Beyond the Numbers: CFOs Play a Greater Role in Strategy
The
2008 Global CFO Survey, developed by IBM with the Wharton School and
the Economist Intelligence Unit, found that the transformation of business
models, global operations, and new risks are demanding more from financial
leaders. The study, based on a survey of more than 1,200 CFOs and senior
financial executives, found that, as "truth-owner," the
finance leader can help shape operational decisions and strategic direction
for the company.
"The CFO used to be concerned with issues such as interest rate risk and currency risk," says John Percival, academic director of The CFO: Becoming a Strategic Partner, who helped IBM in developing the survey. "Now the risks are greater and more complicated — and the implications are greater. How do we handle this new world of risk management?"
The CFO survey found that two out of three enterprises with revenues of over $5 billion faced material risk events in the last three years, and 42 percent of them were not prepared to deal with these risks. The types of risks are also changing — 87 percent of the risk events were strategic, geopolitical, environmental, operational, or legal. The study found that managing risks was one of the key differentiators for high performers in revenue and stock price growth, along with integrated information systems.
Risky Business
The survey notes that risk management is concerned with "getting to the truth." The access of the CEO to core performance data and other measures puts financial leaders at the center of this process. With their fingers on the pulse of the operation and the environment, CFOs also have a critical role to play in shaping operational decisions and strategic direction.
Percival says some organizations have a chief risk officer or a department that handles risk, but because risks are an integral part of financial and strategic decision making, risk is often the direct responsibility of the CFO.
Strategy and risk are inextricably intertwined. For example, Percival points to the lean manufacturing strategy used by Toyota and other companies. By having parts delivered "just in time," there is less of a need to carry expensive inventory. But this creates new risks of disruption. For example, an earthquake in western Japan knocked out a small supplier and shut down Toyota's production. "When the lean manufacturing system was introduced, should the CFO have asked, ‘What if there is an earthquake in western Japan?' It is the job of the CFO to raise these questions."
A Delicate Balance
The challenge for CFOs in taking on these new responsibilities is that they also still have to do their traditional job of financial reporting and management. The financial reporting, especially with new demands from Sarbanes-Oxley and other regulations, is backward looking. The work in strategy and risk management is forward looking, anticipating risks and opportunities. "The CFO is torn in two distinct directions," Percival says. "The survey revealed that both roles — strategic and operational — are important. We don't want to minimize the importance of ensuring the finance organization is performing effectively, but CFOs also need to be effective in this other area of strategy."
In many organizations, the CFO is also taking on increased responsibility for operations and is sometimes assuming the responsibilities of the chief operating officer (COO). "There is some data suggesting that the job of COO is starting to disappear and the CFO is starting to take on a lot of the role that used to belong to the COO."
With the role of the CFO in flux, the impact of the financial leaders on strategy often comes down to interpersonal skills in working with the CEO and other executives in the C-Suite. Relationships between CEOs and CFOs, while extremely important to the success of the company, are all over the map. Some have a very close partnership in setting the strategy for the company and executing it. CFOs can challenge the strategic direction of the CEO. On the other hand, some autocratic CEOs, particularly company founders, may expect the CFO to perform the function in a non-threatening way.
These issues take CFOs a long way from finance and accounting. "Persuasion and influence are important in questioning the CEO's strategy," Percival says. "The roles are not clearly defined in many cases."
Speaking Truth to Strategy
The CFO brings an important perspective to the table. "In our executive education program, we want to empower CFOs to feel that they should be sitting at the table. They have a perspective that the other people at the table don't have. By blending in their financial perspective, they can find more effective ways of achieving the strategy," Percival remarks.
The CFO can be the voice of reason in strategy formulation. Many times, leaders in organizations are excited about a particular strategy because of its potential for growth. It may be clear that the plan will be a success — for someone. But the CFO can ask the question: Will the strategy, even if successful, work for their company? What capabilities will the company need to carry it out? Do they have the resources to execute it? Will the company receive high enough returns in a reasonable time period? "The CFO can help strike the right balance between growth and profitability," Percival says.
The role of the CFO is particularly important in executing strategy. Finance people have perspectives on measures such as key performance indicators that need to be tied to strategy. "These indicators can help you see if your strategy is working or not," Percival says. "If this perspective doesn't come from the CFO, it is not going to come from anyone else in the organization."
