Role of the CFO in the digital age
Digitalisation in finance
By Regine Slagmulder, Professor of Accounting and Control at Vlerick Business School
Source: CxO Magazine (issue 142 - August / September 2015)
Today’s digital revolution is fundamentally changing how companies operate. Enabled by data and technology, digital is quickly rendering existing products, services and business models obsolete. As a result, it is reshaping many industries, including media & telecom, pharmaceuticals, and automotive, giving early adopters a competitive advantage and forcing others to either follow or lose their ability to play.
For the Chief Financial Officer (CFO), the digital era presents both great opportunities to grow the business and create shareholder value, as well as new challenges that can harm a company’s finances and reputation. The most significant risk is being squeezed out of the market by digital-savvy competitors, but there are also regulatory and reputational risks relating to how companies manage the data they collect. Therefore, it is important for the CFO to carefully manage both the upside potential and risks from digitalization.
Role of the CFO
CFOs can be instrumental in transitioning their companies to digitally-enabled businesses since their role has been expanding from focus on reporting, budgeting and control to a broader strategic role. As companies allocate more money to IT development, digital advertising and social media, the CFO should have a clear view on how the technological landscape is evolving and how digital spend drives value creation. The CFO's ability to see the 'big picture' will prove vital, because digital is not only about having an innovative business model, but also about using big data and predictive analytics to identify trends, deploying cloud technologies to drive efficient processes, and leveraging social tools.
CFOs will need to develop the right set of measures to monitor progress as digital initiatives may not lend themselves to standard ROI calculations. For example, evaluating the ROI of traditional technology applications such as data analysis and storage is relatively straight-forward, but it is almost impossible to effectively use conventional ROI methods for social media platforms. Consequently, we may see an increasing number of CFOs adopting non-financial, social metrics combined with financial measures, such as cash generation and profit, to get a complete picture of the health of new digital initiatives.
Moreover, companies need to manage proactively any risks associated with data usage, cyber security, or e-commerce. CFOs need to ensure that proper systems and processes are in place to protect their data from inappropriate use. As companies do more with digital technology and data, regulators around the world are looking to set new boundaries. CFOs need to be aware of the latest developments in regulation and ensure their companies’ data practices are fully compliant to avoid financial or reputational damage.
New skills needed in the finance function
To embrace digital’s potential for future business success CFOs need to address the skill gap that may exist within the finance function. One way to bridge this gap is to work closely with the Chief information Officer (CIO), who is well informed about digital innovations. In many organizations, the Finance/IT alliance is already established with the CIO often reporting directly to the CFO. Traditionally, however, IT was used by the finance department to gather data from which they would produce a range of reports. Today IT is viewed as a key ally for the CFO to access critical areas of the business and engage in strategic discussions.
The ability to effectively manage the ever-increasing volume of data is a key requirement for quickly acting upon opportunities or threats that emerge over time. Business leaders are looking to their finance team to analyse and synthesize (financial) data to distill key information and insights that can impact current and future performance. To meet those expectations, CFOs will need to recruit digital natives who know how to use data and technology to solve problems quickly. However, as demand for these skills grows across all industries and all parts of the business, a war for digital talent may soon be on.
During the economic downturn, many CFOs took centre stage in helping their companies respond to a dramatically changed business environment. Today, the finance organization faces a new set of challenges as the speed of innovation is increasing exponentially in the digital age. Again, a crucial role is set aside for CFOs to help organizations achieve high performance. Having evolved from financial stewards to strategic advisors, CFOs are well positioned to act as a catalyst for the digital revolution in their companies.