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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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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