The chief financial officer (CFO) role is being disrupted by digital innovation, the proliferation of data, a volatile risk environment, increasing regulation and a growing circle of demanding stakeholders. CFOs who don’t proactively define their role in response to these major forces could compromise their ability to shape strategy with the CEO and drive the innovation necessary for sustainable growth.
In EY’s first The DNA of the CFO study, conducted in 2010, we painted a picture of a role that had already broadened to encompass not only traditional financial skills, but also more strategic and market-facing responsibilities. Six years later, in our latest CFO research study, we’ve found that change has accelerated more rapidly than many would have thought possible.
The four forces disrupting finance leadership
Our research shows that it is increasingly difficult to decode the DNA of the finance leader, with profiles and job descriptions becoming more and more diverse. Roles vary depending on the disruptions CFOs and their organizations face, as well as their company, sector, geography and personal strengths.
In this environment, perceptions of what makes a great CFO are harder to pin down, and the expectations of colleagues, including CEOs and supervisory boards, are shifting. This year’s research shows that four new forces are changing the expectations placed on CFOs: digital; data; risk and uncertainty; and stakeholder scrutiny and regulation.
FORCE 1: Digital – Caught in the eye of a perfect digital storm
The challenge for CFOs: Lack of understanding
Among the finance leaders we surveyed, 58% said that they ‘need to build their understanding of digital, smart technologies and sophisticated data analytics’ in order to deliver against their critical strategic priorities.
For CFOs, digital disruption can feel like being caught between the promise of rain and the threat of drought. On the one hand, digitization offers the opportunity for new business models and revenue streams. But on the other hand, digitization makes the organization vulnerable to competition from new players and agile incumbents and creates exposure to new risk.
Changing business models create opportunities for new products and services and recurring revenue streams.
Finance leaders must completely re-evaluate their underlying assumptions regarding business models, pricing, revenue streams and the related financial models.
Technology is helping to transform operations, reduce operational expenditure and support more flexible, scalable systems and processes.
Cyber threats are on the rise. As part of their risk agenda, CFOs must work with the CIO to establish a governance framework for quantifying digital risks, prioritizing and protecting digital assets, and mediating across functional technology silos to create an integrated approach that drives value creation.
To help their organization profit from digital opportunities, finance leaders are using a traditional finance skill: striking a balance between innovation-led growth and prudent risk management. They are collaborating with colleagues to develop their understanding of how the technological landscape is evolving and what strategic investments are needed to encourage and enable innovation and support the business’s growth. Many CFOs are not there yet.
In our research, 58% of finance leaders say that they ‘need to build their understanding of digital, smart technologies and sophisticated data analytics’ in order to deliver against their critical strategic priorities. This is a priority across all sectors, with finance leaders in markets such as media and entertainment and automotive particularly focused on this area.
The CFO’s role in digital readiness
To fulfill their agenda of growing and protecting the organization, finance leaders need to transpose and embrace a digital business model. They must also play a key role in building the organization’s readiness and confidence to act and react with urgency.
Effective finance leaders must:
? Understand the organization’s ability to deliver on its digital strategy. CFOs need to assess their organization’s current digital maturity and understand its key priorities, enterprise-wide digital budget and investments. That way, they can play a key role in helping to make coordinated and focused investments in areas that create real value.
? Build the organization’s confidence and capability to navigate the digital economy. CFOs must prepare their organizations for digital disruptions and help give them the confidence to handle them. Issues to tackle include global tax implications for how goods and services are sold, where companies base their operations, robotics, the accelerated globalization of the world economy, and disruptive new competitors.
FORCE 2: Data – The disruption that will transform finance
The challenge for CFOs: Harnessing the power of data analytics
Data and analytics are crucial for CFOs on a journey to transform the finance function from a reporting entity to a group that guides strategy through business intelligence.
Data and analytics are changing the way CFOs think about business problems, opening their eyes to new opportunities, and challenging accepted and entrenched organizational beliefs.
Data and analytics are changing the way CFOs think about business problems, opening their eyes to new opportunities, and challenging accepted and entrenched organizational beliefs.
Our research shows that 57% of group CFOs believe that delivering the data and advanced analytics for business intelligence and management information will be a critical capability for tomorrow’s finance function. However, many organizations are struggling to turn the promise of data analytics into the reality of improved performance. In a recent EY and Forbes Insights survey of 564 executives in large global enterprises, most admit that they still do not have an effective strategy for competing in a digital world and struggle with getting business users to adopt analytics insights. This presents an important opportunity for CFOs to step in and transform their organizations by turning the promise of data analytics into measurable performance gains.
Finance extends its influence
And finance leaders are ideally positioned to define a role for themselves and the finance function that goes beyond pure finance-related data analytics. There’s no doubt that the CFO needs to be a champion and driver for the use of analytics in all current core financial processes under his or her remit today. But you can start to extend out from that. Financial data, as well as other data, is a key input to many other business decision processes, whether it’s procurement, supply chain, operational-type decisions, or risk management-type decisions. The CFO can be a driver of the application of analytics in many of those areas. Not necessarily ‘owning’ that area, but acting as a catalyst for encouraging and driving the use of analytics in other business processes outside core finance.
Winning data analytics: investing in the human element
In the past five years, 50% of CFOs in our survey have increased the amount of time they dedicate to using advanced analytics to provide insight to the CEO and other senior leaders. As CFOs become more focused on deriving strategic insight from data, they increasingly see the need for investment in the right people as well as the right technology.
Over the past few years, many organizations have spent millions of dollars on technology to mine and manage data, but achieved disappointing returns. This is often because they spend relatively little on drawing actionable insights out of the data and convincing people to use them – that is, the human element of analytics. In order to realize the potential of data and analytics for their organization, CFOs will need to focus increasingly on this crucial – and complicated – area.
The CFO’s role in building better data analytics
To make these efforts into a long-term competitive advantage, CFOs will need to assess the potential disruption for the organization as a whole, and define the role that they and their finance function should play. In some cases, this will mean leading an enterprise-wide analytics capability; in others, it might mean providing crucial inputs. Either way, the CFO has an important role to play in moving the organization toward more business value from analytics.
FORCE 3: Risk and uncertainty – Decision-making in volatile times
The challenge for CFOs: Risk management is becoming a critical finance capability
Managing all types of risk – strategic, reputational, regulatory and cyber risk – are growing parts of the finance remit particularly in larger organizations, where 66% of our respondents say it’s a critical future capability.
Today, organizations and their finance leaders are challenged by a rapidly changing risk landscape shaped by disruptions that include market volatility, hyper connectivity, geopolitical crises, regulatory reforms and cyber threats, to name just a few. Finding enough certainty to be able to make decisions in this volatile risk landscape is a major challenge for CFOs, and they are taking an increasing role in risk management. In the future, CFOs anticipate that the role will be even bigger, particularly in large organizations.
The world we live in is much more connected. Risk events in one part of the world can impact the entire world very, very quickly. CFOs and others need to be thinking about how they keep an eye on the future and what is happening in their markets, in their sectors and more broadly where they operate, so they can anticipate these risk events. We shouldn’t be waiting for something to happen.
For example, a data breach can lead to a disastrous domino effect on enterprise value. Therefore, it is critical for CFOs to understand the cybersecurity that protects their organization’s most valuable data assets and systems, and to know that they are prepared to respond to a breach at any moment.
Toward strategic risk management
However, in this volatile and fast-moving environment, it is difficult – but necessary – for CFOs to find the time to move beyond mitigating the risk implications of decisions that have already been made to managing strategic risk. Managing the risk and return implications of strategic choices that offer potential positive upside can be crucial to driving a growth agenda, and is the key to balancing the tension between the clamor for growth and the realities of the macroeconomic environment.
Our research shows that strategic risk is already an increasing focus for CFOs. Half of group CFOs, for example, say they are spending more time on it today than they were five years ago. However, many finance leaders believe that they need to do more to build their skills in this area. Of the respondents who are focused on risk as their primary priority in the future, 61% say they will need to improve their strategic risk management skills.
Robust strategic risk management requires effort and leadership from a range of leaders in the business. To play their part effectively, CFOs must:
? Think beyond preventable risks. Identify and surface strategic risks that organizations may not have otherwise thought of, including risks whose value-generation potential may outweigh the possible negative consequences.
? Address risk directly. Bring up risk in strategic and business planning discussions, and routinely evaluate the risk profile and its impact on business strategy.
? Make investments in key risk talent. Take the time and resources to recruit talent with the strategy and advanced analytics skills needed to enhance the risk function.
FORCE 4: Stakeholder scrutiny and regulation - The CFO as a public person
The challenge for CFOs: Finding time to manage stakeholders’ conflicting demands
Fifty percent of survey respondents say they will need to improve their skills in managing relationships, including with investors, the CEO, boards and other members of the C-suite.
CFOs are caught between a rock and a hard place when it comes to managing stakeholder relationships. Demands of stakeholders are often in conflict, and CFOs increasingly have to juggle the requirements of regulators with the demands of investors, and other stakeholders.
In our research, 50% of finance leaders say they will need to improve their stakeholder management skills. This is particularly true for emerging markets finance leaders, where the skills to respond to increased scrutiny may not be as mature as in more developed markets.
Relationships with regulators increase in importance
In the past, customers might have had the most significant potential economic impact on a business. Today, intense regulatory scrutiny means that policymakers are an increasingly important relationship for finance leaders.
In a recent EY survey of 1,000 finance leaders, 48% of respondents reported having to comply with more than 10 sets of reporting standards, and a third work with 16 or more reporting systems. In our research, 57% of finance leaders believe that the future finance function needs to improve its regulatory knowledge to keep abreast of a changing and uncertain regulatory playing field. Responding to regulatory scrutiny is a core pressure on the finance leader that is compounded by ever-increasing responsibilities.
The downturn at the beginning of the 21st century was unique in that it was also a time when broad regulatory scrutiny across all industries was increasing dramatically. But today, CFOs also have to worry about areas like digital and analytics – and playing all these new roles – while still having to worry about the increased scrutiny from regulators, from government and from the public. That scrutiny never really went away. The traditional role around stewardship has only gotten harder and more permanently etched into their responsibilities.
Managing the increasing scrutiny and complexity of the regulatory environment will be as much about management of relationships as it is capability. By effectively managing relationships, organizations can collaborate with regulators and play their part in shaping policy.
The CFO’s role in strengthening stakeholder relationships
The high expectations of stakeholders and the increasing scrutiny of regulators are not likely to fade in the future. CFOs will need to practice ways to respond to conflicting demands more effectively:
? Prioritize the stakeholder relationships that are most important. Analyze critical stakeholder relationships and build a strong understanding of what drives them.
? Communicate proactively. With their increasingly public profile, CFOs need to take a strategic approach to managing communication with the media, customers, investors and regulators, either personally or via other parts of the business.
? Tell a consistent value story. In order to be credible and build trust, CFOs need to have a consistent story about the business for all stakeholders.
Strategic considerations: shape your role to support your organization’s strategy
In today’s economy, the rules of strategy and competition are changing. Ambitious competitors from emerging markets are taking on established developed market companies. Established digital players – such as Amazon and Google – are encroaching into different sectors. And newer platform businesses – such as Uber and Airbnb – connect providers and consumers to quickly seize market share and change established competitive rules.
CFOs need to help identify and assess fresh strategic alternatives and help their organization go on the strategic offensive. Five areas are critical:
1. Support innovation and new business models
Many large corporations are turning to collaborations with entrepreneurs and start-ups in order to drive innovation and meet changing customer and emerging market needs. CFOs must play a key role in building successful collaborations, including effective due diligence on potential partners, aligning incentives between the two partners and establishing an effective governance model.
2. Develop and deliver agile strategy
These days, crafting a five-year strategy and setting it in stone is no longer tenable. Organizations need to adapt their strategy to changing competitive dynamics, differing customer needs, emerging technologies and a changing regulatory environment. In short, they need an agile strategy. CFOs must work to develop and deliver these flexible strategies. For example, they can unlock capital and other resources, so they are quickly allocated to the new opportunities offered by a change in regulation or a new customer need.
3. Drive sustained long-term growth
Despite a somewhat improved outlook, the macroeconomic environment remains complex. Companies are struggling with anemic growth in developed markets and slowing growth rates in key emerging markets. There is much uncertainty and volatility about government policy on areas such as interest rates, the potential for inflation, the direction of employment levels and how key markets will perform in the long term. CFOs must help the organization adapt to this volatility.
They need to identify risks as early as possible, managing negative exposures and seizing positive opportunities. In addition, they have the investment flexibility to seize growth opportunities, such as creating new products and services or targeting new markets.
4. Inspire and lead the way with strong purpose and ethics
A strong and shared sense of purpose can help companies meet new challenges and transform their organizations. Articulating a business’s purpose – and its ethical stance – helps people see they are working for something, rather than simply against the competition, tapping into a powerfully motivating universal need. CFOs must help embed purpose in the business by leading through example and also grounding it to practical measurements, for example, aligning performance metrics to the organization’s purpose.
5. Support digital
As we discussed in section one, organizations need to take the impact of digital into consideration in developing strategy, including understanding where the greatest opportunities (and threats) lie.
The corporate strategy delivery also needs to be supported by digital, to increase efficiency and enhance performance. CFOs must act to help the organization to deliver the right digital capability at scale, from striking a balance between near-term targets and the long-term potential of digital investments to building the ROI case for significant technology investments.
Conclusion: mastering the future
The business environment for CFOs is more complex, interconnected and unpredictable than ever.
Digitization, data, stakeholder scrutiny and risk volatility are changing the rules of the game for finance leaders. The impact of these disruptions is seen in the increasingly diverse DNA of finance leaders worldwide, with an accepted definition of the CFO role increasingly difficult to pin down.
CFOs, like all leaders, need to adapt to this increasing complexity, focusing on the attributes and skills that their companies will need to succeed in the future. CFOs need to have a clear view of their own competencies, the role they want to play in strategy and the major disruptions that offer threat and opportunity. If they fail to adapt, they run the risk of being marginalized from the senior decision-making circle.
Of course, the business environment will continue to evolve and change in expected and unexpected ways. But finance leaders can build defenses and take pre-emptive steps to future-proof their role and build finance function capabilities to exploit opportunities and manage risks. Successful CFOs will be those who proactively shape their role in response to the major forces transforming the business environment, and thus secure their place in the inner circle directing the organization forward.