The CFO in Pole Position

Leading next-generation decision-making in a data-driven organization

Mohamed Bouker, Nart Wielaard, Frank Geelen

• Editore: Management Impact Publishing
• Anno: 2020
• ISBN:
  9789462763913
• Argomento: Betriebswirtschaft
• Categoria: Unternehmensfinanzen

The ever-changing business invironment is demanding evermore from Financials and the Chief Financial Officers in particular. In The CFO in Pole Position, the authors pinpoint the current and future challenges for CFO's to take control and keep the organization on course for survival and success.

PART 1

SETTING THE SCENE

The impact of datafication on business and how data can revolutionize decision-making

Chapter 1 An old new role for CFOs

Who is managing the store when it comes to information?

‘Information is a corporate asset to be managed by a top-ranking executive.’

This is considered a truth among many experts in an era of abundant data. It is also a statement in the first international edition of CIO Magazine, published in 1987 (!). At the time, Chief Information Officers (CIOs) were expected to take on this role. More than 30 years later, however, many CIOs have not stepped up to this plate. In practice, many CIOs mainly play the role of Chief Technology Officer. They have enough trouble keeping systems up and running, managing costs, and managing today’s myriad cybersecurity risks without worrying about the bigger picture.

Taking the time to rethink how information could be used to create greater business value appears to be a rather neglected element.

With fundamental changes taking place in many areas of our world, this situation no longer seems tenable. More than ever before, organizations need to take better decisions – based on better insights – if they are to outperform their competition. And how those decisions are being made is also changing – radically (see Table 1.1).

Old	New
Periodic decisions	Ongoing decision-making process
People make decisions based on instinct and experience	Machines make decisions based on facts and rules
Decisions are made unconsciously	Decisions are made consciously
Managers make the decisions (top down)	Everyone makes decisions (bottom up)
Decisions are an internal matter	Decisions are made in external ecosystems

Table 1.1 Overview of changes in decision-making

Back in 1987 (the time of the aforementioned quote in CIO Magazine), companies were hardly thinking about Big Data, Artificial Intelligence, Robotic Process Automation and other innovative digital technology. How very different this is, today. Today, they could not survive without paying strategic attention to those subjects. Managing information is no longer merely a prerequisite for running a successful business – information management IS the business. And it is high time that companies anticipate on this new reality.

They must transform into Decision Oriented Organizations. This is necessary not only because of the huge potential of data (and the blossoming amount of tooling to use this data), it is also necessary to withstand times of chaos and crisis. In the eye of a storm it is more important than ever to have reliable and relevant information at hand for decisions. In 2020, the world faced the COVID-19 coronavirus pandemic. At the time of writing this book, it is too early to tell with certainty which companies have the best responses. Early signs, however, show that frontrunners in data-driven approaches are the ones best prepared for a multitude of challenges posed by COVID-19. They are the ones that can quickly develop scenarios and have the information at hand for swift and powerful anticipations of a new reality, even at a time when this new reality is still fuzzy.

The CFO in pole position

This book thoroughly analyses the changes in decision-making (Table 1.1). First, however, it is important to take a closer look at the role of CFOs, as they are best suited to prepare organizations for the new reality.

CFOs were not chosen at random to get this job done. The choice has to do with three unique characteristics of CFOs (and the finance function as a whole). The job of building a Decision Oriented Organization fits them like a glove.

Characteristic 1: CFOs are impartial

Traditionally, CFOs have always been the – business economics – conscience of an organization and, therefore, have always filled an impartial role on any executive board. They have a decisive vote in allocating resources to projects (i.e. they are in charge of the money). In doing so, they always needed to rely on the facts without sentiment or prejudice. CFOs are trained to prevent these emotions from playing a role in the assessment of information and to always look for the facts.

Characteristic 2: CFOs are a connecting link

Integral, connecting, holistic. These are the key concepts, according to the majority of reports by consultancies, on how organizations should successfully anticipate the digital transformation. And quite rightly so, because the walls should be removed between the traditional compartments of organizations. Here, too, CFOs have the advantage. They are already a connecting link between the various disciplines, and research² has shown that the span of control of CFOs is increasing, with people reporting to them from IT to cybersecurity and from risk management to Mergers & Acquisitions. The same research also notes that more than half of all CFOs have responsibilities ’at the forefront of digitization’, such as in automation, robotics, data visualization, and artificial intelligence (AI). Increasingly, all support functions (like HR, IT, Finance, Procurement) report to the CFO who thereby has the overarching responsibility to enable a smooth-running primary process.

Characteristic 3: CFOs understand information

Last but not least, CFOs are trained to create, analyse, report, distribute, and communicate reliable information. It is at the core of their responsibilities – and always has been. With some imagination we can go back six centuries to the Italian invention of the double-entry bookkeeping system – with a debit and credit side – which is still in use today. In his book The Reckoning: Financial Accountability and the Rise and Fall of Nations,³ US historian Jacob Soll writes about the importance of this invention as a basis of modern capitalism. ‘Good accounting practices have produced the levels of trust necessary to fund stable governments and vital capitalist societies, and poor accounting and its attendant lack of accountability have led to financial chaos, economic crimes, civil unrest, and worse.’

It is also a fact that finance professionals are trained like no other in gathering reliable and verifiable information. Their training includes the processing, categorization, and consolidation of information. In cases of any doubt, they can and will turn to accounting guidelines that provide guidance for the correct categorization of transactions. They set up frameworks with key controls to ensure that information is reliable, and are also familiar with the related Three Lines of Defence (see Chapter 6). In recent decades, financial experts have implemented and refined International Financial Reporting Standards (IFRS) in Europe, in order to improve the comparability of information for the capital market. To this end, they have often had to invest heavily in systems that deliver better information for supervisory bodies. In the financial sector, the same applies to the supervisory frameworks of Solvency II and Basel II, which also ensured better provision of information all based on a combination of very precise definitions and policies on how to register and report on an increasing number of indicators.

Navigating in the eye of a storm

The mentioned specific competencies that CFOs have are especially relevant in times of change or crisis as information tends to become notoriously unreliable in these times. The COVID-19 crisis has highlighted this again; various sources offer conflicting information and experts formed their view of what needs to be done based on their information source of choice. Jevin West and Carl Bergstrom, professors from the University of Washington and founders of an online course called ‘Calling Bullshit in Big Data’ call such crises a ‘natural ecology of bullshit’,⁴ as such an environment offers psychological and financial rewards for attracting attention regardless of the accuracy and trustworthiness of information. The COVID-19 pandemic soon proved to be a real bonanza for statistics, graphs, and data visualizations of how the virus developed with an overload of questionable information. Fighting incorrect information proved to be a tough cookie for social networks and tech companies such as Twitter or Google.

This is not only true when it comes to societal crises and news media. It’s also valid when it comes to being well informed in corporate crises. One of the main objectives in such times is to distinguish crappy or subjective information from reliable and fact-based information, thereby making sure that there is one version of the truth as a solid base for decisions. Cutting through a complex jungle of misinformation is key. And CFOs are well positioned and trained to do this.

How the CFO can become the architect of the Decision Oriented Organization

The aforementioned three characteristics are typical of many CFOs and other financial professionals. In fact, professionals in other areas, such as human resources (HR), marketing, and logistics, could learn a thing or two from CFOs. Finance departments have, for instance, spent years perfecting elaborate accounting manuals to make sure that everyone speaks the same language when it comes to processing information. To many other professionals this may not be a top priority. For instance: Which HR professional comes up with the idea to define what an FTE (full-time equivalent) is? Or how many sales executive would think of correcting monthly sales statistics for essential elements, such as the number of weekends in a given month?

For many financial professionals, such questions are routine. It is deeply ingrained in the professional ethics of finance professionals to present their organization with the best available information, thus providing peace of mind to the managers who need to be able to rely on such information.

This is an essential skill, particularly in a time when the volume of data is exploding. And so, besides taking the lead in classifying, consolidating, and analysing the financial information, CFOs must also do this for all other types of information. They should become the architects of the Decision Oriented Organization. And they definitely could use some help from other executives.

CFOs need the help of other executives to succeed in this.

First of all, they must team up with the CIO. In the past, there was some doubt about the strategic value of the CIO. In 2013, an analysis in Harvard Business Review, with the revealing heading ’Why can’t a CIO be more like a CFO?’, concluded that it is ‘time for CIOs to move beyond their role as chief technology officer and embrace the name with all of its implications: Chief Information Officer.’ The article continues by answering the question of why they are not doing so: ‘Because no one is managing the store’.⁵ Although the I in CIO stands for information, CIOs have not been including this aspect in their responsibilities in recent decades.

This criticism does not alter the fact that CIOs have an incredibly important role in ensuring that the IT landscape – the backbone of any company – is strong and secure. They are essential to enabling organizations to innovate and to build a robust yet flexible IT infrastructure. That is their contribution to building a Decision Oriented Architecture.

Then there is the chief executive officer (CEO). Generally speaking, CEOs have a strategic role and are a company’s face to the outside world. The fact that the handling of information is a strategic issue goes without saying. CEOs must therefore be missionaries and communicate clearly and often. They must inspire the organization to make sure that the CFO’s work of building a Decision Oriented Organization is well understood.

The following two chapters analyse the impact of the omnipresence of data and the related digital transformation. The main focus is on what will change and what will not, and, subsequently, on what that means for how companies should handle information.

Chapter 2 Everything changes

‘Do or die’ in a digital era

Everything changes, at breakneck speed. Although it is a overused cliché, it is nevertheless important to reflect on these changes and the opportunities they present for many executives. There is a justified need for speed, but there is no point in chasing hype – fear of missing out is not the best approach. Let’s briefly analyse the undercurrent of how the role of data changes, as this is the basis for avoiding hype.

In early 2014, the Marriott hotel chain proudly announced plans to offer no fewer than 30,000 new hotel rooms that year. Brian Chesky, CEO and co-founder of Airbnb, promptly responded with a teasing message on Twitter: ’Marriott wants to add 30,000 rooms this year. We will add that in the next 2 weeks’.⁶ The message illustrates succinctly how business models are being turned upside down because of the world’s rapid digitization.

We see the signs everywhere. Take, for example, today’s ranking of the most valuable companies in the world. This list is no longer dominated by oil companies, car companies, and retail giants, but by tech giants (especially new ones) who build business m...