In this second article in a series on the digital CFO, ACCA and PwC look at how the finance team can use data to align themselves with strategic goals
This article was first published in the September 2017 international edition of Accounting and Business magazine.
In the economic downturn of the late 2000s, many organisations focused on cost-cutting and austerity, strengthening balance sheets and building reserves of working capital. With increasing competition and disruption in the market, and ongoing economic and political uncertainty, organisations are still trying to invest to achieve sustainable growth. To succeed, they have to focus on a clear strategy, and consider how digitisation can underpin that strategy. Yet the challenge remains of where to make the most appropriate investments.
Growth today comes from focusing on core capabilities. Businesses often focus on investing where they will achieve the greatest return, so they need to have a clear understanding of the markets, products and channels where they achieve the most significant returns. With the emergence of disruptors in many industries, it is all the more essential to take a proactive approach. The finance function can help by focusing on its core capabilities around cost control, analytics, planning, forecasting and investment appraisal rather than purely reporting on costs.
Finance functions often act as partners to the business, providing stakeholders with valuable insights. By assuming the role of the ‘diligent caretaker’, they are also looking after the cost base and ensuring that money is spent on ‘good costs’ that support business growth, as opposed to ‘bad costs’, which do not.
CFOs need to address two significant cost questions if they are to make the best decisions: how does the finance function help the organisation align costs to the business strategy? How does it take the lead on this tough journey? CFOs can’t expect the business to cut costs if they do not lead the way in their own direct area of influence.
Digitally enabled CFOs need to understand the strategic drivers and identify where value is being generated. Leading-edge analytics have a critical role to play in providing these insights. A recent study by Strategy&, part of the PwC network of firms, and INSEAD found that companies that are leaders in data analytics are on average 38% more likely to be leaders in commercial performance.
In PwC’s survey of 2,100 executives in January 2016, only 33% said their next big decision would be supported by data and analytics, and only 24% used predicative analytics. Nearly 60% said that they used data and analytics to look backwards.
An organisation’s ability to extract insights from data is significantly increasing, including instantaneous information-gathering via the Internet of Things. For example, connected cars can provide telemetric and performance data to manufacturers in real time. This accumulation of both structured and unstructured data gives significant insights for strategic decision-making.
Taking control of data
The CFO needs not only to ensure that relevant financial and operational data is included in this ‘data lake’ but also that there is appropriate governance over the data so that it can be used to improve the quality of decision-making. If finance teams are not equipped to do this, the CFO needs to think about developing their skills.
If the finance team can’t make the data useful in supporting strategic business decisions, then the CIO may end up encroaching on the territory of the CFO. And if capital and operational costs are incurred in aligning decisions with the business strategy, then it is important that the CFO be there to inform and influence.
Many investment decisions now require a greater context before the organisation commits. Cost optimisation is about understanding a combination of factors. Investment cases may not look right across the enterprise; they could be aligned to unit-specific programmes where the greatest return can be generated. Intangible values, including the value of the brand and talent, are areas for investment.
These decisions can also be supported using predictive analytics and data models, and extrapolating forward the impact of certain investment decisions. CFOs and their teams are best placed to provide the robustness to support these analyses, but this approach raises several challenges. Not only does there need to be sound governance over the data but also a strategic focus, which may well challenge the traditional reporting structures.
Finance is less likely to object to business developments if it can support the analysis behind these decisions. But this has to be managed properly. You need to be clear on the costs that support the organisation’s core business activities. The traditional view of apportionment may need to be challenged, which in turn may reappraise the return from core activities.
Achieving this shift in focus requires good data analysis tools. Many organisations are finding that the traditional key performance indicator reports that have been produced for many years are no longer relevant because they are not aligned to the strategic goals. Using simple analytics tools enables finance to improve decision-making across the organisation, speeding up the decision support process and providing more forward-looking insights.
So what of the finance function itself? Finance can be a role model in aligning itself to work in conjunction with the strategic goals. Through application of techniques such as zero-based budgeting, it can optimise its own cost base in alignment with the core capabilities. Opportunities for automation can be applied to areas where there is greatest commercial advantage, streamlining processes that create the greatest return.
Finance as role model
If the finance team is to support strategic decision-making, it needs to have the right skills in place to do so. It needs individuals who understand and can work with data and analytics tools at several levels. Advanced analytics require data-scientist skills to deliver insights from structured and unstructured data. Business partners need to be able to perform data interrogation using desktop tools that look beyond the traditional reports to give business leaders true insights into an entity’s operational performance and offer the advantages of scenario planning.
Investing in these skills, which may well be at a premium, can provide the business case for automation if finance is to truly align its cost base with the strategic goals of the organisation. ACCA’s research Professional Accountant – the future highlighted this changing capability mix.
It is important to have a culture of innovation and sharing in the finance function. By fostering this, team members at all levels can develop cost and efficiency strategies and create a common purpose in achieving the organisation’s strategic goals.
Jamie Lyon, head of corporate sector for ACCA, in collaboration with Brian Furness and Andrew McCorkell of PwC, and Jens Madrian, CFO/COO of Reactive Technologies