Expectations of a modern day CFO

My expectations of a modern day CFO

Deep learning, Blockchain, Initial Coin Offerings, Hackathons, Robotic Process Automation, software-defined networks, exponential development, Minimum Viable Products, Unicorns, the Singularity, Quantum computing, supervised machine learning, data lakes, GPU computing, DXP, generative adversarial networks, edge computing …

BUZZWORDS? Or terms that you and I honestly ought to know better? A fierce storm looming ahead or smooth sailing? Today I want to share my perspective on navigating in an ever more digital age. But first an assertion.

Our ability to predict the future is abysmal. You may be familiar with the illustration of chaos theory: the movement of a butterfly’s wings in a distant jungle in South America sets off a chain of actions and reactions, ultimately causing a storm on the other side of the globe. The initial condition of a deterministic nonlinear system is changed, and with that the outcome. And there are simply too many rolls of the dice to predict with confidence what the outcome will be. Seemingly random actions triggers reactions and so the chain of events unfolds.

Thomas Watson of IBM predicted a world market for “maybe five computers”. In 2004, Bill Gates predicted the issue of SPAM would be solved within two years. The potential for looking silly in hindsight is enormous. The point is: no one can predict with absolute certainty, and you should not set the assumptions underlying your strategy in stone.

Some say the pace of change is accelerating. That today’s “captains of industry” face unprecedented uncertainty, unprecedented challenges and unprecedented disruption of industry dynamics. I think the business leaders, who made it through the Victorian age industrialization would object to that,

  • or those who witnessed the broad-scale adoption of electricity
  • or the introduction of the combustion engine, cars and aero planes, railways and entirely new traffic patterns
  • or the introduction of the “universal machine” (a.k.a. computers)

I don’t know how to make that comparison, and I don’t particularly care; it doesn’t matter. You as a leader and I as a leader will have to deal with and shape the environment we face – now and in the future. Not the environment we may have wanted, but the environment we actually face and will face as it materializes. Just like the sailor at sea: you can’t choose the weather, but you can adjust your sails.

So the first order of the day when it comes to strategy is to keep a lookout and continuously assess patterns. Who’s winning, who is losing – what’s going on?

In most industries obviously, patterns are changing:

  • industries are redefined as roles in the value chain are re-shuffled
  • new technology replacing old, providing new access to and capture of data
  • new business models, ways of monetising customer relationships
  • new entrants with near term focus on land grab and valuation rather than profitability

The new patterns may be driven by marginal cost for digital competitors approaching zero, network effects, leveraging assets in new ways or integrating digitally with customers or …  you fill in the blanks.

So when we talk about poor visibility, it is not only a question of line of sight, but also stochastic outcomes in “systems” that have yet to find a steady state.

Deciphering this is hard work. There is no general answer for all industries. It is not just a question of observing your known competitors, but also keeping a look out for start-ups, venture capital investments, ideally patent filings. Looking at where the “smart money” is headed to address customer needs faster, cheaper, better.

It has been said that if you’re playing poker, and you can’t identify the weak player at the table, it is you. Similarly, if you can’t recognize the new winning patterns in your business, you’re the weak player …

Go out of your way to understand the new game in your environment and for serving your customers.

My second point regarding strategy is to reconsider the foundation of your traditional strategy models and frameworks. Take BCG’s growth/share matrix for example. Truly ground breaking model. However, it is built on the premise that unit costs fall with volume (absolute, relative) and accumulated experience. This is not necessarily ideally suited to an ever more digital world, where

  • industry definitions crumble and eco systems emerge and disappear
  • cost advantages turn to liabilities (as legacy assets are stranded)
  • relative market share may be a bad predictor of future success
  • monetising users and data may be more valuable than products

Does this mean “strategy is dead”? Some say culture and execution “eat strategy for breakfast” anyway. I don’t agree – that’s intellectually lazy in my view. I consider it more important than ever to articulate a purpose for your organization and state the overarching strategies to fulfil it.

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But you need to look differently at strategic options and how you execute: first of all, you can’t just lay a course, and put the rudder on autopilot. Assumptions, priorities and plans need more frequent evaluation and adjustment, and you need to course-correct much more frequently. Not strategically necessarily, but certainly with regards to execution; producing detailed 5 year plans and budgets is a waste of time.

Secondly, capabilities and the collective ability to test and scale or test and fail quickly are critical. And make no mistake: execution today does not call for company-wide end-to-end process harmonization, based on a static blueprint of the corporation and its environment, and a 3-5 year ERP implementation.

And thirdly, look at competitive strategy in a different way: traditionally, competitors are to be conquered or avoided – a classic “fight or flight” response. Today, I want you to consider a third alternative: embrace. Embracing new entrants and start-ups as part of your eco system; many are keen to tap into existing customer relations and experience of the incumbents. Sometimes even embrace traditional rivals as you may gather “strength in numbers” to withstand those new competitors …

What does all of this imply for us as leaders? First of all, you need to recognize that leadership roles are changing. Traditionally, many leaders would have risen to senior positions by virtue of determination, skills and technical mastery. In principle, leaders would master most roles beneath them in the corporate hierarchy, if not all. Today, this is changing. You need to attract and orchestrate the performance of more diverse profiles, most likely with more advanced skills than you and me, and different expectations of work/life balance, careers and attachment to employers.

Secondly, you need to re-assess your own experience and consider if your own personal beliefs and examples of success are turning from assets into liabilities?

“It is not what you don’t know that gets you into trouble. It’s what you know for sure that just isn’t so”

Mark Twain famously said, and that was never truer than today.

Specifically, you need to balance the trade-off between efficiency, accounting for past events and elimination of mistakes, (the traditional domain of the CFO) with the ability to change and evolve, turning adaptability into a Darwin-like strength.

So therefore, make sure to stay curious, constantly exploring relevant new capabilities and understanding new concepts. Of course, you will never know machine learning better than a data scientist or robotics better than an engineer, but you don’t have to. What you have to do is staying abreast of developments, put them in perspective in your environment and harness the capabilities of others to exploit them.

Don’t be like the US senators questioning Mark Zuckerberg –  and don’t bring a screwdriver to a hackathon.

So in summary, what do I – as a Chair and from the perspective of the board – want from a modern day CFO?

First and foremost, I want you to get the basics right. Surprised – in the light of my previous comments about strategy and leadership? You shouldn’t be. Any sailor approaching uncharted waters or heavy weather should ensure the boat is prepared for whatever happens. If core processes in Finance are flawed, if liquidity isn’t managed, if bills aren’t paid, if receivables aren’t collected, if costs aren’t properly accounted for, then why should we care about the CFO’s point of view on strategy? Don’t forget the basics. But of course, I want more than that.

I want the CFO to be the guardian of value creation, even as circumstances change. Capital allocation, risk profiles, scenario evaluation, portfolio strategy, dealing with uncertainty, understanding the option value of initiatives. What-if? These are not new concepts. What might be new to some is my expectation for the CFO to be on the forefront of business model evolution, pricing models, going “asset light”, capturing customer value. Testing and exploring without taking undue risk. Helping the organization understand the game being played, and act as the constructive “devil’s advocate” to challenge unfounded optimism and blurry visions without substance. But I want more than that.

I want the CFO to spearhead new ways of working.

I want you to kill your darlings and eliminate backward-looking activities that no longer add value. I want you to stop ritual meetings, committees and reporting and “coordination” that hampers execution. I want you to take charge of data structures and data analytics tools. I want you to take “your own medicine” and test and implement new approaches such as machine learning for hedging and forecasting and robotics for taking cost out and increasing customer satisfaction. I want you to put in place the forward-looking KPI structures, which enable the organisation to execute, based on clear hypotheses for value creation. And I want you to help the organisation focus and shut down initiatives that aren’t delivering and learn from that.

But more than anything, I want the CFO to lead. The crew on your ship and your fellow officers don’t need you to be timid in times of uncertainty. They need you to be transparent and candid, they need you to be explicit about choices made – options chosen and options not chosen. They need you to communicate priorities – especially as they change along the way – and they need you to explicit about outcomes. What’s working and what’s not.

And I want you to do this in a way that creates a following, which values diversity and heterogeneity. Not just because it is the right thing to do, but also because it works better. “People join companies, but people leave because of people”. I want you to create an environment which builds the confidence, the self-esteem of your organization and the eco system around it that embraces experimentation and the occasional failure, because failure is inevitable and an opportunity to learn. Don’t expect perfection.

I know I want a lot. And perhaps no one person can deliver on it all.

But at least you should try; that’s why you are here today and that’s why I’m here today – to keep our skills ready for whatever lies ahead. I want to thank the organizers for providing this opportunity to us all.

I wish you happy sailing.

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