The role of the CFO continues to expand. In addition to overseeing core finance and accounting functions, they’re also responsible for talent management, championing cybersecurity programs, identifying and evaluating digital investments, identifying new sources of competitive advantage, providing data-driven insights, and enabling innovation, among other functional areas.
To meet these changing demands and remain relevant, CFOs and their teams need to continuously embrace change and adopt new ways of thinking. This is a significant departure from the traditional finance role, which is very conservative, detail-oriented, rule-oriented, structured, and backward-looking.
COVID-19 has shined a light on the benefits of embracing fundamentally new ways of thinking and the dangers of getting comfortable with how things are. Change is inevitable and when it happens it’s usually quick and when we least expect it. Hence the importance of outside-in thinking and agility.
Companies that had the first crack at new technologies to enable new ways of working and simplify processes pre-COVID found it much easier to embrace remote working. Further, leaders who took an objective hard look at their business models were able to swiftly identify and pivot new sources of value.
Part of the reason why the office of the CFO is failing to deliver expected results for its business partners is that the finance operating model and its supporting processes are designed primarily with a finance-centric lens. In other words, built around an inside-out mindset.
For example, performance reports are based on what finance is accustomed to producing rather than on new requests to help decision-makers answer key performance questions.
Also, CFOs are often too caught up in their function’s highly specific challenges to understand the broader challenges of the business and how they can help it succeed.
Embracing an outside-in perspective focuses on creatively delivering something of value to leaders and other stakeholders instead of finance recurrently producing the same historical reports that lack forward-looking insights and recommendations to enable effective decision-making.
The conversation has to move beyond mere value preservation to also understand how finance can serve as a true enterprise-focused business partner and help influence the future direction of the company.
Why is it so important for finance to take an outside-in approach?
- It helps finance understand sector-specific trends driving market disruption or emerging focus areas and consider innovation investments to drive growth.
- Embracing an inside-out perspective often creates stand-alone “silos” with an endemic capacity to halt growth by creating blind spots to new opportunities.
- Instead of providing reactive answers to unforeseen problems, it empowers finance to help business units scan for change signals, model different scenarios, and nimbly respond to changing market conditions.
- It helps CFOs align finance and operational objectives with company strategy, determine the most critical measures to monitor strategy execution, and manage processes end to end rather than in a silo.
Making the transition from inside-out thinking to a broader, forward-looking model requires a lot of innovative thinking. Take traditional budgeting and forecasting as an example.
- The annual process is inherently flawed, time-consuming, static, and political.
- Capital and operational funding decisions are based on past performance without consideration of broader external market factors.
- Legacy initiatives are first in line to receive funding, building on last year’s plan versus new investments considered risky or unproven.
To enable innovation and more agile responses to shifting signals in the markets, CFOs and their teams need to transform financial planning into a dynamic funding process that transcends the generally narrow view of the business.
When an opportunity presents itself, the company should be able to immediately mobilize a team, shift investment priorities, and allocate the necessary funding instead of informing a business unit to wait for the next planning cycle because the initiative was not built in the current plan.
By embracing an outside-in perspective and looking forward, finance will be able to influence strategic decisions through developing investment assessment criteria grounded not only in the economics of the business but also in other critical factors such as market attractiveness, urgency, competitiveness, feasibility, and strategic fit versus utilizing a historical approach.
Finance transformation is a never-ending journey. However, to begin fostering outside-in thinking:
- Embrace the need to keep learning and confidently challenge the status quo. Recognize that what was useful yesterday may not be useful tomorrow.
- Don’t optimize finance in isolation. Rather, break down traditional functional boundaries and collaborate with other functions to explore the art of the possible.
- Look at issues from a different perspective. Let go of the old mindset that says “this is how it has always been done” and embrace fresh thinking that says “this is how it could be done.”
- See beyond the problems of the past and recognize possible futures. Think through what might happen, what should happen, and consider alternative strategies.
- Constantly anticipate the possible changes in your industry not only with current trading partners but also with other players across the market.
- Create an environment of safe failure that encourages experimentation with ideas, emerging technologies, and business models. Failing forward is part of innovation.
- Become performance-centric. Beyond reporting performance, understand the strategic direction of the business, what key performance questions to ask, and how to answer them with insights and analysis.
As the role of the CFO continues to evolve from record-keeping to delivering reliable insights and effective decision support, having an outside-in perspective is not a nice-to-have for the finance leader.
Being too slow to adapt will lead to irrelevance.