Over the past decade, the role of finance has focused often exclusively on reducing costs — and they’ve been successful at it too, reducing costs on average around 30% across all industries.
But research shows this focus is shifting from the traditional accounts management and cost cutting activities to instead a focus on finding and creating value adding activities for businesses.
In other words — it’s time to rethink finance.
This shift from traditional finance activities to value-driven activities is excellent news for businesses, but it isn’t without its challenges. The CFO, alongside their wider finance department, is in a unique position to lead this change and utilise data-driven decisions to improve business performance and productivity.
That’s why in this article, we’ll be looking at:
- How finance functions are changing across businesses
- The challenge CFOs face in developing finance function
- How finance can drive business performance
How Finance Functions are Changing Across Businesses
As we mentioned in the introduction, for the previous decade the primary function of finance departments was to cut costs, something that most organisations achieved.
Research shows the function of finance has moved on. In fact, on average five functions other than finance now report into the CFO. While surveys of CFOs reveal four in ten say they spent the majority of their time over the course of a year focusing on activities besides traditional and speciality finance.
The CFOs who stated they focused on non-finance activities said they spent most of their time over the last year on:
- Strategic leadership
- Organisational transformation
- Performance management
- Capital allocation
- Big data and analytics
- Finance capabilities
- Technology trends (cybersecurity, IT etc.)
- Other functions (risk management, procurement etc.)
Not only did CFOs spend more time in these areas, but they say they developed more value through these other activities.
Only 18% of CFOs said traditional finance activities have created the most value for their company and 22% cite strategic leadership as the area with most value.
This shift to value added activities makes perfect sense given the increasingly difficult, global economic landscape that businesses face. It is no longer practical to keep finance on the side lines, when they have the data, operational knowledge and analytical thinking to drive internal performance.
But this change is not without its challenges.
The Challenge CFOs Face in Developing Finance Function
The barriers to finance functioning as it needs to to drive business performance are vast, but in summary:
- Disconnect between CFO responsibilities and perceived role
- A lack of investment in new data and automation technologies
- A lack of available talent and training
- A dated finance operating model
- Challenging the status quo of strategy
A Disconnect Between CFO Responsibilities and Perceived Role
There is a disconnect between how CFOs view their role and what other C-suite executives expect of them.
From the above, we know the need for CFOs to be involved and even lead business strategy and to dedicate more of their time to this aspect in order to add value to businesses.
Most CFOs and C-suite executives agree that CFOs are significantly involved in bringing deep financial expertise to boardroom discussions, as well as focusing these discussions on the creation of financial value. But while 79% of CFOs state they're significantly involved in allocating financial resources, only 29% of other C-suite executives agree.
In a similar vein, another study reveals 51% of finance organisations are involved in setting strategy, but only 17% are seen as leading it.
This research highlights a clear need for the role of the CFO to develop and for that change to be communicated to the rest of leadership to allow finance leaders to better develop strategy.
A Lack of Investment in New Data and Automation Technologies
It's apparent to all those within finance, and outside of it, that businesses have entered a new age of technology and automation in the Fourth Industrial Revolution.
Finance technology in particular has developed so that many of the transactional activities that used to take up so much time are now almost exclusively automated. But the adoption of this technology has not logically led to the adoption of the next wave of financial technology.
Less than one in three CFOs believe their company has the capacity to be competitive in their digitisation of business activities.
A separate study reveals that only 10% of organisations have widespread use of reporting and predictive tools to aid data led insights to create value.
This gap in investment in new data technologies presents considerable challenges for CFOs and finance departments in driving business performance. Without investment in advanced technologies, finance will struggle to identify areas of the business that could create the most value.
A Lack of Available Talent and Training
The new CFO and the new function of finance needs to look beyond the static job descriptions of finance currently.
To strategise effectively, CFOs increasingly need a sense of commercial awareness. In fact, commercial acumen is ranked as the number one competency required in developing finance business partnerships.
Looking beyond the CFO and into the wider finance department presents new challenges too. There is a global shortage of data scientists and analysts. But these skills are vital in being able to digest and action the insights available from machine learning and AI.
A Dated Finance Operating Model
The new finance technologies we mentioned above allow for more contextual reporting. Where previously, finance departments predominantly looked at internal sources of data, new technologies allow this data to be put into a wider external context. For example, profit projections can be contextualised against overall industry performance.
This is great news as it will deliver more accurate reporting, allowing for better planning. But with it come new challenges. Current finance operating models lack both the data management practices and the departmental agility to react to wider contextual changes effectively.
Annual, or even quarterly reporting, does not allow for sufficient reactivity to changing economic circumstances — and we've all seen over the last year how quickly those circumstances can change.
Challenging the Status Quo of Strategy
More than 50% of a company's growth comes not from internal performance improvements, but simply from functioning in markets that are doing well.
It makes sense then, that when it comes to business strategies, companies allocate 90% or more of their resources to the same projects and activities as the last year, regardless of changes in environment.
CFOs and finance departments face the unique challenge of changing the status quo for business strategy. Even with data-driven insights, they will still need buy-in from all other stakeholders and leadership to actually be able to lead these changes.
How Finance Can Drive Business Performance
Though the challenges are plentiful, there is much finance departments can do to tackle them successfully. The following steps are a good start:
- Develop the role of the CFO
- Invest in modern technologies
- Change the finance operating model
- Identify and target performance drivers
- Collaborate with the rest of the organisation
Develop the Role of the CFO
The CFO is at the helm of the financial ship. Without their direction and guidance, all other efforts will lack direction and clarity.
The CFO then needs to champion these changes as a finance leader. They need to guide the wider department and business in focusing on value added activities.
Vanessa Simms, CFO of Grainger, recognises this shift in role:
“Traditionally a CFO has been about stewardship, performance management, whereas now I think fundamental to the role is being a good business partner, helping the business make the right decisions, and helping to execute strategy. I see that as fundamental to the CFO role."
CFOs then need to move from leading just the finance department to a more holistic position of leadership. This isn't a challenge they can face alone and represents a need for wider business hierarchies to shift and allow for better data-driven strategies to take prominence.
To achieve this, the CFO must possess a variety of new skills that were not formerly associated with the role, with the top CFO skills cited as:
- Excellent communication skills
- Wider people skills
- Leadership skills
- Commercial acumen
- The ability to support and also challenge the CEO
- Analytical and strategic skills
Invest in Modern Technologies
This step is a little simpler. Companies cannot hope to remain competitive in a digital age unless they invest in new technologies that help them drive business performance.
The technologies that are revolutionising finance are vast, with many new contenders to the scene. CFOs and finance departments need to have a good understanding of the finance technologies that can best benefit their businesses, as well as the backing from other C-Suite executives to invest in them.
Advanced analytics can allow finance departments to make more effective, reactive decisions. As such, it’s important that finance departments play a clear role in managing data and should be a key player in data strategies.
Where possible, technologies that allow laborious tasks to be automated should be invested in, allowing staff more time to dedicate to strategic tasks and innovation, driving better internal business performance.
Change the Finance Operating Model
The purpose of finance is now to drive performance, but the current finance operating model is static and allows for little agility or reactivity.
Finance departments need a new operating model. They need to be able to work faster and more dynamically so that when data highlights new opportunities for performance, teams can work reactively to plan the steps needed to maximise those opportunities.
Though one operating model cannot fit all businesses, there is a strong argument that the finance operating model could look more akin to the common IT operating model. These typically consist of flatter hierarchies of teams with agile working principles, allowing for high performance working.
At the same time, finance departments need their staff to have the right behaviours for the new finance function, as well as the correct skills for the future. To address these, finance departments, alongside HR, can use selective hiring techniques to hire for the behaviours to best suit the role and wider company. So for example, instead of hiring solely for analytical skills (which can be taught), companies can hire those who display change agent behaviours instead.
Of course, there is still a need for analytical skills within finance, as well as a more pressing need for advanced data analytical skills. Businesses must invest in their employees' skill development throughout their career to ensure the finance department has the right skills and behaviours to produce the best results.
Identify and Target Performance Drivers
With the right technologies, team and leadership, finance departments can move onto this vital step; the switch from cost reduction strategies.
Cost reduction is a short-term fix. For companies that want to grow in the long-term, it is not a sustainable business strategy. Cost cutting is a counterproductive strategy which often leads to missed opportunities, high operational costs and inefficiencies across businesses.
Instead, the CFO and wider finance department must bring unique insight into where capital allocation is best-used, based on data. They can achieve this by using advanced analytics to identify areas of the business where changes could add value and help grow the business. For example, improving product offerings, growing existing business units, diversifying the business and so on.
Collaborate With the Rest of the Organisation
As clarified above, the CFO must act as a trusted business partner to other C-Suite executives or leaders within the business. But the finance department needs to communicate this across other departments and throughout the wider business. This ensures everyone has the information they need to understand the decisions taken and the reasoning behind them.
Research shows an overwhelming majority of 88% agree that the CFO has a substantial role to play in supporting operations across businesses.
To achieve this, concise and transparent communication is a must. Performance and productivity is everyone’s concern, even if it is led by finance. Working with departments such as IT, sales, marketing and R&D to identify areas where performance can be improved ensures it is a common goal for everyone across the business to work towards.
Finance should present data in an accessible way with the relevant context necessary for departments to have the most comprehensive understanding possible. New technologies with real time data available on interactive dashboards can be helpful in aiding these transparent communications between finance and other departments.
Looking to the Future
From this research, it is clear the change of finance function from accounting to business performance is already underway for many businesses. For businesses that hope to remain competitive, it is imperative that finance is utilised to drive business performance through data-driven decisions. CFOs play a key role in implementing these changes and guiding businesses into a more productive and profitable future.