Are you tired of receiving transformation updates expounding the top 10 reasons for failure or the top 5 considerations that drive transformation? If you are, then read on and learn something new. The need to transform is nothing new, but the drivers for transformation are changing.
Joseph Schumpeter, widely regarded as the most important economist of the 20th century, popularized the term “Creative Destruction”, sometimes known as Schumpeter’s gale. This term is used to describe the disruptive process of transformation that accompanies innovation. Schumpeter is noted as saying “Capitalism is by nature a form or method of economic change and not only never is but never can be stationary... that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” This process of Creative Destruction results in the fact that change is inevitable.
This white paper is intended to help you understand how CFO’s are preparing for the next wave of change and to suggest focus areas that can help your organization position itself to a competitive advantage. We call this Transformative Destruction, which means eliminating or minimizing the activities that are not aligned with the strategic direction of the organization.
The pressure for organizations to trasform and adapt is increasing due to changes in the economic environment, the increasing influence of regulators, and the fluidity with which information can be shared across your ecosystem of customers, employees, partners, and competitors. Schumpeter likened capitalism to “a perennial gale of creative destruction.” In other words, innovate or be destroyed. The pace of this need to adapt and transform is increasing for companies not decreasing as can be seen by the raw data relating to the amount of companies who on average dropped out of the Fortune 500 annually.
With the financial economic crisis that took hold in 2008 it is likely that the number of companies falling off the list would have only increased. Since the onset of this crisis, most articles on finance transformation have been focused on cost cutting. Many finance organizations have been cut to the bone in order to survive the austere environment that has been prevalent recently. This has often resulted in finance organizations that are understaffed and under skilled, not a good combination.
We are starting to see a significant shift in why organizations are undertaking transformation activities. Now CFOs are exhibiting cautious optimism which is resulting in the drive to transform to support growth! Yes growth. According to the Bank of America Merrill Lynch 2014 CFO Outlook survey released in December 2013, “nine out of 10 CFOs said they expect their companies to increase or maintain the size of their workforce next year.” Additionally, the Accenture 2013 CFO survey, released in late 2013, indicates that 61% of CFOs projected 5% or more growth in revenue by 2015. Furthermore, over 25% projected greater than 10% growth.
- Will your organization be ready?
- Are your analytics capabilities market focused and predictive?
- Is your risk function aligned to promote profitable innovation?
- Does your finance staff understand business operations or do they mainly have experience in Finance operations?
- Does your organization track results of strategic initiatives and have a closed loop process that can quickly sense misalignment of your strategies and the direction of the market and apply those learnings to future initiatives?
Many CFOs have difficulty in remembering a period of time when growth drove operational decisions for the finance organization. However, most CFOs surveyed are gearing up for growth and many feel that acquisitions will be needed. The Bank of America Merrill Lynch survey mentioned above indicates that more than 25% of CFOs said they expect their company to acquire anothercompany. Of those executives, most expect to acquire a competitor vs. a supplier or distributor.
You will likely need different capabilities than you have been focusing
on over the past few years.
As previously mentioned, most CFOs have focused on cutting costs over the past 6 years, few have dramatically improved their organizations ability to identify, onboard and digest acquisitions. As the economy starts to hit an uptick, the war chests and financial reserves will be deployed in an effort to capture market share. CFOs need to be ready to support the organization in the most effective manner possible. Given the degree of uncertainty in the marketplace a good deal of the support CFOs can provide has to do with improved analytics and predictive modeling so that risk analyses and tradeoffs can be better evaluated by the business. Improved capabilities in personnel, tools and technologies can help the finance organization to better understand performance, sense risks and opportunities, and inform and shape the investment decision making to best position your organization for growth.
Most organizations lack the follow through and discipline necessary to track the results of their investments so that there can be a structured process with defined criteria for ongoing allocation of capital to investment opportunities. Given constantly changing economic conditions, CFOs must be able to evaluate those scenarios and deploy a disciplined approach for managing the investment portfolio. This includes identifying the points at which it is appropriate to abandon investments that used to be considered priorities. Finance organizations with strong analytic capabilities are better positioned to provide their companies the performance visibility necessary to support profitable growth.
The CFO organization needs to do more than manage the debt load.
Improve analytics to support the selection of more profitable growth strategies, to predict successes and losses earlier and where necessary correct course to move the ship in the direction of higher profitability, and to improve overall comprehension of performance. In the 2013 Accenture CFO survey the data demonstrates the need to push towards improved analytics.
Enhanced capabilities around merger and acquisition (M&A) support. While organic growth is always preferred, many organizations will seek to enhance growth through M&A transactions. The CFO organization needs to do more than manage the debt load to ensure the availability of capital for acquisitions. The CFO organization will need to further develop the capabilities required for improved support of analysis, targeting, integration methods, experienced resources, and post-deal evaluations.This will require thinking about how to deploy finance resources in a different ways and perhaps even deploying more rather than less resources.
The key challenge is to create strategies that improve capabilities while monitoring performance.
Align risk management activities with innovation. Traditionally, risk management has been seen as a control function and left to manage business activities after decisions have been made. As businesses seek new opportunities to compete and innovate, they naturally face more risk. If an organization is able to integrate better risk management capabilities into their innovation and growth activities, the outcome of these activities should improve.
Moving the focus of risk management from back office to front office is a challenge, but it is critical for CFOs to demonstrate they can shift from a compliance focus to a focus on improving differentiation. Turning a traditionally defensive measure into a strength can enable your company to reach new heights of growth and profitability.
Enhanced benefits realization reporting. After you have selected the growth strategies to deploy, you must track the success of these initiatives and ideally sense, in real time, the necessary adjustments to optimize the strategies deployed. The ability to sense and react to changing circumstances begins during the strategic planning process. If the finance organization is not actively involved in the planning process, the ability to understand key drivers and also to set up key success metrics can be limited. To be more involved in these strategic discussions CFOs must make sure they have the necessary capabilities to build trust with the business.
Given the increasing pressure to innovate and compete, it would seem that the status quo is more dangerous than launching into the unknown. The key challenge facing CFOs today is to develop capabilities that can both better help their organizations analyze and pick strategies that are more likely to succeed and to drive improved capabilities to monitor and confirm performance of those strategies after they are deployed. In survey after survey, most CFOs say they are planning to invest in upgrading the skills of their finance professionals and/or systems to support planning and reporting. Choosing where to make these investments and how to redeploy resources that have been focused for over a decade on reducing the cost of finance operations will be critical to creating the finance capabilities needed to drive profitable growth.
- Advanced analytics focused on growth metrics and visibility.
- Enhanced M&A support to improve portfolio returns.
- Improved alignment of risk management with innovation activities.
- Enhanced reporting to provide a closed loop mechanism to evaluate deployed strategies and inform future strategic choices.
While many of these areas of focus are not new for CFOs, they are not typically aligned with the cost reduction mentality that has been prevalent during recent years. To achieve results in these areas, CFOs will need to make difficult decisions on how to develop these skills. Often the personnel that CFOs have leveraged for cost reduction may not have backgrounds or skill sets that are well suited to these areas. In some cases, training and redeployment may be feasible but in other cases acquiring new capabilities from either new hires or external consultants will be needed. This type of concerted change in core capabilities does not happen overnight. To be successful you will need to continue to focus on all four of the traditional transformation levers: processes, systems, data and people. However, for the past decade the focus of most transformation efforts was primarily on systems and processes and less so on data management and human capital management. Without improvements in the latter two areas, the future capabilities today’s CFO are seeking will not be feasible. By embracing Transformative Destruction today’s CFO can lead his organization away from the focus on cost reduction focus to one of developing the new capabilities that their organizations will need to achieve their growth strategies.
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