Evolution of the role of CFO. Trends of 2017


The role of CFO is becoming increasingly comparable with the role of CEO as evidenced by dozens of studies conducted by leading consulting companies around the world. Kaufman Hall interviewed 380 CFOs at the end of 2016 and found that 70% of CFOs consider that their top priority in 2017 is to support top management in making strategic decisions rather than focusing on traditional accounting and financial functions. In a survey of financial leaders in Europe, the Middle East and Africa conducted by Oracle in August 2016, 52% of respondents said that their role was primarily focused on advising on issues related to how their company could achieve growth, and 56% said that they work with business units more closely than ever before. This trend is confirmed by a study conducted by EY* (see picture) which surveyed 769 CFOs from America, Europe, the Middle East and Asia.

Станислав Скакун, директор по экономике и финансам Интеркомп
Stanislav Skakun
Head of Finance
Today, more than ever, CFOs need to have a clear understanding of their company’s business: competitiveness level, strengths and weaknesses, the impact of external factors on the company, and technology development. In other words, CFOs in 2017 are strategists liaising with founders and investors.

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Let’s look at this role from another perspective and consider how CEOs look at CFOs.

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KPMG interviewed 549 CEOs, and 63% of respondents were certain that the importance of CFOs will further increase in the coming years.

That said, the gap between expectation and reality is all too great. 30% of KPMG survey respondents consider that their CFO do not fully understand the strategic objectives of their company and are not involved in their implementation. In most companies, the link between budget and strategy is basically tenuous: it is short-term and very rarely includes the targets and proposals from strategic planning.

Why is that?

Process automation and centralization, as well as the development of technologies make it necessary to significantly review the requirements for CFOs. International experience, the application of innovative methods and the ability to quickly adapt are among the most important new requirements.
According to EY data, it is often difficult for CFOs to pay sufficient attention to strategic issues for the following reasons:

Vision of CFO role: 47% are concerned that their responsibilities and authority do not allow them to duly influence the strategic issues of their companies.

Delegation: 52% claim that they are not ready to delegate the supervision of operational processes because their colleagues do not have the necessary skills to fulfill this function properly.

Workload: 51% note that they cannot focus on strategic objectives because of their already great operational workload.

What is to be done?

Although CFOs need to handle global tasks, most are still involved in routine processes.

Obviously, what needs to be learned is to delegate. There is a lot of literature, training and courses on the art of delegation so everything is pretty simple as far as the theory is concerned. First, it is necessary to sort out tasks and determine which ones should, may and must not be delegated. Then, it is important to set tasks correctly, choose and put the right person in charge of their fulfillment, and monitor their timing and implementation. Although these are quite simple rules, known to every manager, they are often very difficult to apply.

Despite the fact that most CFOs still face challenges to delegate, today’s business and scope of financial risks doesn’t allow focusing only on operational tasks. This means that delegating issues should be solved primarily by hiring qualified team members, expanding role functions and taking responsibility to following modern trends.

If it is not possible to delegate, then a good alternative is to outsource. RAEX 2016 annual survey of the Russian market of accounting outsourcing shows that accounting and tax accounting still account for 52% of the revenue of the largest outsourcing providers.

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According to a survey of Intercomp clients

78% of respondents said that one of the main reasons for outsourcing non-core functions is that outsourcing free them to focus on strategic issues.
To sum up: in addition to focusing on strategic tasks and getting involved in the development of their company, modern CFOs should keep pace with the times, use innovative approaches and models, as well as take into account modern concepts and the factors affecting the business of their company.

We have selected some trends, which CFOs should, in our opinion, consider, as they would help them transforming their role.

Trends

Rolling forecasts

Rolling forecasts consist of budgets constantly updated by adding the next accounting period (month or quarter) as soon as the previous one expires. Rolling forecasts are most appropriate when future costs and/or operations cannot be accurately predicted.
According to studies conducted by Kaufman Hall, the main priority for CFOs in 2017 is flexibility. Only 23% of respondents are confident that their company is flexible enough to prepare for unforeseen circumstances in an unstable economy. The main reason for this low indicator is that most companies still use outdated methods of financial planning and analysis (FP&A).

Rolling forecasts differ from traditional budgeting insofar as they are not tied to the budget and focus on business drivers evaluated using key indicators.

According to Kaufman Hall, rolling forecasts should become more and more popular as in 2016 38% of respondents already used them compared with 33% in 2015 and only 25% in 2014.

Meanwhile rolling forecasts are not always easily matched with top managers’ bonus systems. Rolling budget defines short-term planning – no longer than a quarter, while top managers bonus systems are linked with long-term prospective of around 1 year or even more. This makes companies apply other than rolling forecasts planning methods, and take classic annual budget as the source for planning and goal setting.

One of the solutions is to fix several high-level indicators (company’s revenue growth by %%, profitability level, etc.) at managers’ bonus system and make sure that they are focused on key financial targets rather than following budget in details. Such targets will become key marks for rolling budgets and will help managers choose the best scenario to achieve key indicators.

Zero-based budgeting

Zero-based budgeting is a budgeting method under which all activities as well as their related expenses and revenues are completely revised each time a budget is prepared.
This is in fact a classic method which has taken a new form today. It has indeed been transformed from a planning process, which was used only in times of economic instability, to a permanent and vital process in companies.

This method allows not only reducing costs, but also focusing resources on key goals and activities which are really profitable.

This budgeting method is currently used by international companies such as Unilever, Coca-Cola, Mondelez International and KraftHeinz, and the officially published statements of these companies show significant cost optimization and increase in operating margin.

Zero-based method enables companies find additional ways to improve profitability by carefully considering each business activity and each role while budgeting.

As we know, zero-based budget method requires to form budget from the scratch, and background of previous periods is almost ignored. It is correct to calculate revenues dynamics in relation to previous year in order to limit expenditure of zero-based budget.

Fixed costs shouldn’t be changing faster than inflation, while variable costs shouldn’t be growing faster than revenues. Such method of limitations will allow growing companies increase profitability, and companies with decreasing revenues will not lose more.

Cybersecurity

Information and cyber security remains a relevant issue for many companies. The intensity and complexity of cyber-attacks are constantly growing and have become a threat not only to individual companies and internet resources, but also to state agencies.

According to Kaspersky Lab, in 2016, 52% of Russian companies lost access to crucial information as a result of a cyber-incident so today cybersecurity is also a pressing matter for CFOs as they are responsible for the most important and confidential information in their company.

Given the changing demands on CFOs, which include a great understanding of business, industry, market and risks, and the fact that the role of CFO is becoming more and more business-oriented, it is extremely important for CFOs to be the drivers of prevention of possible cyber-attacks and threats to data security.

Grant Thornton recently surveyed 912 CFOs and found the following:
  • 44% of respondents are very concerned about information and cyber security;
  • 38% of respondents CFOs should also be responsible for the safekeeping of information.

AI technology

Finance Departments work with a lot of information, and as the volume of information is constantly growing, data processing speed needs to be increased. The IT component thus plays an important role in the work of CFOs. Many CFOs struggle with obsolete programs and methods still used in certain companies. This is one of the challenges encountered by CFOs in 2017.

We work with a great amount of client data. To stay competitive and increase our performance, we invest a lot in the development of the IT component of our services. Before offering a new solution to clients, we test it by applying it internally first, as we did, for instance, with our ECM system (electronic archives of primary financial documents), portal services for employees, etc.

Artificial Intelligence (AI) should be singled out from among the world trends in technology.

In a recent IBM study, 38% of CFOs noted that AI will become in the next couple of years one of the technologies that could change business beyond recognition. AI technology is the future.

An interesting fact is reported in the International Economic Forum review* of Technological Tipping Points following the survey of 800 top managers. To the question “When do you think it will be possible to prepare corporate reports using IA technologies?”, 75% answered no earlier than 2025.
Many argue that some professions will disappear with the development of AI which will give rise to mass unemployment. For example, German Gref, President of Sberbank, referred to Artificial Intelligence as the “hottest trend in 2017”. He is also certain that the development AI technologies will result in the disappearance of some professions (accountants among others), and that companies should now not only invest in AI, but also in blockchain technology, robotics and quantum computing.

CFOs should not fear change. They should keep up with the times and welcome the technologies that fully automate operational tasks and help with strategic matters as they support the work of CFOs.