What Are CFOs Worrying About?

August 10, 2010
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Not unlike any organizational function – the so-called silos – the finance function under
the CFO is striving to shift their role and purpose to create and add economic value. Their
shift is from bean counter to bean grower and to be a strategic advisor. Increasingly they
have more capabilities at hand, especially business analytics that they have innate skills
with but unfortunately limited time for due to compliance reporting and transactional
handling duties.

Not unlike any organizational function – the so-called silos – the finance function under
the CFO is striving to shift their role and purpose to create and add economic value. Their
shift is from bean counter to bean grower and to be a strategic advisor. Increasingly they
have more capabilities at hand, especially business analytics that they have innate skills
with but unfortunately limited time for due to compliance reporting and transactional
handling duties.

What are CFO’s current concerns? A recent survey of 1,102 senior financial executives by CFO.com is described in an article Stuck on Hold. Its source is the Duke/CFO Global
Business Outlook Survey administered by researcher John Graham of Duke University.
The survey of CFOs from Europe, Asia-Pacific and Western hemisphere countries
addressed both macro-economy concerns and localized concerns about their own
organization. The lists of these concerns appear in the lower right corner of the Weblink.

Key survey findings
Not surprising and now routinely reported in the media, employers are cautious and
delaying hiring workers until they feel more confidence in demand. During this waiting
game modest increases in demand are being addressed by increased work hours of
existing employees, including overtime, and with temporary contractors. Uncertainty
of demand is the main problem with new hiring, and it ranks as the CFO’s number
one macro-economy concern. Other macro-economy concerns are federal government
policies, price pressure from competitors, financing interest rates, and global financial
instability.

But let’s move on to the survey findings related to CFO’s own companies – issues that
an organization can exert some control over. Each of the concerns can be addressed with
enterprise performance management solutions with each methodology embedded with
business analytics of all flavors.

• Ability to maintain profit margins – This is a CFO concern that the finance function
can certainly contribute to assist and arguably even to improve margins. An obvious
assistance can be by providing the sales and marketing functions with progressive
managerial accounting for profitability reporting and analysis that applies activity-
based costing principles. This information assists with answering questions like which
type of customer is attractive to retain, to grow, to win-back and to acquire, and which
types are not attractive? Then additionally, for the attractive types, how much to spend
– actually think of as invest – retaining and growing each customer micro-segment.
After all, it is an optimization game since you can over-spend on loyal customers and
destroy shareholder wealth yet in contrast under-spend on marginally loyal customers
and risk their defection to a competitor. For operational cost reduction and future cost
avoidance, mainstream process improvement initiatives like lean and six sigma quality
management but good cost information aids these teams beyond how to think to where
to think.

• Ability to forecast financial results – Two keys to effective financial projections
and rolling financial forecasts are (1) accurate operational forecasts, and (2) driver-
based managerial accounting that models cause-and-effect relationships between
demand volume / mix and their required resource capacity and spend. Analytics-
based performance management provides both keys. Improved forecasting comes
from advanced analytics software with dynamic best-fit (i.e., correlation) choices of
algorithms. Converting operational data to its reflective financial account – because
that is what managerial accounting does – is accomplished with modeling. And
with advanced analytics, scenarios based on varying probabilities of the demand
estimates can be calculated to see the likely ranges of forecast financial results.

• Maintaining morale/productivity – A problem all organizations suffer from is their
imbalance from how much emphasis they should place on being smart rather than being
healthy. Most organizations over-emphasize trying to be smart by hiring MBAs and
management consultants with a quest to achieve a run-it-by-the-numbers management
style. These types of organizations miss the relevance of how important it is to also
be healthy – assuring that employee morale is high, employee turnover is low and
also assuring that managers and employees are deeply involved in understanding
the leadership team’s strategic intent and direction setting. This is where enterprise
performance management’s strategy maps, balanced scorecards (strategic KPIs),
and dashboards (operational PIs) fit in. They align employee priorities, projects, and
behavior with the executive team’s strategy. Healthy behavior improves the likelihood
of employee buy-in and commitment. (My employer SAS was awarded by Fortune
Magazine as the 2010 #1 Best Employer, so I have some appreciation for this CFO
concern.)

• Cost of health care – This CFO concern is obviously a thorny one. It involves a nation’s
policies and all sorts of special interest groups. However to the degree that the health
care and insurance industries can self-apply performance management with business
analytics to improve, then the costs of covering health care benefits to the CFO’s
organizations can be kept in check.

• Working-capital management – This CFO concern involves balance sheet elements
including customer accounts receivables, inventories, and vendor accounts payables.
Analytics aid in evaluating and monitoring the creditworthiness of customers and
vendors. A substantial lever for inventory management can come from more accurate
forecasts of demand (using supply chain analytics) to deliver right-time, right-place and
right-quantity all the way to the individual stock keeping unit (SKU) level of each store
and its shelves by size, by color, or by whatever the mix is.

Analytics-based Performance Management
What surprised me from the survey was the absence of strategy execution as one of the
top five company-related concerns. Other surveys have listed this as a top ranking issue,
and Drs. Robert S. Kaplan and David Norton have been consistent broadcasting this need.

I referenced this in concern in the third concern above. Perhaps I am wrong and am
overstating its importance. Alternatively, perhaps CFOs are a bit myopic or feel that
strategy execution is not their job but rather that of the CEO or Managing Director.
The CFOs listed productivity as their concern. In my opinion good organizational
effectiveness and processes will never overcome a poor strategy or the inability of the
organization to implement it.

Links:

http://www.cfo.com/article.cfm/14508723?f=search

http://www.cfosurvey.org/

Gary Cokins, SAS  
919.531.2012  
Cary, North Carolina, USA
http://blogs.sas.com/cokins

Review books I have authored and webcasts / podcasts at:
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