The Role of CFOs in Business Transformations

CFO involvement can lead to better outcomes for organization-wide performance improvements.

FREMONT, CA: Often, managers begin a business transformation after deciding that performance needs to change. Such changes are extensive initiatives that span the entirety of a business, testing the foundations of every organizational layer. That covers the most fundamental procedures in R&D, purchasing, production, sales, marketing, and HR, among other areas. Additionally, the impact on earnings might be significant—up to 25 percent or more.

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The value of a transformation can only be measured with a useful baseline; managing this process is a natural responsibility of the finance function. If the market expanded at the same rate, an effort that boosts a company's earnings by USD 200 million could seem successful. Additionally, performance may be impacted by a variety of occasions and actions unrelated to a transformation in progress, including M&A, plant openings or closings, changes in the price of raw materials, and even unanticipated business interruptions or significant restructuring costs. Although it seems like a straightforward relationship, it's frequently misinterpreted and inadequately explained.

It is natural for the finance department to own this part of the process since baselines are necessary for valuing both individual initiatives and the overall transformation process. However, there is not a set formula that works for every business, and changing a baseline frequently entails a lot of moving elements.

For instance, management in one manufacturing company had to establish a baseline that took into account shifting commodity prices, a predicted drop in sales volume and pricing in one area, and the impact of new plants and facilities in another. To choose which assumptions to incorporate in their estimates of how a firm is likely to operate in the absence of a substantial transformation, CFOs must eventually apply their technical expertise and judgment. That, therefore, serves as the standard against which the business evaluates its success and the means through which it shares its performance both internally and with investors.

Such endeavors frequently demand complex analysis to value. While some transitions involve drastic adjustments, the majority significantly increase the margin of current operations.

To do that, one must comprehend the marginal economics of the company or the costs and advantages of producing one extra unit of a good or service. Managers have the power to reroute an entire transformation when they have a strong grasp of the marginal value of enhancing each of the activities that contribute to performance. For instance, the value of marginal output was substantially lower than predicted when it was assessed by the CFO of a natural resource business.

The connection between variable expenses, fixed costs, and income had changed with significant ramifications for trade-offs and on-site decision-making. Using this knowledge as a guide, the CFO's coaching assisted the company in changing its transformation goals from boosting production at a less profitable location to developing operational flexibility that supported more profitable sectors of the business. Managers were aware that the corporation as a whole would prosper even if this link in the value chain would produce lesser earnings.

Finance experts can assist by examining a company's reporting of progress and ensuring that objectives are understood by everyone in the organization. This could involve, for instance, making sure that budget commitments are made formally to reflect transformation priorities. Translating conventional P&L accounts into the underlying metrics that influence their value, like volume, foreign exchange rates, headcount, and productivity, also involves accounting for traditional P&L accounts like the cost of goods sold and overheads. This has provided managers with a much more detailed understanding of how value is created.

Many CFOs are preparing for further change in the future because of the advancements in technology and their expanding duties. They realize that they must evolve to be successful.

In addition to their regular financial responsibilities, finance directors say that there are additional demands on their time, such as managing cybersecurity and automating crucial business processes. Although these increased responsibilities give finance directors the chance to set themselves—and their businesses—apart from rivals, many CFOs feel that their organizations are not yet equipped to handle these challenges. The majority of CFOs are aware that performing their regular duties is no longer sufficient. Instead, the findings suggest that for CFOs to continue to add value as their responsibilities change, they must expand their business knowledge, take on more leadership responsibilities, and reconsider how they typically deal with pressure from outside sources and look for new investment opportunities.

Most CFOs are aware that their jobs are evolving and plan to change course as a result. The majority of their time in the previous year, according to about four out of ten CFOs, was spent on tasks other than standard and specialty finance. Among these additional responsibilities, CFOs frequently concentrated on organizational change, strategic leadership, and performance management.

CFOs believe they can add value in a variety of ways, not just by carrying out their conventional responsibilities, according to respondents in other roles as well as CFOs themselves. 18 percent of CFOs claim that their regular financial work has added the most value to their organizations over the previous year. Others, however, are more likely to see strategic leadership (22 percent) as the area in which they have added the most value. CFOs should spend more time on strategic leadership, organizational transformation, performance management, big data, and technological developments in the coming year rather than less time on traditional finance duties. However, many CFOs are on high alert due to their nonfinancial obligations, which also include those related to technology.

Less than one-third of professionals believe their businesses have the skills necessary to compete in the digitization of commercial activities. Less than half of respondents believe their firms are adequately or very adequately positioned to compete in terms of cybersecurity.

Top executives and CFOs both agree on the value that finance chiefs provide to their organizations. Both parties largely concur that CFOs are active team members when it comes to financial matters. But as the CFO's position changes, so do other business executives' expectations of them. The results demonstrate that CFOs perceive certain of their contributions differently from other members of the C-suite, which is not surprising. The majority of CFOs and other C-suite executives concur that their CFOs play a significant or disproportionately large role in bringing extensive financial knowledge to discussions, focusing group discussions on the creation of financial value, and acting as the executive team's spokesperson concerning financial stakeholders.

The findings, however, indicate that there may be a disconnect between the leadership that CFOs currently exhibit and what other business executives anticipate of them in areas other than finance. For instance, 72 percent of CFOs claim to be the executives most or considerably active in allocating personnel and financial resources. Only 29 percent of other C-level executives, however, agree with this statement about their CFO peers. Compared to their fellow executives, CFOs judge the performance of their finance functions differently. Only 56 percent of other C-level executives agree that their finance departments are effective, compared to 87 percent of CFOs. Additionally, these groups reflect contrasting opinions regarding the difficulties facing finance functions. Others in the C-suite frequently point to a lack of innovative mindsets as a barrier to effective finance function performance, but CFOs are more likely than their counterparts to cite a lack of resources and capabilities.

CFOs are often aware of the need to depart from conventional or textbook procedures. However, few people claim that their businesses make decisions in an inventive manner. About two out of every three CFOs claim that their organizations do not currently possess the agile decision-making, scenario planning, and decentralized decision-making capabilities necessary to remain competitive in the years to come. Similar to this, many claims that their organizations apply fundamental financial controls when making decisions, but few mention the usage of more sophisticated procedures.

Most CFOs who were questioned about their capital allocation procedures concurred that their organizations set capital-expenditure budgets at the project level, used equivalent KPIs across business units, and tracked the outcomes of particular projects. These procedures assist in building a solid capital allocation process from the ground up. However, fewer CFOs report employing strategies that would encourage additional learning or innovation. Only 30 percent of CFOs report that their organizations formally examine investments made three to five years prior, and only 25 percent report utilizing innovative techniques to find funding opportunities.