CFOs make better decisions thanks to artificial intelligence

Source: Management Scope (27/11/2019); Author: Kristof Stouthuysen - Image: Lien Geeroms

The right use of data can give companies a strategic advantage. In his recent research, Professor Kristof Stouthuysen says that this offers a great opportunity for CFOs. Technology is making access to valuable data more relevant than ever.

Companies can draw on a growing quantity of both financial and non-financial data. As long as it is used properly, this reservoir of data can provide valuable information for strategic business operations. When making strategic decisions, it is not only information relating to profit & loss but increasingly also insights into customer behaviour and potential revenue growth that are crucial. Data-driven companies such as Microsoft, Amazon and Google show how the smart use of data can contribute to profitability. The same applies to pharmaceutical companies such as Pfizer and Novartis and financial institutions such as the Bank of America. One of the success factors, according to international research, is the fact that these companies make intensive use of data to support strategic decisions. Companies both large and small can benefit from this. But who should take this up within the company? Due to their analytical abilities, CFOs and other financial professionals are ideally suited to working with this data inside a business.

Unlocking valuable data

The smart use of data is certainly not a privilege reserved for large companies. Technology has eliminated the practical obstacles that used to obstruct the use of data in business operations. Artificial intelligence such as machine learning is helping to open up large volumes of unstructured data. Machine learning can use algorithms to make targeted predictions based on large amounts of data. In such cases, the more information, the better the model. Investment budgets for costly data storage and analysis are also lower, as long as storage largely takes place in the cloud and the programming language is open source.

The possibilities go far beyond financial data alone. Algorithms can now also analyse text files, photos and videos. Based on the data from order histories, satisfaction surveys, product choices and other customer characteristics, for example, it is possible to find unexpected correlations between profitable customers. By focusing more of the marketing efforts on this group of customers and using the insights to attract similar customers, or by saving on certain cost items and saying a timely farewell to potentially non-profitable customers, the organisation can make strategic decisions that will increase profitability.

Analytical qualities

Data technology offers numerous strategic benefits. Nevertheless, CFOs in Europe are still very cautious about using these new technologies. Many of them have not yet mastered the technological innovations to a sufficient extent. This is a shame, as the CFO in particular can play a pioneering role here. The analytical qualities of CFOs make them extremely suitable for directing this development within the company.

It is crucial for CFOs to embrace the technology, acquire knowledge and experiment with machine learning, for example. Although there is no need to retrain as a data scientist, the CFO must certainly understand the language of these experts: this will help when it comes to exploring the possibilities within the company. Attractive applications can be found in the area of risk management, for example. Artificial intelligence is also revealing its strength in value creation, in close collaboration with the CEO and other senior managers such as the Chief Information Officer.

Risk management

Machine learning is increasingly proving its worth in companies when it comes to detecting and preventing fraud. Technology is better able to estimate the likelihood of fraud based on a range of variables. These include a customer's historical payment behaviour, the products purchased by the customer and information from external credit registers. The technology can also do more, however, such as performing unsupervised searches for deviating patterns in the data. After all, the methods used by fraudsters are constantly changing. Because of the way the brain works, humans can only search for known patterns in the available data, whereas technology is able to search for any possible correlation that may indicate fraud. Technology can also help to predict customer payment behaviour. Traditionally, the company only considers the time in which a claim is outstanding. Why not combine this information with more interesting variables from public sources, such as payment problems with other companies in the past or ongoing legal proceedings?

Talking to Erica

Knowledge of technology will also put the CFO in a better position to respond to processes in other business units. After all, artificial intelligence is being used in more and more business processes. Organisations will inevitably be faced with the new challenges that entails. Take Erica the virtual assistant at the Bank of America, who already serves over a million customers. Besides asking Erica for account information, customers can also verbally instruct her to transfer money. This naturally requires new structures behind the scenes to carry out these processes and to detect and intercept fraud. As well as the algorithm that ensures Erica ‘understands’ what the customer is instructing her to do, there is another algorithm to make sure that the amount of the verbal transfer is transferred to the correct account. The downside of this technology is that it can be misused, for example by a fraudulent client.
CFOs will therefore need to consider how to prevent abuse. The CFO's analytical expertise offers added value in these processes, for example when asking the right questions and analysing data quality. Another possible issue is that data files can sometimes be so large that the technology finds nonsensical correlations. For example, it is statistically possible to show a correlation between the number of newborn babies and the number of storks in the Netherlands. The CFO has an important role to play here; he or she is in the ideal position to ensure that the data and technology are used appropriately.

Partnership and value creation

Research by Vlerick Business School shows that CFOs see a greater strategic role for themselves in the future, in partnership with the CEO or other senior managers. In this role, the CFO will actively contribute to future scenarios, new business models and action plans. Machine learning can help with this, for example by better predicting the anticipated turnover and analysing existing cost structures. The technology makes it possible to include various new variables that are often lacking in traditional financial models, or to test the variables that are being used. For example, is the company using the right KPIs?

The analysis of non-financial data also offers added value for company valuations and acquisitions. Financial data such as cash flow remains important. Analysing customer reviews on social media can help to identify the sustainability of the cash flow. Artificial intelligence allows you to map what customers are saying online about the company's products and services. The technology is capable of weighing up positive and negative words. Other non-financial parameters include the company's remuneration policy and sustainability strategy, for example. In this day and age, it is important to map out how a company is able to create social value in addition to financial value.

Proactive and enterprising

As a result, there is every reason for CFOs to adopt these innovative technologies. An enterprising mindset is important, as CFOs are often somewhat conservative. Any fear of the technology is unjustified. Technology will not eliminate the role of the CFO and other financial professionals. It will change their role, however. I like to compare it with the unease felt in the mid-1950s, when the invention of computers meant that accountants no longer had to work on paper. That unease was unjustified, because nowadays, some 65 years later, there are more financial professionals than ever in the business world. More tasks of the finance department will be automated in the future. The CFO’s reactive role will therefore be transformed into a more proactive role. In our surveys, CFOs already indicate that they are spending less time on traditional reporting and controlling. That is a welcome development. Automation will give the busy CFO more time for risk management and value creation, and specifically more opportunities to develop increasingly into an adviser and strategic partner for the CEO.

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