The CFO: Becoming a Strategic Partner

Strategy is the intersection of your customers, your competition, and your company. It is a roadmap for where you want to compete as an organization and how you plan to win in that space.

To craft a strategy, you need to start with an in-depth market analysis. Identify the customer segments that are available, which competitors are already in those spaces, and how you want to position your business in order to be successful.

A strategic plan converts your strategy into action and includes both resource allocation and execution. It clarifies the investments you will make in order to execute on the strategy over a period of time.

There are financial and nonfinancial performance metrics that can be linked together to provide a snapshot of overall performance. Financial performance measures include margin, return on capital, and capital productivity. Nonfinancial measures include data about employees, teams, and customers. Taken together, these metrics provide a view of your performance internally, externally, and from a shareholder’s perspective.

CFOs typically migrate from roles in accounting, bookkeeping, or treasury, so they need to be prepared to transition to a more strategic mindset. In addition to more expected responsibilities such as closing the books and performing internal audits, they must support and partner with the CEO in decision making and work with the board by providing a financial perspective of the business. The role of CFO also includes identifying, engaging, and retaining talent — skills most of those new to the role have not yet developed.

New CFOs’ responsibilities also include engaging with business leaders such as the head of marketing or an international business unit — leaders over whom the CFO does not have direct authority. CFOs must also work with the board of directors, external partners, and other stakeholder groups that represent a range of perspectives. Bringing them to a consensus that meets the company’s goals without direct authority requires strong influence and persuasion skills.

Strategy is about making resource allocation and execution decisions today that support the company’s goals and will impact the business in the long term. The finance team, led by the CFO, quantifies the investments in resources both today and in terms of their future impact.

Because markets and customers change so quickly today, no strategic plan lasts for more than a few months. Companies instead look to make small bets that will give them the ability to compete in multiple scenarios, or options, tomorrow. From a financial perspective, the CFO needs to understand how to value those options using Real Options Analysis (ROA) or Real Options Valuation (ROV) techniques, which are very different from traditional capital allocation.

A critical value driver for every company is its ability to grow. Often, they won’t have the tools, skills, or other capabilities needed to compete. Building them internally can be slow, so, although it is expensive, acquisition is sometimes the preferred method for getting necessary capabilities. Acquisitions are less about becoming a larger company and more about amassing the right tools, skills, and customers needed to compete successfully.

Many companies hold on to poor performers for too long. Evaluating your portfolio should be a continuous process to find businesses that either lack momentum or are no longer a good fit. Finding a better owner in these situations makes sense, because the problems get worse over time.

As markets move quickly, consumer purchasing behaviors change, and competitors build new capabilities, strategic planning must be a continuous process. Instead of developing a five-year plan, companies must stay true to their core — the way they differentiate and position themselves in the market — while developing smaller sets of strategic initiatives more frequently.

There are two levels of strategic planning, both of which are important. The first is corporate strategy, which is done by the senior leadership team including the CFO. This strategy is about what the overall portfolio should look like and how individual business units are synergistic with one another and the overall strategy.

The second level is business unit strategy, which is more about positioning the business in terms of the competition and customers. The CFO is responsible for partnering with business units in creating their strategies because they might not have the necessary skills. They must make sure the business units articulate their strategy for positioning themselves and that their strategies are consistent with the corporate strategy.

The most powerful ways that large companies can grow are pivoting toward momentum and innovating. Markets are always shifting, and customers are always changing, which means some businesses fade while others have momentum. Companies must continuously scan for pockets of growth in their markets and reallocate resources to capture them.

Innovation means either creating markets that didn’t exist before or providing better service in existing markets to capture share over time. One drawback to innovation is that a new product or customer experience can be easily imitated, but it remains a powerful avenue for growth.

Growth is defined and measured differently depending on the company. The easiest place to start is with revenue, but in some industries revenue is too volatile, so another measure must be used. In general, measuring growth is about whether a company is getting bigger over time, capturing more markets and customers. For example, in oil and gas, because gas prices fluctuate, growth is driven (and measured) by the ability to explore and find oil.

Profitability is based on price and cost: can you generate a price higher than your peers through better products and services? If you meet customer needs more effectively than your competition, you can charge a premium price and increase profitability.

Profitability is also dependent on productivity and utilization: how good are your employees at what they do, and do they have enough opportunities to do it often? Profitable companies are both productive and highly utilized.

Different metrics are used for different parts of a business. In terms of customers, a key metric is retention rates. For internal employees and teams, metrics involve engagement, turnover, and productivity. Financial metrics include revenue growth and return on capital.

CFOs are responsible for hiring, engaging, and retaining a group of direct reports of up to 200 people or more, depending on the organization. They need to set the right culture that prioritizes efficient execution while avoiding problems such as fraud. But they also need to encourage curiosity in addition to closure. World-class CFOs develop a team of talented individuals who are enabled to grow professionally from bookkeepers to consultants. The bar is set high, but the resources are available for team members to reach it.