The Contemporary CFO By Michael Haupt Book Summary

The Contemporary CFO, How Finance Leaders Can Drive Business Transformation, Performance and Growth in a Connected World By Michael Haupt

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No longer just bean counters, chief financial officers are taking on more wide-ranging roles, Deloitte partner Michael Haupt writes in this practical guide to CFO responsibilities. In addition to preparing financial statements, top finance executives are now leading corporate digital transformations and overseeing sustainability initiatives. Haupt acknowledges that CFOs’ financial backgrounds don’t necessarily prepare them for these new challenges, so he offers advice based on his own work with high-level finance professionals. New occupants of the CFO’s office will find this a useful reference.

Take-Aways

• The roles and responsibilities of chief financial officers have expanded. 
• CFOs must embrace “design thinking” and assume a new digital toolkit.
• Data is a precious commodity for businesses, yet many rely on poor-quality numbers.
• Five main building blocks contribute to strategic performance.
• Networks and network effects are a major part of successful digital businesses.
• Digital business platforms succeed by leveraging networks.
• Digital business ecosystems are remaking the global economy.
• Sustainability is now within CFOs’ purview.

The Contemporary CFO Book Summary

The roles and responsibilities of chief financial officers have expanded.

Traditionally, CFOs were in charge of the finance function at their corporations. However, many companies have broadened that job description in recent years. Indeed, many CFOs’ duties have moved well beyond preparing financial statements. They’re tackling much larger challenges, most notably in leading digital transformations. Chief executives increasingly lean on their CFOs to take on wide-ranging tasks. CFOs have become “change agents” in many organizations, and firms are making these new demands while also holding CFOs to the highest standards of any executive in the organizational chart.

“The old stereotype of a mere ‘bookkeeper’ is long outdated.”

In this new job description, CFOs are expected to oversee their companies’ transformations. It’s a high-stakes assignment. Such corporate casualties as Blockbuster, Kodak, Polaroid and Borders illustrate the hazards of not keeping pace with technological change: Companies that don’t adapt in a way that prepares them to respond to constant change cease to exist. As one CFO of a Fortune 100 company notes, “We need to prepare ourselves to meet the demands for a business we haven’t even seen yet.” CFOs don’t necessarily need to become experts in specific technologies, but they do need to guide their organizations to “digital maturity.” It’s a state of technological transformation that means the company not only has met the technical demands of today but is prepared to evolve to meet the needs of tomorrow.

CFOs must embrace “design thinking” and assume a new digital toolkit.

As financial professionals, CFOs are accustomed to analyzing problems in a conventional way. That approach doesn’t necessarily work when it comes to digital transformation. These challenges demand creative and unconventional solutions, and that reality has led to the rise of design thinking. Design thinking involves engineering solutions that meet consumer needs in a way that’s elegant, easy to use and probably not what end users were expecting. As company founder Henry Ford famously quipped, if he had asked early 20th-century consumers about their transportation needs, they would have asked for faster horses.

“One of the key challenges of digital transformation is that both the problem and the expected outcome are often difficult to define upfront.”

Seven digital technologies that CFOs must add to their toolkits are:

• Cloud computing – This internet-based, remote storage method led to the rise of technology as a service.
• In-memory computing – Storing large volumes of data speeds processing and response times.
• Cognitive computing – This category, which includes artificial intelligence, allows technology to replicate human skills such as speaking and learning.
• Collaboration platforms – These networks allow communication across large groups of employees.
• Blockchain – Building blocks of digital assets verify transactions.
• Data visualization – These tools allow for the presentation and exploration of vast sets of numbers.
• Advanced analytics – New methods are emerging to analyze big data.

Data is a precious commodity for businesses, yet many rely on poor-quality numbers.

With storage and processing power seemingly unlimited, many organizations are amassing not just terabytes of data but also petabytes, zetabytes and even a huge sum of data known as a brontobyte. But the reams of data haven’t led directly to more knowledge and insight. Many organizations are awash in data, but the paradox is that none of it is good enough to drive meaningful business transformation. In fact, a Harvard Business Review study in 2016 placed the cost of low-quality data at more than $3 trillion a year.

“For all the impressive gains promised, only a few companies seem to have realized the expected benefits from their ‘big data’.”

Imposing best practices on data will help organizations tap into what should be a valuable source of insight. Some suggestions include:

• Look at data as a long-term investment – Cleaning up corporate information is an ongoing project, and it should be treated as such.
• Create a sensible strategy – In many organizations, data are fragmented and siloed. CFOs need to reposition data as a shared asset. And the data strategy should connect clearly to the company’s overall business objectives.
• Standardize data definitions – When data are dispersed across organizations, a hodgepodge of definitions and reporting practices follows. Effective data strategies start with consistent definitions of metrics, so that every individual in the organization is using information in a way that means the same thing to everyone else.
• Create strong guidelines for governance and ownership of data – Companies should establish frameworks for the safety of data and the ongoing improvement of data practices. Procter & Gamble offers an example of a company with a robust model of data quality and governance.
• Leverage cloud computing – Many organizations already are using the cloud to manage their data. This step promises both lower costs and access to greater resources.

Five main building blocks contribute to strategic performance.

The first leverage point the CFO must consider is the performance goal. One challenge of a company-wide performance goal is to persuade employees that it’s not just an arbitrary target but a shared motivation, one that drives growth and improvement across the organization. Performance goals also need to be clear and tangible. Former General Electric CEO Jack Welch hit the mark with this goal: “To become No. 1 or No. 2 in every market we serve, and to revolutionize the company to have the speed and agility of a small enterprise.” Performance goals set a direction and guide everyone to work in that direction. But in a rapidly evolving business landscape, the direction can change, along with external circumstances.

“The reality – whether we like it or not – is most companies are just muddling through.”

The second leverage point is the growth model: This part of strategic performance adds further detail to the performance goal. It helps company leaders develop a sustainable approach to driving and accelerating growth. The third component is accountability, which involves putting someone in charge of the performance objective and giving that person the responsibility to decide how to reach the goal. The details of the accountability model will vary by organization. One European streaming company, for instance, divides workers into small “squads” to tackle specific problems. In a different approach, a global manufacturing team sets up front-line teams that bring in expertise from important product groups.

“For a large company to work effectively and efficiently, the different parts of its organization must work well together toward a common performance goal.”

The fourth core part of strategic performance is the information management system. Because accountability models make individuals responsible for their own performance, the management information system should give clear and consistent feedback about how well contributors are performing. The fifth and final piece of the puzzle is risk management: Digital transformation is characterized by the automation of routine tasks and the freeing of front-line workers to act in ways that are more autonomous and creative. However, this new reality creates a risk that employees might make operational mistakes or commit ethical lapses. Risk management systems need to give clear guidance about what not to do, a form of boundary setting that reduces risk.

Networks and network effects are a major part of successful digital businesses.

The power of networks defines today’s tech world. Many CFOs have been trained to understand an economy dominated by the law of diminishing returns. In the business reality of yesteryear, Ford enjoyed hefty profits until competitors such as Dodge and Chrysler entered the market. The tech industry experiences a much different trajectory: Companies that already possess a strong market position grow even stronger and more profitable as markets mature. This is a result of the network effect, which allows companies to create markets and then solidify them through interlocking relationships with customers and communities.

“Networks are an essential ingredient in any complex adaptable system.”

One important characteristic of networks is that they gather momentum over time. The worldwide web started with just one website but then grew exponentially, thanks to network effects. Networks also benefit from the “rich-get-richer phenomenon”: Established networks tend to attract large numbers of new users, while less-established networks struggle. Operational excellence also matters. Google seemed a latecomer to the internet, but by offering a superior search engine, it quickly vanquished other networks and became a prime beneficiary of network effects. To succeed in a digital world, CFOs must understand and embrace networks’ importance.

Digital business platforms succeed by leveraging networks.

Back in the 1990s, Apple was struggling as a personal computer manufacturer. Then it pivoted to iTunes and the iPod, and Apple soon built a thriving platform. By 2005, Apple had sold 30 million iPods. Apple offers an early case study in the power of network effects in building successful platforms. More recently, ride-sharing platforms such as Uber and Lyft built platforms and then sought to create network effects. To achieve this goal, a ride-hailing platform must attract a balanced match of drivers and passengers: Too few drivers, and passengers will be forced to wait. Too few passengers, and drivers won’t have enough business.

“Traditional performance metrics are not appropriate for tracking and managing the complex, multi-directional value flows and dynamic network effects in digital platforms.”

From a business owner’s perspective, platforms offer many advantages. They can grow rapidly, thanks to the reality that digital goods can be transferred and replicated quickly. Platforms also don’t have the old-economy need for physical assets. Uber commands a fleet of drivers yet owns no vehicles, and Airbnb is a major lodging company that holds no buildings on its balance sheet. And once a platform is established, it can use artificial intelligence to keep growing and improving. All these realities distinguish digital platforms from an earlier generation of traditional businesses with physical goods and linear value chains. CFOs must understand that the financial accounting analysis that once applied to traditional companies isn’t relevant to the new breed of digital platforms.

Digital business ecosystems are remaking the global economy.

Digital ecosystems are becoming a major force, generating an estimated $60 trillion in global revenue by 2025, according to a study funded by the World Economic Forum. Unlike a digital network, a digital ecosystem consists of a group of independent entities that come together in pursuit of a common goal. Alibaba is one prominent example of a digital ecosystem. By harnessing the power of this model, the Chinese e-commerce platform became one of the world’s most valuable companies. Alibaba brings together sellers, marketers, service providers and manufacturers.

“The new generation of dynamic, digital business ecosystems is rapidly evolving and reshaping our connected economy, sometimes spanning traditionally disconnected industries.”

Apple’s iPhone offers another example of an ecosystem. While Steve Jobs at first was skeptical of opening the platform to third-party app developers, the wave of new apps from outsiders helped create a network effect. The ecosystem structure also helps companies achieve resilience. That’s how Microsoft’s Windows has remained the dominant operating system for decades. Building an ecosystem isn’t cheap – during its long road to profitability, Amazon reported cumulative losses of $3 billion in its first eight years of operation.

Sustainability is now within CFOs’ purview.

In the old days, a CFO might have sacrificed long-term value in pursuit of quarterly profits. In the newer iteration of the role, the CFO drives not just digital transformation but also sustainability initiatives. The reality is that most executives now see climate change as a grave threat. And some corporations are developing a new mind-set, one that sees companies pursuing performance goals that go beyond their financial statements. For instance, the Italian energy company Enel Group transformed itself from a traditional power producer into a leading generator of green energy.

“To meet quarterly earnings and short-term investor expectations, CFOs have consistently been forced to forego investment in long-term value creation and prosperity for the core business, for other stakeholders and for future generations.”

Paul Polman, the former head of Unilever, is another leader in the rethinking of the corporate role in society. Polman has called for a shift in attitude in corner offices. “We have to take responsibility, and that requires more long-term thinking about our business model,” Polman said in a 2014 interview. The Unilever Sustainable Living Plan drew a roadmap for the company to operate in a way that was less harmful to the environment. Both Enel Group and Unilever embraced a sustainability plan as a way to achieve significant value over the long term, an initiative largely driven by their CFOs.

About the Author

Michael Haupt is a partner at Deloitte Consulting in London. He’s a leader of Deloitte’s Finance, Performance Management and Technology practice in Europe and works closely with senior leaders of global companies.