives and help grow the beans within their organizations. The modern finance function has evolved from being a “just numbers” back-office function to a “strategic partnering” front-office role providing deeper insights and a clear direction for translating the numbers into effective actions for those operating on the front lines of the business.

Whereas in the past the finance professional spent his day behind the scenes, glued to his computer, producing and reporting the numbers, today’s finance professional is involved in the business interacting with the other organizational functions and helping drive business performance. There is a joke about an accountant without a spreadsheet being described as “lost”. In the past, this could have been true, but not today. The bean grower of today is a strategist, a motivator, a leader, a team player, a change agent, completely understands the drivers of business performance and drives improvements in respect of new revenue and value-producing opportunities.

It is no secret that the finance function is the custodian of the business profit and loss. In times of economic downturn when cost control is critical, the finance professional is called upon to help identify areas where the organization can scale back in order to improve overall profitability. In good times, finance helps senior management identify new opportunities (new markets, new products, potential acquisition targets, new services etc.) that need exploiting. Disrupt or be disrupted is the mantra in today’s ever-changing business environment. The business has to evolve with times.

The challenge on the finance function is to deliver more with less. This has led to many organizations to embark on ad-hoc cost-cutting programs hoping to improve the bottom-line. Unfortunately, cost control alone is not sufficient or effective enough to enable the organization realize the targeted gains. You can only cut costs up to a certain level. This is because each cost initiative reaches a point of diminishing return, after which, the company has to explore new ways of improving profitability. In order to grow its influence on company profitability, the finance function must:

  1. Understand the Drivers of Business Performance.  To be effective bean growers, accountants need to move beyond numbers and get an understanding of the company’s product s and services and how they affect the profitability of the business. This means finance teams lifting their heads up from their financial reports and obtaining a better view of the business itself. Instead of focusing only on where the business has previously failed, finance should provide strategic insights, competitive intelligence and analysis that enable effective decision-making by the senior management team. For example, finance should be able to provide data, metrics and analysis that helps transfer the function’s own understanding of the drivers of profitability to others throughout the organization, in order to ensure that profitability develops into a basis for action.
  2. Help Identify New Pathways Toward Profitability. When it comes to profitability improvement initiatives, many at times the focus is on the bottom-line. As mentioned earlier on, eliminating fat from the bottom line works up to a certain extent. Cost reduction is a short-term fix but not sustainable in the long-term, especially if the company is looking to grow. Management become misguided and believe that by laying-off people to contain salary costs or postponing capital investments they are placing the organization in a better competitive position. The opposite is true.  In fact, cost cutting by itself is counterproductive as it can lead to inefficiencies, missed opportunities and higher operational costs. There is nothing wrong in getting the business lean, but getting lean has to be linked to the business strategy, done the right way, at the right time and for the right reasons. Attention should also be focused on the revenue side of the business, for example, diversifying the business, internally growing existing business units, making additional productivity improvement, improving existing product or service offerings and making major business purchases.
  3. Invest in Modern Technologies. As the amount of data generated continues to grow, an enormous demand is being placed on finance to make meaning of this data, identify trends and develop the most effective responses that will help protect and improve company margins. Finance must know what information will have the greatest impact on profitability since having the right information is at the core of improving company profitability. Equally important is placing this information in the right hands. Relying on spreadsheets alone will not cut it. Finance must invest and make use of modern Business Intelligence and Analytics technologies in order to be able to identify accurate, reliable and relevant information and place it in the hands of the right people at the right times. These modern technologies help transform finance into a more flexible, responsive and forward-looking function. The modern finance function must have the ability to use technology to gain a more detailed understanding of the metrics underlying the company’s profitability.
  4. Develop Effective Pricing Capabilities. The sales organization is normally rewarded on revenue made and this sometimes results in the sales team being interested only in closing the deal at the expense of profitability. Not all customers are equally profitable to the organization; therefore sales should be tailored to optimize profitability. Getting the pricing wrong has negative consequences on the overall profitability of the company. Finance need to have an advanced understanding of the company’s different customer and product portfolios. By performing customer profitability analysis and product profitability analysis, finance will be able to understand the customer costs-to-serve and use these costs to segment customers, fine-tune pricing and manage profitability by helping direct efforts towards growing profitable product and customer combinations. Sales personnel can then use this cost-to-serve in negotiations as well as forward-looking analyses to drive effective decision-making.
  5. Collaborate With the Rest of the Organization. Although finance plays a central role, maintaining and improving company profitability is a team effort – it should be everyone’s concern. It is imperative that finance professionals work directly with their colleagues outside of finance (Sales, Marketing, Operations and R&D.) and develop a list of actionable items which impact profitability. For example, working more closely with the sales organization will ensure that sales personnel have all the information and tools they require to make decisions that support profitability goals, otherwise they will be ill-equipped to make the best decisions. Getting the buy-in and commitment of the C-Suite is also critical since the C-Suite is involved in setting the direction of the company. The C-Suite’s involvement will in turn lead to the establishment of a common goal and set of metrics shared with the front lines of the business through synergies with their finance teams. Remember Individuals don’t win, teams do.

If the organization is to succeed in maintaining and improving its margins, finance’s involvement is important. Finance helps make meaningful and measurable profitability improvements.  Look at the bigger picture and beyond quick fixes such as rapid cost reductions. Develop a more detailed understanding of the full set of your business’s profitability drivers and take full advantage of new technologies capabilities to uncover the organization’s key profitability levers and challenges.

Transforming Finance Into a Strategic Function

There has never been an interesting time to be in finance than now. The role of finance has significantly transformed over the past years from being a back office function responsible for reporting past performance to more of a front office strategic role responsible for delivering strategic insights that enable effective decision making.

Although some high performing organizations have managed to transform their finance teams into value-adding strategic partners, the story is different in many organizations. In these entities,  finance is still regarded a back office function responsible only for preparing reports and reporting on past performance. In order to successfully transform their finance teams into strategic business partners; finance needs to build new capabilities,  get involved in the operational side of the business and take the lead in corporate strategy and business stewardship.

Although cost management and financial performance still remain crucial , in today’s increasingly uncertain and competitive business environment, the finance organization is required to take a more strategic role, provide solutions to the numerous challenges facing the business, manage risks effectively and efficiently, create sustainable value and steer the business in the right direction.

In his book Good to Great, Jim Collins talks about first getting the right people on the bus and the wrong people off the bus. Great vision without great people is irrelevant. It is therefore critical for CFOs to attract, retain and develop talent capable of building an effectively and efficiently well run and valued finance function. It is all about having a balanced skill set within the finance function. For example, some people are good at cost control while others are good at treasury management, management reporting and analytics, strategic planning and forecasting, performance measurement and management etc. The CFO ought to have the ability to match the right individual with the right job and resources.

To be an effective catalyst for change within the organization and transition to a value-adding business partnering role, the finance function of today must move and act beyond financials, in other words, resist focusing on numbers alone to drive business performance. This in itself does not mean that the function must lose its corporate stewardship role. Producing business financials with the highest possible level of integrity still remains a critical role of the function. Perhaps it would be ideal for the CFO to hire a strong financial controller so that he or she is freed to focus more on strategic issues. In order to be able to provide strategic advice that helps steer the organization through times of uncertainty and complexity,  finance needs to obtain deeper insights of the industry in which the business operates, assess and redesign the operating model and respond with agility and innovation.

Today’s business environment is increasingly characterized by ongoing disruption which requires management and their organizations to respond quickly with smart effective strategies. Failure to do so is a sure recipe for disaster. Take for instance digitization. Digital transformation is arguably one of the most disruptive forces organizations are facing today. Digital has revolutionized entire business models and sectors and at the same time transformed a number of businesses from market leaders to nobodies in a very short space of time.

To survive and flourish in these extraordinary times ( achieve top-line growth and business model innovation), it is imperative that CFOs and their teams are constantly challenging the status quo. It is so sad that in many organizations people have gotten used to working and producing results the same way over and over again. Continuous improvement is very unheard of and it is a taboo to suggest new ways of delivering performance. This culture must be changed and create one that is always looking for better ways to achieve excellence.

Digital transformation is a great enabler of strategy execution and business performance improvement. It is high time that CFOs leverage new digital technologies within the finance function instead of operating on yesterday’s business models and outdated technologies. As a CFO or finance professional you need to understand how digital ( Cloud Computing, Analytics, In-memory Computing, IoT etc) can help you exploit growth opportunities and create new sources of value. Is your organization’s business strategy fit for the digital world? Playing catch-up in a competitive environment is by no means a successful strategy. Digital has rewritten the rules of competition and blurred traditional sector boundaries. Because of technological disruption, barriers to entry have significantly been removed in almost every sector. This has significantly intensified the level of competition.

To avoid lagging behind competitors, finance plays a critical role in helping the organization adapt to digital within the core economic business model. Leveraging its analytical capabilities; finance can help evaluate a range of new risks and opportunities for the organization,  measure and balance the risk and return of any changes to help inform the right approach and develop proactive strategic responses that enable the management team to make better and faster decisions that improve business performance,  manage risks and protect the company’s reputation and brand. By ensuring effective risk management and embedding enterprise risk management in strategic planning and performance reporting, new opportunities and threats can quickly be identified. This will in turn challenge senior management to ask the right strategic questions and rethink the business operating model as a whole.

As the role of the finance function continues to transform into more of a strategic one, in addition to developing and executing strategy,  there is also need on the part of CFOs to have the ability to measure performance against strategy. Effective performance measurement and management looks beyond financial. As well as traditional financial measures , the organization must measure and manage non-financial metrics that matter. Thus scorecards need to include metrics relating to performance against the purpose of the organization.

The starting point in getting this right is for CFOs to consider the needs of the difference audiences. Many at times the focus of performance measurement is on growing shareholder value at the expense of various stakeholder experiences. For example, by listening to the voices of its customers, measuring customer experience and assessing that experience,  the organization will be able to identify areas of improvement, build trust and loyalty, reduce churn, increase sales and improve bottom-line value. How much time are you currently spending on broader strategic issues that relate to the organization’s overall performance than on financial management?

Measuring performance against strategy also requires CFOs and their teams to balance hindsight with foresight.  It is good to know where you are coming from but great to know where you are going. In many organizations,  the majority of performance measurement programs are backward looking. Management are spending a greater part of their time and resources on the past. There is little focus on the future. In today’s world of analytics, the finance function need to have the ability to mine performance data for forward-looking information and interpret the data so that executives do not miss strategic opportunities. The FP&A team must be able to generate real-time insights on what the business should do and not do in order to manage performance in the future. This kind of analysis also requires finance to keep pace with big data technology capabilities.

The modern finance professional is also required to help the business grow and create sustainable value. Exploiting growth opportunities can be achieved organically or through M&A activities. The former involves expanding the business through increased output, increased customer base or new product development.  The later involves acquiring new businesses by way of mergers, acquisitions and take-overs to increase business growth and sales. Because of the disruptive impact of new digital technologies,  many companies are now making use of M&A to create new business models and a technology-driven competitive advantage.

Thus in analyzing potential M&A targets, the CFO must have the ability to analyze exactly areas of value creation within the transaction as well as how the transactions align with the other growth drivers of the business. Today’s finance function must possess the right skills, knowledge and capabilities to develop and execute the organization’s M&A strategy.

As the role of the finance function continues to evolve,  in order to create value in today’s VUCA economic environment,  organizational CFOs need to balance control with growth opportunities and focus on business model transformation rather than only on cost management. Ask the right strategic questions and always review the business operating model. This will help you identify any areas of the operating model that are not aligned with the corporate strategy, identify the implications of change in one aspect of the operating model on another, redesign the business model and execute strategy successfully.

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