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The Outlook

What does the next century hold for corporate finance? Here are 21 predictions for the 21st century.

1Jan

There is no question that over the past decade or so, chief financial officers have risen to prominence in the corporate landscape. And with the new century upon us, it's only natural to wonder how the role may continue to evolve. What new responsibilities will they be expected to assume? Could a significant economic downturn mean a return to bean- counting? Will the Internet shrink the finance department to a one-person outpost monitoring legions of outsourcers?


What follows are our predictions--based in part on your perceptions--for the future of finance in the next decade. Some predictions may seem obvious; others, far-fetched. About all we can say with absolute certainty is that the rules of the game will continue to change, and that finance executives must be ready to change with them.




1
Speed, not structure, will rule.
It is 57 days, 3 hours, and 49 minutes to the end of the century, and Craig Monaghan is a bit frantic. The CFO of iVillage Inc., which runs a leading online site for women, has just come off a two-week road show for a follow-on offering to last March's initial public offering. Now, with a fresh $75 million on hand, he's staring at an earnings-release deadline that's just hours away.


As the clock ticks down, Monaghan checks on the work of staffers who are double-checking the third-quarter numbers, while fielding calls from an advertising sales manager, an investor-relations consultant, and iVillage CEO Candice Carpenter as she steps off a plane. The next day's announcement should add to the four-year-old company's legacy of losses, yet he hopes investors will focus on the progress being made on key nonfinancial, brand-building, and core metrics.


For the 42-year-old Monaghan, the speed and intensity of the job is nothing like what he experienced growing up in finance at General Motors, Bristol-Myers Squibb, and Reader's Digest. Rather, it feels more like his life back in 1980, when he commanded a tank unit in South Korea and had the authority to launch missiles if the North Koreans fired on his platoon. "There we were on the front edge, and here [at iVillage] I think we are on the front edge as well," he says.


In Monaghan, it seems safe to say you can glimpse the multiple roles CFOs will play in the future--strategist, technologist, deal maker, financier, and CEO partner. There is little evidence that the pace of change will slacken. In a recent survey of 620 readers, in fact, we asked them what they think the future holds: 67 percent said they expect the rate of change to accelerate. Only one respondent thought things would slow; the rest predicted that the pace would stay about the same.


For Monaghan, whose new-century priorities-- manage rapid growth, push for profitability, seize new strategic opportunities--reflect those of many finance chiefs, the speed is exhilarating. Yet this 21st-century CFO secretly yearns for that relic of corporate finance--the inches-thick binder of management reports. "I'm envious of the sophisticated systems, formal policy manuals, and monthly reporting packages that big companies have," he confesses. Reminded that many firms want to stop delivering reams of backward-looking data, Monaghan agrees that there's no need for them, but adds ruefully, "I'd like a little more structure than I have right now."



Prediction 2
Responsibilities will increase.


In recent years, CFOs have faced a slew of new challenges as financial markets have become global, investors have become more demanding, and the Internet has reshaped how value is created. To keep up, says Frank Gatti, CFO of Educational Testing Service, in Princeton, New Jersey, "the CFO has to have a more integrated view of the business, a greater understanding of the impact of technology, and an ability to align people with the organization's objectives. Without these qualities, you can't support the company's needs in the future, or now."


The problem, of course, is one of balance. Rick Fleming, the CFO of building-products giant USG Corp., estimates that he now spends more than half his day on what he calls "nontraditional areas"--for example, market-segmentation issues, optimizing the supply chain, and exploring E-commerce opportunities. Which means, of course, that he has only half a day for everything else a CFO is expected to do.


Others are just as busy. In fact, according to our survey, the number of priorities CFOs count as major is rising. And we predict that their plate will be at least 10 percent fuller in the new century.


Not that they are complaining. "I wouldn't like a job that was narrow and predictable," says Linda Havard, CFO of Playboy Enterprises Inc. "Having a broad set of issues to deal with makes the job more fun." The trick, says Fleming, " will be to not drop the ball in the areas where I'm ultimately held accountable. I'll still have to do what I've always done, but I'm going to have to learn to handle a more complex job. And there will still be only 24 hours in the day."



Prediction 3
The work week will lengthen.


The problem with those 24 hours is finding time to sleep. When asked about the one thing they would change about the job, CFOs complained most about the hours. Almost three out of four respondents already work more than 50 hours a week, with almost half of that total putting in more than 60. And with the ubiquity of E-mail, faxes, and cell phones, the workplace is now everywhere, and the workday, in theory, is never-ending.



Prediction 4
E-business will change everything.


The Internet can be blamed for much of the increased velocity. It has already changed the way CFOs do their jobs; most in our survey say they log on first thing in the morning and stay on line all day. And when we asked about the biggest change they foresee for their job, almost all cited the impact of E-commerce and other Internet-based business applications.


"Everybody is rushing into that space," says Richard Wallman, CFO of Honeywell, where every functional area has been challenged to develop E-business initiatives. Finance, for example, is looking at ways to use the Internet for activities ranging from order-acquisition to invoicing to cash collections.


When it comes to figuring out how to exploit the Internet, most finance executives are somewhere between the panic stage and the rudimentary-education stage. But they need to be on top of E-business decisions, insists Gary Moran, a partner at Arthur Andersen LLP. "As companies' business models are changed in an E-commerce world, so will the economics of the business," he says. "Finance executives must be actively involved."



Prediction 5
The finance department will shrink because of the Web.


The impact of the Web will be felt directly in the finance department, which will become increasingly virtual. Business-to-business E- commerce opportunities and sophisticated networked systems will take care of this. Transaction processing will become increasingly paperless, with embedded controls, direct user inputs, and real-time vendor and customer links. Likewise, huge warehouses of data and increasingly sophisticated software will empower line managers to do more self-service financial analysis. And outsourcing of traditional finance activities will become commonplace.


"We see the formal finance organization shrinking," says Pricewaterhouse-Coopers's Donniel Schulman, co-author of the recently published book Shared Services: Adding Value to the Business Units. "The CFO will no longer measure influence by the number of direct reports, but by the number of strategic decisions made."



Prediction 6
The Web will foster insourcing, too.


Within these smaller departments, the Internet will become a bazaar for sophisticated corporate-finance products and services. Use of the Web for corporate loans, foreign- exchange options, interest-rate swaps, and over-the-counter derivatives is expected to quintuple in the next two years alone. "People are willing to see the Internet as a transaction medium, where you can post whatever product you need and let service providers bid on it," says Robert Simmons, CFO of Campus Pipeline Inc., an IPO-bound Internet portal for colleges and universities. "There will be a lot of benefits from 'webifying' the whole process."



Prediction 7
Technology will drive shareholder value.


How firms invest in technology will also become an indicator of shareholder value.


Corporate futurist Thornton May of Cambridge Technology Partners, in Cambridge, Massachusetts, contends that CFOs need not take over the chief information officer's domain, but must step up as a kind of "value arbiter" of IT investments. Somebody had better do it. Only 10 percent of IT projects are delivered on time, on budget, and on spec, and right now, companies are spending an average of only 3 to 4 percent of revenues on technology. May predicts that figure will jump to 20 to 40 percent over the next two decades.


"If we have the same failure rates in the future," he opines, "a lot of shareholders will get angry." It's happening already. In recent months, Hershey Foods Corp. and Whirlpool Corp. have seen sell-offs after announcing that recent technology installations have caused operational snags and hurt financial performance (see "Blaming ERP").


"Bad IT decisions are going to drive down a company's multiple," May contends, "because everybody knows that IT can be a good investment. The insightful investor will buy stock in companies that have an effective IT investment process. This will give CFOs a new way to create shareholder value."



Prediction 8
Deal making will accelerate.


That doesn't mean M&A activity will slow down anytime soon. In fact, in the emerging E- commerce-driven universe, deal making in general--from new global sources of capital to alternative strategic ventures--is certain to accelerate. "The markets will be broader and deeper than ever before," says Staples Inc. CFO John Mahoney, "and the willingness of people to consider new relationships will have a major impact on how you think about capital structure."


The office-supplies retailer, which straddles both the bricks-and-mortar and clicks-and- mortar worlds, has just completed its first eurobond offering, and has created a tracking stock for its Internet-related assets, with an IPO planned for within a year. In a series of deals struck last fall, Staples made investments in several Internet start-ups that offered strategic advantages, but stopped short of acquiring them.


"In the past, we might have acquired a young company with great prospects," explains Mahoney, who is active in these negotiations. "But rather than going through the machinations to buy, we get them to quickly agree to the gives-and-gets and make a deal. We can get into these relationships faster, with less investment, and see how they develop, because everything is happening so fast."



Prediction 9
Winners will find synergies fast.


How companies assimilate all these various acquisitions and alliances is another story, however. Looking for synergies is going to give many a CFO headaches in the next century. And the companies that fail to find them quickly will be subject to a new round of divestitures and consolidations. The best advice: Never be complacent.



Prediction 10
Winners will also manage the talent.


Integrating and retaining talent--both within finance and throughout the company--will remain difficult for years. As long as unemployment stays low, bored employees will be apt to bolt. Good training programs will help retain them. "A lot of young people have greater expectations of what we will ask of them," says Staples's Mahoney. "We can no longer teach someone a skill that they can apply forever. The business is changing rapidly, and we need people who can change roles, and take one set of skills and apply them to a new set of problems."



Prediction 11
The information onslaught will continue.


One problem finance executives will need to think about is how to better manage the onslaught of information emanating from the Internet, E-mail, fax machines, voice mail, TV, and print media. A recent study by Pitney Bowes found that the average executive at a Fortune 1,000 company sends and receives about 190 messages a day, both electronically and on paper. That number will only increase.


Finance executives will need to hone the ability to separate important information from the trivial. They will have to set priorities more effectively and create better information hierarchies. Skillful knowledge management will also mean developing the ability to know when you have enough information. Three good metrics may be better than 10 mediocre ones.



Prediction 12
Great communicators will excel.


Finance executives will still be the lords and ladies of financial reporting, as well as the keepers of performance metrics and the owners of the budgeting and planning processes. "And even as the CFO organization gets smaller," says Richard Roth, managing director with Hackett Benchmarking Solutions, a leading best practices and finance benchmarking firm, "the CFO will continue to serve as a funnel for strategic information."


CFOs must not just gather the information; they must also analyze it, identify trends, and reach conclusions in a heartbeat. If deals can't get sealed in a week, they may evaporate. If decisions are delayed, the benefits may dissipate. The control-focused budget will become obsolete. The planning process will evolve into a continual, as- needed effort that involves multiple scenarios and checkpoints for midcourse corrections.


"Ten years ago, we spent all our energy gathering the information," says Staples's Mahoney. "Now you wind up as the person who is most familiar with major trends. There is greater value in making the news, not just reporting the news."



Prediction 13
Accounting rules will be harmonious.


Finance will still have to report, however. And despite gripes by U.S. regulators about the current position of the International Accounting Standards Committee, the effort to "harmonize" international standards will be completed sometime in the next five years.


"I don't see one set of rules," says Dennis Beresford, former chairman of the Financial Accounting Standards Board and now Executive Professor of Accounting at the University of Georgia, "but we're moving toward having things more similar than different. Our financial reports will look more like other countries', and vice versa. It's been slowly developing and is picking up steam."


He doubts, however, that there will ever be a single international accounting board, for the same reason the world doesn't have one language or currency. "There are too many issues of culture and sovereignty," he says.


But if Beresford could make one wish, it would be that financial statements were simpler. As he sees it, the basic reporting package has grown so complex that its value has diminished. With long-standing issues such as accounting for intangibles, and emerging issues such as Internet-related revenue recognition, he fears that finance professionals may have to endure more complexity, not less.



Prediction 14
Quarterly earnings will die.


The campaign against earnings management launched by Securities and Exchange Commission chairman Arthur Levitt in 1998 is clearly having an effect. Now any hint of accounting impropriety can trim billions from a company's market cap and chasten those under scrutiny. Just this past fall, Tyco International Corp. angrily disputed charges that it toyed with merger-accounting rules. The clamor died down and the stock stabilized only after CFO Mark Swartz sounded a more contrite tone and agreed to forgo acquisition accounting that tended to inflate earnings.


As the new century dawns, the SEC will require companies to publicly disclose information shared privately with analysts--in an effort to curtail what Levitt calls the "game of nods and winks" that goes on between corporate leaders and Wall Street.


But Levitt will never end the gamesmanship, as long as analysts establish consensus estimates for quarterly earnings and companies are punished for not meeting or exceeding them. As part of the wired revolution, the markets will demand unrestricted access to key performance measures on a continuous basis, and the SEC should encourage this move to a real-time reporting system. Investors "will get a pure look at the pulse of the business pretty soon," says Phil Ameen, comptroller of General Electric Co.



Prediction 15
Confrontations with interest groups will increase.


If CFOs feel persecuted by the SEC now, just wait. An expanding roster of both governmental agencies and grass-roots organizations will want to clamp down on business and accounting practices. From hidebound bureaucrats to Greens and reconstituted Reds, everyone will have an agenda, and it might not be business- friendly. Think of what transpired during the World Trade Organization talks in Seattle.


As the rush to globalization accelerates, some people will be hurt, triggering antibusiness sentiment. To flourish, companies will have to develop techniques for blunting critics by accommodating them without sacrificing financial objectives. A tall order.



Prediction 16
Career paths will vary.


In the past five years, 440 of the Fortune 500 companies changed CFOs. According to our survey, the average CFO is 44 years old. Expect more turnover ahead. Those top echelon jobs, predicts CFO headhunter Peter Crist of Crist Partners, in Chicago, will go to people with major deal-making and financing feats under their belts, with experience running business units, with strategic and global exposure, with proven technological prowess, and with a sensitivity to customers and markets.


"Anything less than that is a nonstarter," Crist avers. One dot-com company joked that its newly hired CFO should get the title A Leader of the Company Who Will Be Involved in All Kinds of Things.


Executive roles will blur, Crist adds. With more of an operational focus, the next- generation CFO may supercede the chief operating officer. And the new finance executives won't be drawn mainly from the ranks of accounting firms. Crist expects more to emerge from investment banks, venture capital companies, and consulting firms. Forget about rising to the chair if you've never ventured outside the finance silo.


Demand for these CFOs will outstrip supply for at least the next three to five years, Crist says, as potential recruits in their 20s and 30s build up their credentials. Then, watch out. The free-agency mindset that has created a handful of CFO superstars will become more pervasive.



Prediction 17
CFOs will seek the top spot.


According to our survey, many finance executives want to assume positions of more power and authority over the next 5 to 10 years. In fact, 3 of every 10 respondents see themselves becoming CEO at an established company. Another 18 percent want to go off on their own and start a company. Only 20 percent indicate they're wedded to their current job as CFO.



Prediction 18
A rich retirement will seem more attainable.


Compensation schemes will continue to emphasize variable pay, and cashing in a load of stock options will remain the goal. In our survey, one CFO who says he's happy in his current job is Bob Baer, of software maker Artesia Technologies, in Rockville, Maryland. He's part of a triumvirate that led a management buyout of the former Thomson Consulting division in June. His future plans are to take the company public soon and "grow into a large public entity." Says the 48-year- old Baer, who started his career in General Electric's vaunted finance organization, "For most CFOs, that's the brass ring." He quips that when filling out our survey, "I thought about checking off that I would retire in the next 5 to 10 years."



Prediction 19
Health-care costs will explode.


Retiring is fine; just don't get sick anytime soon. Health-care premiums have been skyrocketing in the past two years, averaging 8 to 10 percent annually, with no end in sight. The underlying factors--increasing drug costs, an aging population, and costly technology--aren't going to disappear anytime soon, either. Because of the tight job market, CFOs are actively managing costs without passing them on to employees. That will only work so long, however. In the end, these costs could cause a full-fledged employee revolt and undo the bull market.



Prediction 20
The downturn will arrive--and all bets will be off.


Such a recession would also require the reworking of certain truths. For example, the whole idea that CFOs may become pure strategists may be moot if the economy demands cost-cutting and divestiture skills. And then there's the one that says intangible assets can only rise in importance, and that current financial accounting and reporting rules are hopelessly outmoded as a result. When the economic cycle next turns, CFOs are likely once again to tout performance measures based on traditional earnings, instead of "cash earnings," "operating earnings," or other yardsticks that exclude write-offs deemed irrelevant to the so-called New Economy. "In a downturn, I doubt management will tell investors to exclude amortization for goodwill and other intangibles," says Jack Ciesielski, publisher of the Analyst's Accounting Observer newsletter. "If their earnings are trading at a multiple of seven, companies will say their earnings look cheap."



Prediction 21
There will always be a tomorrow.


It's 58 days, 12 minutes, and 36 seconds to the end of the century, and Chris Sale is confident. If the ATMs go haywire, the CFO of the Federal Deposit Insurance Corp., the nation's bank deposit guarantor, will surely be among the first to hear. But having closely monitored the final rounds of Y2K compliance by the financial institutions, she doubts that any disasters will come to pass.


"We believe things will go well, and we're ready," says Sale, who, just to be sure, will stop at her Washington, D.C., office on December 31 to oversee one last internal systems check. "My job will be no different the day after the millennium than the day before," she says, "though we'll be over this hurdle, and I'll be very glad to be working on emerging issues."


She's not alone.


Add your own predictions or comments.



Never-Ending Story
Average hours worked per week:


Less than 40 - 0%
40-50 - 32%
50-60 - 43%
More than 60 - 25%



Pay Still A Theme
CFOs who say they are:


Adequately paid - 57%
Underpaid - 43%
Overpaid - 0%



New age dawning...
Routine activities CFOs didn't do five years ago:





  1. Use E-mail

  2. Use Internet for competitive intelligence

  3. Take part in videoconferences

  4. Fly to remote locations regularly

  5. Spend extensive time with analysts

  6. Use computer as daily planning tool

  7. Consider Web-based technology a competitive advantage

  8. Make monthly calls to investors

  9. Bank electronically

  10. Participate in conference calls



Remember When?
Traditional activities CFOs no longer perform:





  1. Use manual spreadsheets

  2. Write letters

  3. Prepare detailed monthly closings

  4. Prepare formal memoranda

  5. Employ a secretary for typing and filing

  6. Prepare daily cash reports

  7. Use Wite-Out

  8. Carry a hard-copy planner

  9. Prepare tax returns manually

  10. Retain paper documentation



Brush-Up Time
Skills/experiences CFOs plan to develop over the next 5­-10 years:


Technology - 42%
Operations - 16%
People - 16%
Communications - 16%
Financial - 9%

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