From Bean Counter to Business Leader: Can a Performance Management Framework Change the Role of the CFO?

The role of the chief financial officer (CFO) has undergone significant and dramatic changes since the early 1980s, with some of the biggest taking place over the past decade. In the run-up to Y2K, companies invested heavily in preparing their IT systems, with many opting for enterprise resource planning (ERP) applications to ensure a smooth date-change transition.

Today, the role of CFO comes with even more pressure, with increasing demand to identify cost savings and uncertainty around every corner. In the most recent business cycle, the emergence of regulations, such as Sarbanes-Oxley (SOX), Basel III and their associated compliance costs, has kept cost containment on the front burner, while putting pressure on the CFO to implement more effective internal controls and corporate governance. Given these issues, it is not surprising that the CFO’s role is often far from easy or predictable.

However, this is not to say that difficult situations don’t have their advantages. In many cases, they offer a level of freedom to act that is not present during the boom times. Today’s CFO has more latitude to make the changes needed to create a new performance management culture that explores patterns found in real-time data to identify risks and opportunities. It is clear that post the financial crisis, many CFOs believe that having real-time access to estimates, projections and pattern recognition will allow them to act prior to the occurrence of the events predicted.

For example, in a recent Healthcare Financial Management Association (HFMA) poll, nearly half of CFOs surveyed stated that their primary goal is to explore alternative approaches to making the most out of data. Similarly, 44% said that they would use predictive analytics tools to identify missing charges, detect underpaid accounts, automate the resolution of credit balances and estimate costs for customer care. Despite this, another survey published in Management Accounting Quarterly stated that 36% of large-scale organisations do not use predictive analytics because they believe they have more pressing issues.

This is somewhat understandable as the primary focus of many CFOs prior to the financial crisis was the implementation of the enterprise business intelligence (BI) system to deliver information and benchmarks on past performance. The problem is that many failed to realise the anticipated benefits as they were lured by the promise of enhanced business performance. Unfortunately, some CFOs were mired in a fragmented, overgrown BI environment and frustrated by lacklustre results.

The good news is that today, most CFOs now view information as a major asset justifying significant investment, and many believe that they can now manage information better. As the CFO becomes more strategically involved with enabling all departments to work towards the strategic objectives of the business, sharing information across multiple departments is becoming increasingly important in order to create a performance management culture, as well as framework that sits across the whole enterprise rather than just in the area of finance. Strategy mapping can be co-ordinated across an organisation and tactics/objectives developed by function and tracked in real-time departmentally, as well as on a group basis.

The addition of predictive analytics, for example, means that marketing teams can access the data. They can then use metrics and performance measurement to demonstrate to the CFO the contribution of marketing to the business. Or provide manufacturing and design teams with detailed financial analysis of costs and competitor prices allowing them to review what and how they produce their products in order to remain competitive.

To foster such a forward thinking culture, predictive analytical information has to be automated and embedded into the current BI system. Currently, in many functional areas, predictive analytics is implemented as one-off research projects where the findings are reported in powerpoint presentations and the recommendations are implemented as rule-based policies.

This silo-like approach is costly over time, difficult to enforce and hard to track the outcomes in the long term. However, there are a number of areas in which best practices are beginning to emerge to help CFOs identify cost savings and revenue opportunities that can be automated and embedded in business analytic applications. For example, predictive analytics can help CFOs identify root causes and inefficiencies that lead to cost escalation and marginal cost differences between various operating units. By identifying deviations around capital restructuring, processes can be streamlined to close cost gaps. In addition, CFOs can now predict future revenues by combining and analysing large volumes of internal revenue data and external economic data to identify both positive and negative trends in real-time.

While reporting is seen as a time-consuming task (perhaps not surprising given the high use of spreadsheets), on a positive note CFOs very firmly believe that they should focus on non-financial measures of performance as well as financial data. The business benefits identified are clearly driving a need for intelligent and real-time information on financial and operational performance across all areas of the business which will ultimately help businesses create a performance management culture right across the organisation.