How CFOs Prepare Their Finance Organization for the Challenges of the Future

While it was previously enough to have funds, internal figures for management, and the annual financial statement under control, the demands made on today’s chief financial officers (CFOs) has undergone a huge change. Instead of working in the background, CFOs now find themselves in the thick of the action.
The requirements relating to when the financial figures are available have increased significantly, for example. At the same time, accounting standards such as IFRS or US GAAP have become more complex, and the need for accurate and legally secure compliance has grown. The Sarbanes-Oxley Act, the reaction of the US government to the corporate scandals at the beginning of the decade, forces companies – not just those listed in the United States – to attach far greater importance to the subject of corporate governance and their risk management solutions.
At the same time, financing instruments have become more and more complex, but in return offer greater opportunities. Professional and innovative financing strategies are needed to secure financing at the lowest costs possible.
Finally, the quality of capital market communication is becoming increasingly important for the development of a company’s shares. This not only requires accurately drawn-up figures but also means that the CFOs must develop a communication strategy and must actively communicate with analysts and investors.
In addition to these tasks, which primarily concern the CFO’s external perception and the CFO’s external role, a number of internal factors are contributing to the changing requirements and reorientation of the CFO’s internal role.

Costs down, quality up

Every enterprise today is under pressure to permanently improve its own efficiency and effectiveness. And just that is also expected from the internal service provider “Finance&Control” – meaning nothing else than: costs down, and quality up.
Because of more complex enterprise structures, the requirements relating to management processes that link the head office with business divisions with global responsibility and with local or regional management units have increased dramatically. It is therefore no longer enough to merely provide figures. Finance must also design management processes, take on the role of a facilitator in planning and performance meetings, and assume joint responsibility for results achieved.
CEOs also expect their enterprise to react more effectively and quickly to changing customer needs. For this, the CFOs must provide the necessary controlling concepts to enable dynamic performance management “at the rhythm of the business”.
Finally, pure cost reduction strategies alone can no longer satisfy investors’ expectations for increasing enterprise value. “Profitable growth” is therefore at the top of the CEO’s agenda today, but a growth strategy extends far beyond the classical domain of finance. Finance must therefore cooperate with other support units in new ways in order to find innovative solutions – for example with the Marketing or Human Resources department. Above all, though, the finance division must work more closely with management and the business units – on strategy development, identification of growth drivers, and business development.

The new role of the CFO

All these new demands put the CFO under increasing tension between two key functions that he or she has to fulfill. On the one hand, the CFO is the guardian of internal and external governance and compliance and ensures professional risk management, thereby securing the enterprise’s reputation on the financial markets, among regulatory authorities and other important stakeholders. On the other hand, the CFO is a service and sparring partner for management and the business units. He or she supports this by helping to manage and control business and in decision-making, and shares responsibility for the outcome.
While the first function is a continuation of the CFO’s traditional role as guardian of “financial order,” the second function poses the real challenge for the CFO today. It requires the CFO to fundamentally change the perception of him or her self, and that of his or her range of tasks – away from being the guardian of figures and funds and towards offering a service-oriented and professional support function that is geared towards the needs of internal “customers” and external stakeholders.

Finance transformation

Developing a Finance Transformation-Strategy
Developing a Finance Transformation-Strategy

How are CFOs tackling the transformation of their function? First, they need to develop a future-proof and clear role profile (“finance mission”) and a strategy for finance. To this end, the most important internal and external stakeholders are asked about what they expect finance to achieve now and in the future. It is also necessary to compare the enterprise’s own finance organization with the “best practice benchmark.” The potential for improvement is then determined, priorities are set, and the finance strategy and its strategic work packages are defined.

Concept for the new finance organization
Concept for the new finance organization

In a second step, a suitable concept must be drawn up for the future finance organization. In this process, it is important that decision support and business-related services are directly integrated into business. These can be accessed as required as self-services via an intranet portal, possibly combined with local business partner support. In addition, transactional processes will be automated for the most part and concentrated as shared services or handed over to an external service partner. Other services that are not repetitive and cannot be automated – specialist tasks such as auditing, tax, treasury management, or risk management, for example – will be bundled in “centers of excellence,” a type of shared services centers for specialist services. One kind, the decision support services, are available to the business or local business partner support as a type of second-level support.

One important element of the transformation work takes place during the re-engineering of finance processes. This is carried out in subprojects, which are coordinated by the finance transformation program manager. These subprojects are roughly divided into “transactional processes,” “specialist service processes,” and the factors that support the transformation process – the “enablers.” With regard to the enablers, HR development often poses a large and significant challenge in many finance transformation projects, because the new rules require not only the CFO but also his or her staff to learn new skills and adopt new modes of behavior.

CFOs at the crossroads

Many CFOs have already made great progress in improving the efficiency of their finance organization and in implementing the procedures to comply with new (external) regulations. However, only a few CFOs have yet successfully taken the next and more important step – honing the finance function so that it is more effective, adds value, and becomes a true business partner.
Inrecent years, due to the challenge to comply with new important regulations, CFOs have been largely concerned with tackling governance aspects in their classical “guardian” role. If they are now not able to establish themselves as an effective business partner quickly, for example by improving the decision support services, they run the risk of losing influence in the organization, not least in view of the growing number of outsourcing options an enterprise now has in the area of transaction processes. In view of this situation, there is the danger that the gap between the “world class“ CFOs and the rest will widen, rather than reduce.

Jürgen H. Daum
Jürgen H. Daum