This article was first published in the January 2013 China edition of Accounting and Business magazine.
As the global financial crisis continues to hit economies and international business, the role of the CFO is in a state of flux. Growing demands on the finance function have increasingly drawn CFOs into strategic decision-making processes and they are fast becoming a major interface between the business and its stakeholders.
Speaking at the first regional ACCA CFO Summit Asia, held in Hong Kong, ACCA chief executive Helen Brand remarked that the modern CFO had become ‘a true brand guardian, the senior business partner extending the reach of the finance function across the whole organisation’.
She added: ‘CFOs are prioritising the re-engineering and transformation of finance activities and their own position at the forefront of business.’ However, she warned that achieving this goal in a sustainable manner would be difficult. Her comments set the tone for a day of reflection and debate over the critical issues facing finance leaders in Asia.
Presenters and panellists participating in the summit discussed pioneering approaches to outsourcing, talent management, risk management, corporate governance and other finance and business processes that need to be retooled or overhauled altogether in the process of transformation. The discussions revolved around these issues because, as Brand pointed out: ‘Nearly everyone in this room faces the challenges of keeping the finance function in touch with the changing needs of the business world and anticipating how those needs are going to change in the future.’
Brand stressed the importance of a robust response to the transformation challenge. ‘If the finance function and the accountancy profession want to be there for business in the future, it must change with business, to meet changing needs,’ she declared, while acknowledging that the task was not a simple one. ‘We all know that business needs are incredibly complex and numerous, and there is no facet of business that is immune to change. The ways in which the finance function adapts and changes will need to be equally complex and numerous.’
In his presentation on driving finance transformation through business analytics, Scott Goodwin, CFO of IBM’s software group, growth markets unit, said that in becoming a globally integrated enterprise his company now deployed a significant portion of finance and accounting staff in shared services centres, for example, to reap the benefits of labour and process arbitrage. Equally importantly, the transformation has freed the entire finance and accounting team to focus on supporting the CFO’s expanded role as change agent and trusted business adviser.
‘The challenge is to leverage the gains,’ Goodwin said. ‘While everyone in finance now uses a common chart of accounts and financial systems, the high volumes of data generated were only recently applied to analytical tools and processes for forecasting and decision support. There was minimal integration of financial and non-financial information and use of this information rarely went beyond what is possible through the extensive use of Excel worksheets.’
That’s all beginning to change with analytics-driven tools, processes and organisations. Goodwin said: ‘The use of analytics is an important and emerging new trend allowing an enterprise to transform, gain insights and optimise based on the analysis of an increasingly large amount of data.’
In his presentation on business and finance analytics, Robert Bergström, executive principal at Accenture, agreed that analytics could enhance decision-making and bring competitive advantage. He added that one of the key drivers of a business strategy was ‘to develop rich analytic capabilities and be able to prioritise capabilities based on expected value generation’.
The truth is that implementing business and financial analytics is a complex process that must take into account not only technology but also mindsets, organisational complexity, business culture and volatility in the business and economic environment. ‘The world was more stable 15 or 20 years ago. You could actually do an annual plan based on a set of assumptions that might change only slightly,’ Bergström said. Today, the assumptions behind the annual plan and forecasts change from month to month.
The size of the organisation was also a factor, said Norman Sze, managing partner, consulting, at Deloitte China, who was on the panel discussing transformation for value. A modest-sized organisation can probably rely on Excel spreadsheets to dig out information for decision support, he reckoned, but analytics programmes are required in larger and more complex companies to provide financial, risk and customer data modelling, as well as to craft different scenarios and undertake stress-testing.
Not just costs
Sze’s fellow panellist, Holger Lindner, former CFO at Daimler South East Asia and now a member of the advisory council of the Singapore CFO Institute, flagged three other critical elements in finance transformation: cost-cutting, effectiveness and compliance.
‘Most companies think of finance transformation once they realise there’s a problem – a problem with competitiveness, a problem with margins,’ he said. ‘So the immediate reflex tends to be, let’s cut the cost base to improve margins.’ The challenge for finance is to recognise – and make sure the board and the rest of management also recognise – the need to tackle the effectiveness part of the equation as well.
‘It’s easy for management and the board to say, let’s cut costs by 20%, now please work it out,’ said Lindner. ‘But as CFOs we have to look at the entire equation of value, which is benefits minus cost. If you look only at cost, you tackle a relevant part of the equation, but not all of it.’
In short, attaining cost efficiency at the expense of effectiveness is ultimately self-defeating.
Compliance and governance are part of the equation too. Lindner said: ‘The sheer amount of regulation we have to comply with in any given country, especially for a multinational with involvement in and exposure to different legislations, is so overwhelming.’
One answer is business process outsourcing (BPO) and/or insourcing via shared services centres. Citing Deloitte research, Sze listed the processes that ‘definitely can be outsourced or centralised’ as accounts payable, cash application, travel and entertainment, general accounting and other transactional finance, as well as consolidation, reporting, budgeting and planning.
Sze and Lindner both agreed that cost saving based on labour arbitrage was no longer the key driver for either insourcing or outsourcing. ‘In Asia Pacific, the cost savings are not as big as in the US or Europe,’ said Lindner. ‘The key drivers are standardisation, which is one basis for analytics, reducing complexity, increasing efficiency, improving effectiveness – doing things faster, better and with fewer mistakes.’
So what will be left in the retained finance function? At the head-office level, Sze suggested it could become a centre of excellence for consolidation, reporting, cash management and other specialist activities. At local levels, the focus could be on budgeting, planning and forecasting.
Lindner said the retained function could focus on becoming a respected partner to the business: ‘My core function is not to crunch the data; it is to make use of the data to create value. The data that has been standardised will flow in from different sources and will just need to be processed [by shared services]. I don’t need to do this in the retained function.’
One thread that wove through almost every panel discussion and presentation was the importance of talent in finance transformation. ‘You don’t want to lose your best people,’ said Lindner. At the outset, you don’t know who is really going to be affected by change – whose job will become redundant, what new skills and expertise will be needed, what offices will be closed or relocated. Communication lines must be kept open and managers should be ready to listen, explain and reassure.
But this dynamic is playing out against the backdrop of finance capabilities in Asia that are, in Sze’s words, ‘not yet of global standards’ in terms of maturity. The region’s talent pool is still shallow in terms of professional accounting qualifications – and even shallower for the skills and expertise needed to support the CFO.
‘The finance function cannot afford only to look at the best people,’ Lindner warned. ‘We also need to look at the right people.’
In the same way, not every CFO has to take on an overarching strategic role – for example, if they are in a family-owned business. The CFO is expected to be ‘a sounding board for the board and for the CEO, provide necessary finance modelling and stress-testing for business propositions, and be a partner to the CEO,’ said Chiew Chun Wee, ACCA head of policy, Asia Pacific, in his presentation on finance leadership.
Chiew added that the CFO had a plethora of duties that required a variety of skills. ‘A CFO cannot afford to be a specialist only; he or she needs to acquire the ability to transform at will.’
Risk and governance
Above all, CFOs will be increasingly called on to help deal with the risks spawned by the uncertainty in the local, regional and global economy, not to say population growth, global warming, currency fluctuations and the risks inherent in managing the business. ‘Among all executives, it is the accountant and finance director who is least a risk-taker,’ said James Lee, director of finance at Regent Hotel Singapore, because of training, professional standards and ethics, which is the bedrock of accountancy.
He was speaking at the panel on risk and reward. At consumer goods and adhesives company Henkel, reported its Asia Pacific vice president and CFO Marco Swoboda, an inventory of risks was compiled every year. He added: ‘However, the finance function drives risk management through a lot of other tools, starting with the simple accounting concept of provisions. Once a provision is or might need to be built up, all of a sudden you have enormous focus on the respective risk for mitigating the impact as much as possible. In a larger perspective, risk management is an integral part of budgeting and forecasting processes.’
Patrick Chan, executive director and CFO of Sun Hung Kai Properties, said: ‘We have so many policies, procedures, theories, tools and techniques that help us do a good job on risk management but it all boils down to people, more than anything.’
The ethical tone should be set at the top and the board – the CEO and other senior managers should talk the talk and walk the walk.
Paul Mok, group financial controller at Orient Overseas (International), said: ‘The CFO has a role to play as catalyst. He is also responsible for cultivating the right kind of financial control-minded atmosphere in the organisation.’
As Chan put it: ‘The CFO should be the conscience of the company.’ It is yet another expansion of finance’s ever widening remit.
‘Risk management lies at the core of whatever we do,’ noted Clarence Yang, head of corporate governance Asia ex-Japan at BlackRock, during a panel discussion on corporate governance. ‘We review the quality of the management teams of the companies we invest in and their ability to manage risk in the most effective way. We believe that this leads to an environment where projects can be executed as best as possible.’
Fifteen years on from the Asian Financial Crisis, corporate governance practices and related regulations continue to evolve in Asia Pacific, yet panel speakers Kevin Lau, director at Hin Yan Consultants, and Arnout van Rijn, executive vice president and chief investment officer at Robeco Asia Investment Center, agreed that corporate governance should not be a box ticking exercise. Noting that failing to pay attention to the benefits of good corporate governance could lead to a loss of value, Lau argued that a company ‘could be punished by investors for not doing enough in maintaining good corporate governance.’
In his presentation on the coming 10 to 15 years, veteran accountant Ng Boon Yew, executive chairman of Raffles Campus and chairman of ACCA’s Accountancy Futures Academy, said that ‘concepts such as justice and fairness could be incorporated in the reporting system of the business in the future’ as the public and investors sought more evidence that companies were acting responsibly.
His presentation highlighted the key findings of ACCA’s recent report, 100 Drivers of change for the global accountancy profession, among them the growing role of emerging economies in the development of global accounting standards and practices.
Closing the summit, ACCA Hong Kong chairman William Mak noted that the modern CFO helps organisations navigate incredibly challenging times, and grows both top and bottom line in the face of a highly competitive climate – a truly difficult task. ‘CFOs have never been more important in bringing their financial skills, acumen and expertise to bear. While these developments present enormous challenges, they also present excellent opportunities for finance leaders and the functions they lead. They very much place the finance function centre stage for the business.’
Cesar Bacani, journalist