CFO Series: Finance as a Competitive Advantage
The time has passed when CFOs could focus only on cost control and financial reporting. A company’s finance function, in the digital world, is a driver of competitive advantage, of strategy, and of innovation.
In a competitive environment, the winner will be the company that best acquires financial resources, invests those resources in the right activities, and—over the long term—best manages risk. The CFO’s job is not to reduce costs, but to spend on the right things and to manage that spending well. It is to channel resources to the right investments and away from the wrong investments. It is to make good trade-offs between long-term and short-term spending and returns. And it is to communicate those decisions and their results to the rest of the company’s leadership, to the board of directors and its audit committee, and to shareholders and analysts.
If the company has an opportunity to innovate—to develop a product or a process that gives it a competitive advantage—then a superb CFO will make sure resources are available to seize that opportunity and will make sure that those resources are quickly available without much process waste. A talented CFO will ensure that the company invests in agility—that is, in the ability to handle uncertainty by responding quickly and nimbly to unexpected events and changes in the environment. A great CFO will make sure that the company has the right data to make good decisions. An ideal CFO will make sure the company has controls in place to manage risk, and that those controls are cost-effective, efficient, and do not slow the company down as it is trying to compete.
Now, as a thought experiment, let’s say that there are two competing companies, both with access to the same labor market, the same customers, the same channels. One of them has a “superb, talented, great, ideal” CFO, as I just described. Is it not clear that that company will have a huge competitive advantage? It will be more innovative; it will be leaner; it will be making good future-oriented decisions; it will get to market more quickly with new ideas; it will earn a higher return on its capital; it will have less risk; and the CFO will communicate all this to the capital markets to keep the share price climbing and to have access to capital at a low cost.
Some good news for CFOs: now that we are in a digital world, the CIO can help make you a hero in all of these areas. In fact, mastery of digital magic is the key to becoming a strategic CFO. Let’s start with data. It is the IT organization that can acquire data and make it available. IT can give the CFO analytic, reporting, and visualization tools. With the cloud, the company can build a data lake that erases company silos and gives the CFO transparency across all lines of business and functions. Merger integration can be smoother if the acquired company’s data is quickly merged into the data lake and made available for analysis side-by-side with the acquiring company’s data.
Many of the company’s investments will be IT investments. Today’s Lean and Agile IT approaches can help manage these investments better. They make it possible to test hypotheses before committing large investments. They allow for continuous oversight and monitoring of the investment while it is in progress and constant adjustment to maximize business value. They “maximize the amount of work not done” by focusing requirements on what is necessary to meet objectives rather than on wish lists and pet projects. They allow lower-risk incremental investments.
They also allow for more efficient and effective application of capital when it is invested. An IT team working in the cloud and using DevOps practices can very quickly turn a business idea into a deployed capability, with low overhead and little waste. It can drive innovation by testing ideas quickly, inexpensively, and at low risk. It can build agility into IT systems that will make the company more nimble—and, therefore, maximize future cash flows—by using contemporary microservice architectures, by creating reusable components, and by integrating open-source and cloud-based components.
With the cloud and DevOps, the IT organization can automate many types of governance controls, making them more effective and also leaner and less intrusive. These governance controls are self-documenting and auditable, and therefore, better able to satisfy auditors and the audit committee, as well as keep the company in compliance with any of its regulatory frameworks.
The digital world is one in which capabilities can be created and can reach the market extremely quickly. In order to make the most of this, the company must find a way to make governance and investment decisions quickly as well, while at the same time keeping risk low. It must, in other words, make sure capital flows to the right investments quickly. It can do this because with automated controls, fast feedback cycles, staged investments, and high transparency—all hallmarks of today’s IT practices—risk can be dramatically reduced. In fact, the risk of stasis becomes higher than the risk of moving forward nimbly.
A lean path to making small, incremental, low-risk investment decisions; an oversight process that ensures that capital is deployed to the initiatives that will create business advantage, and only those; risk management controls that are effective but do not impede agility. These are areas where the CFO can be a hero, making sure that the company can innovate and stay ahead of its competitors, while at the same time managing the real risks. A true source of competitive advantage.