Traditional to modern: the metamorphosis of the CFO

June 2024  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

June 2024 Issue

The role of the chief financial officer (CFO) has undergone a profound and strategic transformation. Previously, the CFO was primarily responsible for ensuring accurate financial reporting and maintaining financial controls. The role was considered more of a support function.

But CFOs have been required to move with the times. As businesses grew in size and complexity, the CFO position evolved to encompass a broader range of responsibilities. In the 1980s and 1990s, the focus shifted toward financial planning and analysis, and CFOs had to play a more strategic role in driving business growth.

Value creation and strategic direction

Today’s CFOs have evolved beyond merely offering financial stewardship. They are responsible for a wide range of strategic activities, including financial planning and analysis, capital management, risk management, business strategy and investor relations. They need to be multidimensional, supporting business development across their organisation.

Much of this evolution has been driven by a need to contribute to the company’s overall strategy. CFOs provide predictive analytics to chief executives, helping them to make informed decisions and anticipate future trends in an increasingly complex and tech-focused landscape.

Indeed, the bond between chief executive and CFO can be central to a company’s success. According to Gartner, 80 percent of CFOs have strong relationships with their chief executives. Trust and respect should underpin this relationship.

While traditionally the chief executive focused on overall strategic direction and operational execution, the CFO provided financial insight and guided financial decisions. Increasingly, however, the boundaries between the two roles are blurring, with the CFO’s responsibilities transcending conventional financial reporting.

According to McKinsey, not only does the CFO lead a company’s finance function, they are also a key colleague across business functions and the chief executive’s strategic partner in maximising value creation. The CFO helps shape the company’s portfolio strategies, undertakes major investment and financing decisions and communicates with key stakeholders, all while managing finance teams.

The level of expectation on CFOs has never been higher. The rising importance of financial data demands that CFOs become a strategic partner to the chief executive. In this capacity, chief executives expect their CFOs to offer strategic financial leadership, shape risk management and compliance competencies, guide efficiency and cost control programmes, provide detailed financial reports and transparency, play a pivotal role in talent development and retention, and continue to learn and innovate in a changing economic landscape.

According to SAP, CFOs are finding themselves working more closely with other C-level executives too. Eighty percent of CFOs believe they must work more effectively with HR heads, with 87 percent saying the crossover between finance and HR is more significant than ever. Amid greater competition for talent, CFOs can help identify skills gaps and allocate the right people to fill them, adding further value to their organisations.

Communication has also become a key part of the CFO’s remit. They must be comfortable communicating strategically with both investors and boards. Going beyond simple earnings calls, today the CFO helps to establish credibility for the company’s strategic direction.

ESG is another area where CFOs are turning their focus. According to McKinsey, many CFOs want to play a larger role in shaping their company’s ESG programmes. The aim is to align social and climate issues with the company’s overall direction. And when CFOs are engaged in ESG initiatives, they do better. There is a 20-30 percentage-point higher alignment between ESG initiatives and strategic goals when CFOs are actively engaged in ESG topics, according to McKinsey.

Nearly a third of CFOs are analysing how climate change scenarios could impact financial performance going forward, according to PwC. Forecasts are being used to integrate sustainability into business strategy, to analyse risks and explore opportunities for growth through sustainable products and solutions.

Turning to technology

As CFOs move away from their traditional role of financial partner, they have to develop a more holistic grasp of the entire business and how it creates value. In doing so, they certainly have their hands full. Notably, as companies have become more technology focused, the role of the CFO has shifted toward this path. Embracing technology and integrating it into the CFO’s remit requires a shift in mindset – 88 percent of CFOs and other business executives say they struggle to capture value from their technology investments, according to PwC.

In recent years, CFOs have been required to oversee investment into essential new technology to provide faster insights into every aspect of the business. But according to Accenture, in 2022 only 60 percent of traditional finance tasks were automated – almost double what was reported in 2018, but still a surprisingly low number.

Accelerating digital transformation can enhance efficiency and productivity across organisations. CFOs will be vital to this process. The emergence of artificial intelligence (AI), automation and other innovations is having a profound impact. These are important tools enabling CFOs to create additional value for their companies. With AI-driven data analysis, CFOs can identify growth opportunities and allocate resources effectively.

According to PwC, 64 percent of CFOs and finance leaders say their companies are investing in new technologies like AI and the cloud. CFOs are using AI, machine learning and robotic process automation (RPA) to automate tasks, freeing up staff and resources to explore new areas. Automating core tasks allows team members to move into analytical roles which provide greater value to the organisation.

Cloud systems, for example, provide the flexibility to adjust resource capacity according to demand, allowing CFOs to synchronise costs with real-time requirements.

Digitalisation is reimagining many areas of business, from HR and sales to enterprise resource planning (ERP) and customer relationship management (CRM), logistics, and beyond. Software tools can provide real-time insights and strategic analysis.

CFOs are also building internal controls with the latest technology, helping them to mitigate risk and drive scalability. Automated internal processes are typically more reliable than manual, due to less potential human error. As such, CFOs are working with IT and risk teams to identify which processes are best suited for automation, to determine essential automatic control capabilities, and to find the right experts to integrate them.

In the coming years, understanding and harnessing the power of technology for business transformation will be central. A solid grasp of data tools, models and governance is essential to the future trajectory of CFOs as they expand their remit to optimise processes for the benefit of their organisation.

However, even as technology drives businesses to move faster, it creates risks, such as cyber security and data privacy, which companies need to address. CFOs must understand how and where related threats arise. Measures are then needed to protect networks, devices and data from malicious activities.

Through fraud, theft and other disruption, cyber criminals are capable of causing catastrophic financial and reputational damage to organisations. One of the most important CFO challenges of the coming years is to manage the risk to assets with adequate safeguards. Investing in cyber security should be a priority.

Technology and innovation are advancing at an exponential speed, outpacing what legacy processes were built to handle. It is incumbent on CFOs to maintain their company’s core capabilities while integrating technology solutions.

CFOs will need to gain knowledge of the new possibilities presented by technology. Staying up to date on the latest developments within the finance and technology space is key, as the two spheres are closely intertwined.

CFOs must also ensure that their finance teams leverage the benefits of technology. Roles within the finance function are being reimagined and staff reskilled. Adopting a cloud- and data-first mentality can help identify opportunities for growth. Advanced analytics, cloud technology and other advancements can drive improvements in forecasting and redefine organisational structure.

The cost-cutting conundrum

Despite all of the changes to the CFO’s role, certain traditional areas of focus remain central. One is strategic cost reduction. Eighty-nine percent of CFOs say striking the right balance between cost cutting and investing for growth is a top challenge, according to PwC.

A focus on cost reduction is mirrored elsewhere, with chief executives taking a similar approach. According to PwC, 52 percent of chief executives are focused on cutting costs as they take steps to increase revenue using tactics such as raising prices and diversifying product offerings.

But cost reduction, already a difficult proposition, is even more challenging in the current economic climate. In times of economic uncertainty, companies often resort to cost-cutting measures to maintain profitability and weather the storm. However, this approach can have negative consequences for staff members, creating employee disengagement, which, in turn, can lead to reduced productivity and weaken the company further.

CFOs should modify cost-management programmes to focus on long-term growth and employee wellbeing. They need to align cost reduction efforts with the company’s strategic vision to create a leaner, more agile organisation. While it may be easy to deploy reactionary, short-term measures, adopting a more strategic mindset can help with investing wisely in the future of the company.

Agents of change

Going forward, CFOs will need to evolve their roles in line with stakeholder expectations. This includes contributing to innovation, efficiency and future strategy. The CFO of tomorrow will be a pivotal figure in shaping strategy, far beyond the financial realm. They will need access to a broad spectrum of skills, ranging from enterprise-wide project management to commercial fluency and technical proficiency. CFOs should also commit to delivering on diversity and inclusion.

The scale and speed of transformation required to stay ahead of the curve in today’s business and economic climate is unprecedented. As such, the CFO role will continue to evolve and expand.

No longer just ‘bean counters’, CFOs are agents of change who help drive new initiatives, laying a path for their organisations toward value and long-term growth.

The complexity of business operations means CFOs must be adept at managing a wide range of responsibilities, from financial management to strategic planning. The CFO can be a disrupter who creates opportunities for competitive advantage and growth.

© Financier Worldwide

BY

Richard Summerfield