External and internal factors provide the backdrop for reviewing or updating the Finance team’s strategy
For CFOs, the beginning of the year is frequently busy season. The planning cycle for the next year is finalized, year-end close is "in the box", and the first strategy meetings for the next planning round are already scheduled.
For the majority of CFOs, the current planning process has provided proof that the external market and competitive environment is becoming increasingly dynamic. Established companies are increasingly facing the threat of disruption from other smaller and agile players or start-ups, which succeed in leveraging the opportunities afforded by new technologies better or faster. New platform-based business models are gaining momentum and need to be considered in parallel to existing business models. Client-centricity and better anticipation of clients’ needs is fast becoming the rule rather than the exception in today’s companies‘ growth strategies.
Opportunities through maturity in new CFO technologies
As a result of these factors, CFOs are increasingly focusing on innovation in technology and sociological changes. In many application areas, new technologies have reached a maturity worth considering in the finance team. These include big data analytics solutions, applications based on artificial intelligence/"cognitive computing“, as well as cloud-based solutions, and they are offering significant opportunities for those companies which succeed in adopting them to win a pole position amongst their peers.
Introducing these innovative approaches also requires new skills within the team and frequent updates to existing job profiles. Demographic changes in the society are impacting labor markets and the ways of working within companies. Members of Gen Y and Z bring new requirements and a different attitude concerning work-life-balance and in doing so are fundamentally influencing the way work is done within their companies.
All of these are causing change within enterprises. Sales, product development, and R&D teams were the first to adapt to the changes in the markets, exploring the opportunities arising from digital technologies early on. However, in 2017, more and more CFO teams have started to consider these opportunities as well. According to a study by Oxford Economics called "How Finance Leadership Pays Off“, conducted in April 2017, 72% of the study participants in the top performer group (so-called “leaders”) were found to be underscoring the increasing impact of finance on growth and development of the overall enterprise. This high score in the importance of Finance naturally triggers higher demands regarding the quality of output from the CFO team and broadens the playing field in which the team operates.
As a result of the "tension“ caused by technology innovation and increasing competitive dynamics, new ways of creating products and services for clients and business partners are conceived and new ways of working explored. One of the key driving forces for this is clearly the proliferation of those digital technologies which create new ways to provide individualized and customer-specific products and services (e.g. Microsoft CEO Nadella stating that the company is now focusing on products which are “loved” by customers) and which open up new channels for value creation using platform-based business models (see for example the “kloeckner.i” steel trading platform created by Gisbert Rühl and his team in Berlin). Digital also provides opportunities within enterprises to create more efficient processes by means of process automation of transactional processes (“robotic process automation“) or by implementing artificial intelligence solutions for better cash flow forecasts. In parallel, companies are increasingly starting to intensively use internal and external data to generate business insights for better and faster decisions using big data analytical applications.
Seven finance strategy questions which can start the paradigm shift in the CFO domain
For the finance team, these changes and new opportunities are ushering in a paradigm shift. Before starting work on your Finance strategy, you need to answer the following seven questions – certainly, others will follow:
1. How does the performance management of the company need to be adjusted over the next few months and years to use the opportunities of innovation, market dynamics along with the strengths of the enterprise?
2. How will the finance team collaborate more intensively with the operative business counterparts of the company?
3. How can we improve quality and speed of enterprise decisions?
4. How will we use Robotic Process Automation, AI and Big Data/Predictive Analytics in the best possible way and what basics do we need to implement to leverage the technologies?
5. How will we support digital platform business today and in the future?
6. Which employee profiles and skills do we need for the finance team in the next three to five years?
7. What is the best organizational structure for the finance department 2020 and how will the definition of the role of the team change?
These questions can form the starting point of approaching the question, how the role of the finance team will evolve in the future and where the focus for value creation in the team will be. Hence it is not surprising that more and more companies are starting functional finance strategy and finance roadmap workgroups now and that industry practice groups like Germany's "Schmalenbach-Gesellschaft" have created workgroups for "Digital Finance".
Working on functional finance strategies helps companies to provide first answers to the questions above. Based on finance strategy updates, better priorities for CFO projects and initiatives can be developed. The team effort in building the CFO strategy creates a new common understanding within the enterprise as to what the role of the finance team is and will be in the future, as well as how the team will support the operative business with future-focused analysis, a newly refocused view on the business partner role, and which development opportunities exist in the team.
Based on the (revised) finance strategy, a roadmap for the team’s future development journey can be drawn up. The strategy provides a better frame of reference against which individual initiatives can be gauged.
What's your opinion? Do you think that both external factors, innovative technologies and changing requirements for the Finance team will be triggers for an examination of the CFO team’s functional strategy? Is so, what are the most important topics, the Finance strategy should address?
I would like to exchange thoughts with those of you interested in discussing the way Finance will operate in the next years. Please leave a comment if you like.