Chief Financial Officers (CFO) have become jugglers and they have to be good at it. Any ball they drop can be the death knell of an organization. The growing importance of a CFOs role within the organization cannot be underestimated. Risk managers should view it as a game changer. They are normally susceptible to viewing CFOs and finance departments as just being the owners of financial records. However, the CFOs focus is shifting from financial numbers to becoming strategic business partners. In light of this trend, risk managers while conducting a finance department risk review or audit need to look at things from a different perspective.
Hence, the question is in a recovering global economy what are CFOs focusing on? I had a sneak peek at the soon to be released SAP report – “The Superstar CFO: After the Crises.” The report is in continuation of “The Superstar CFO” published in 2007. The report categorically says that CFOs wear multiple hats and their key performance areas have changed significantly. I am giving my opinion below on some of the trends mentioned in the report.
1. Focus on Business Strategy
As I had mentioned before board generally selects strategies of politically strong CXOs . Although the assumption is that organizations follow a proper process for strategy selection, it is full of loopholes. CFOs have access to hard data and they are in the ideal place to facilitate the board in choosing the right strategy. The decision-making would improve, as data is apolitical. Secondly, cognitive and political biases will be highlighted.
The good news is that CFOs are now focusing on being business partners to CEOs by facilitating them in forming strategy. To emphasize the point Mr. Fernández at Scottish Power stated – “To me, the role of CFO is first of all to help define the right strategy together with the CEO, and seeing that investments and operations follow that strategy. In summary, to keep the company where it should be.”
This is an excellent opportunity for Chief Risk Officers (CRO) to align themselves with CFOs initiatives in strategy development. Presently, in just two-fifth of the organizations, risk managers are involved in strategy formation. They need to collaborate with CFOs to do effective strategic risk management.
2. Financing Growth
As the economy is recovering the CFOs focus is shifting on supporting business growth. During recession CFOs focused on maintaining cash reserves to protect the organization from volatile market conditions. Moreover, it was difficult to obtain short-term funds when financial sector was in doldrums. The whole effort was on maintaining status quo.
With the changing business environment, organizations are strategizing for organic growth or new acquisitions. Hence, CFOs would be looking at providing finances for organizational growth. A Singapore based CFO appropriately summarized the CFOs thinking – “Sitting on cash is not the smartest thing to do, with interest rates so low today.… We’d rather have our cash going to new acquisitions or new assets.”
This indicates that risk managers require paying attention to the financial risks the organization is undertaking. Since the economies have still not stabilized they should monitor the early warning signs for excessive financial risk exposure.
3. Setting Shared Service Centers
CFOs continue to focus on establishing and growing shared service centers for accounting and other back office processes. The objective is dual – reduce costs and improve availability of financial information. Ms. Urban of Bardy Corporation said about the organization’s shared service center – “It has really allowed my team to have more scale, not have to worry so much about transactions, and be able to give better support to their business leaders. We’ve been able to spend more time on the things that actually drive business decisions rather than managing accounts receivable and accounts payable.”
Risk managers need to do an in-depth analysis of back office risks, especially if the activities are off shored and/or outsourced. Key failures while establishing shared service centers are that cost savings are not analyzed properly, processes are not re-engineered, and regulatory and country risks are not assessed before off shoring.
In nutshell, CFOs role is dramatically changing. Besides financial experts they act as business partners, strategists and risk managers. While CFOs have improved their portfolio of activities and visibility in business, the risk managers have failed to do so. Hence, the risk management department heads need to learn a lesson from this. They must leave behind their narrow focus on financial risks and align their activities with those of the CFOs. This move will put them on CEOs and Boards radar and enable them to drive risk management culture throughout the organization.
The Superstar CFO: After the Crisis – What it takes for Finance executives to excel in a changing and uncertain world – A report prepared by CFO Research Services in collaboration with SAP. The report will be released for public viewing in July 2011 but you don’t have to wait to get your hands on it. You can download it BRP_Advanced_Release_No1_AP_Superstar_CFO_After_Crisis_Jun2011