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.