This article was first published in the January 2016 China edition of Accounting and Business magazine.

Chief financial officers are now expected to be leaders first and ‘numbers people’ second, particularly as they lead companies through a ‘volatile, uncertain, complex and ambiguous’ world. 

VUCA, a term once reserved for military doctrine, is well suited to describe the world current and future CFOs face. This world is defined by a lack of a global growth engine, larger currency fluctuations, fluctuating energy prices and ongoing environmental challenges. 

These challenges were at the core of the discussion in October, when ACCA Shanghai welcomed more than 400 CFOs and senior finance executives to its CFO Summit, Asian Groundbreaker – CFO From Doing to Being. An impressive line-up of speakers discussed the macro-economic trends that have a significant impact on the way businesses operate, the skills and knowledge that top finance professionals need, and the shifting role of finance professionals as they become strategists that lead smart and diverse teams.

More than ever before, finance leaders and their organisations operate in a volatile business environment. Six years after the global financial crisis, robust and synchronised global expansion remains elusive. This year and the next are likely to mark a transition period, particularly for the Chinese economy that is moving from rapid growth to high and intermediate levels of expansion. Just as challenging, against a backdrop of a longer term shift in economic clout from west to east, emerging market economies (EMEs) seem to be losing steam. CFOs polled by Deloitte in its quarterly CFO survey reported a sharp rise in uncertainty facing their businesses and have scaled back their expectations for investment and hiring over the coming years.

‘Slower pace of growth’

China’s GDP in 2014 was RMB63.6 trillion, in dollar terms US$866.5bn more than in 2013. ‘$866.5bn equals the GDP of the world’s 17th largest economy,’ Fan Jianping, chief economist of the Information Centre of the State Development and Reform Committee told the summit. ‘However, a larger base means slower pace of growth.’ 

With slower growth, many industries are tackling issues of profitability. For CFOs, the challenge and the priority is to streamline businesses to ensure cost-efficiency. ‘Specifically, the strengthening regulations under a tighter macro-trend, increasing cross-field competition and increasingly complex needs from customers are mounting pressure on profitability,’ said Wilson Tian, director of management consulting at KPMG China. ‘Worse still, the pressing need for cost control is beginning to show more side effects.’

There are a number of pitfalls that CFOs should avoid. Top of the list are inaccurate cost information, unsustainable cost reductions and limiting the areas for cost optimisation. ‘A one-cut-fits-all approach or too much focus on short-term growth will only make the cost-cutting initiative backfire,’ said Tian.

So what is the best way to cut costs? Value-chain analysis may be crucial. The process allows firms to identify the primary and support activities that add value to the final product and analyse these activities to reduce costs or increase differentiation. ‘Most important is to identify links between activities. Only by understanding what factors drive the costs, managers can focus on improving them,’ Tian said. 

Cutting costs associated with one activity may lead to further cost reductions in subsequent ones. This is particularly true during downturns, when the goal is to maintain highly productive workers on the payroll. Labour-intensive activities are affected by the length of work hours, work speed, wage rates and similar factors, and different activities have different cost drivers. The cost of labour is always a controversial topic. When wages rise, corporate profit margins fall; that does not mean that this is where the first cuts should be directed.

‘The first thing that comes to mind may not always be layoffs or cutbacks,’ Tian said. The question is ‘how to improve productivity by rearranging the workload? [That] can be another way out.’ 

Another avenue to cut costs is to produce products with fewer components, which could lead to fewer faulty parts and lower service costs, as well as looking at accounts receivable. 

‘Companies stay efficient and competitive by keeping inventory levels down and speeding up collection of what they are owed,’ Tian said. The longer the collection period, the larger the problems that could lay ahead. 

‘A company may be letting customers stretch their credit in order to recognise greater top-line sales and that can spell trouble later on, especially if customers face a cash crunch. Getting money right away is preferable to waiting for it,’ Tian added.

Not just the numbers

The overall picture is that now, more than ever, CFOs must take a strategic view of operations and not just look at the numbers. ‘CFOs have to cross fields whether they want to transform or not, because CFOs must observe the whole business including R&D, purchasing, sales, logistics from the perspective of the CEO or general manager,’ said Gu Feng, CFO of Shanghai Automotive Industry Corporation (SAIC Motor).

The responsibility for formulation of business strategy typically rests with the broader executive team, and CFOs are key members of that team and important advisers to the board of directors. 

‘CFOs should go beyond finance and touch on every single other function in the company as well, since CFOs need to transform the company,’ said Sun Zhenyao, chairman of HiSoft and a former president of HP China. ‘For CFOs, emotional intelligence (EQ) never weighs less than IQ.’

A key priority for CFOs was the need to meet stricter rules and ensure better communication among the different functions. It is in this area that Marcia Reynolds, president of Covisioning, weighed in. An expert in the field, she pointed out that the most effective leaders can turn difficult conversations into breakthroughs.

‘The best leaders make us feel unsure of ourselves or bring us to a discomfort zone, since learning always happens in the moment of uncertainty,’ Reynolds said. Leaders like CFOs are charged with getting people to stretch their limits. This is not always easy. When done incorrectly, a difficult conversation can lead to more resistance to growth. 

CFOs should pick the right time and place to enter the discomfort zone and work to create a ‘safety bubble’ so that people trust their intentions. Drawing from recent discoveries in neuroscience, she said that leaders should ask questions that short-circuit the brain’s defence mechanisms and habitual thought patterns. Instead of being told where they are falling short, people prefer to discover their shortcomings by themselves and find ways to do better. This process of self-discovery typically leads to long-lasting changes.

Irene Zhou, journalist