The role of the Chief Financial Officer (CFO) has undergone a significant transformation in recent years. Traditionally seen as number crunchers responsible for financial reporting and budgeting, modern CFOs have emerged as strategic partners to the CEO and key decision-makers within organizations. This shift can be attributed to the rapid advancements in technology, the increasing complexity of business operations, and the growing recognition of the importance of financial insights in driving strategic initiatives.
In an episode of McKinsey & Company’s podcast In the Strategy Room, senior partner Kapil Chandra and associate partner Matt Stone elaborated on the reinvention of the CFO’s role amidst waves of disruptive digital innovation. Digital has transformed the economics of entire sectors and led to the growth of new business models around platforms. CFOs have a pivotal role to play in these new digital ecosystems, driving business and industry-wide change through a deep understanding of how digital and analytics can transform the ecosystem.
A fast changing landscape assisted by tech
The digital age has brought about a paradigm shift in the way organizations operate. Technology has disrupted traditional business models, ushering in a new era of data-driven decision-making. CFOs have had to adapt to this changing landscape by embracing digital tools and leveraging data analytics to gain valuable insights.
For example, CFOs can improve their cash flow management by adopting artificial intelligence (AI) and predictive analytics. These tools can help CFOs to identify trends and patterns in their cash flow data, which can then be used to forecast future cash needs and make better decisions about how to allocate resources. Additionally, data management and process automation can help CFOs to streamline their workflows and free up time to focus on strategic initiatives. This can lead to improved decision-making and a more proactive approach to managing cash flow.
Strategic decision-making beyond finance
In the past, CFOs primarily focused on financial reporting, compliance, and cost control. However, the digital age has elevated their role to that of a strategic partner. With access to vast amounts of data and sophisticated analytics tools, CFOs can now provide valuable insights to support strategic decision-making. A 2019 study by McKinsey found that companies with highly effective finance organizations were twice as likely to have CFOs who actively contributed to strategic initiatives.
The survey also highlights three ways by which CFOs can reinvent their roles and drive change in their companies: by actively leading transformations, spearheading digitization throughout the company, and capacity-building in order to sustain complex transformations within and outside the finance function.
From users of tech to driving its adoption
Having used technology-led innovations, many CFOs are now at the forefront of technology adoption within organizations. They are responsible for evaluating and implementing financial systems and technologies that streamline processes and improve efficiency. The introduction of cloud computing, robotic process automation (RPA), and artificial intelligence (AI) has revolutionized financial operations, enabling CFOs to automate routine tasks and focus on more strategic activities.
“The greatest proportion of CFOs felt that leading digital transformation would be the hardest area to achieve success this year,” said Marko Horvat, vice president, research in the Gartner Finance practice.. “The survey suggests that CFOs are mostly not comfortable delegating oversight over such matters, and they want to keep a firm grip on the reins.”
CFOs should therefore have a deep and broad understanding of new-age digital technologies such as AI, ML, blockchain, data analytics, automation etc, in order to effectively identify opportunities to streamline operations and promote efficiency using these solutions. Since innovation is a key driver of success in the digital age, CFOs need to be involved in driving its usage within their business. They provide financial insights and analysis to support investment in research and development, identify growth opportunities, and foster a culture of innovation.
Data Analytics and Forecasting
One of the key areas where CFOs have embraced digital transformation is in data analytics and forecasting. Advanced analytics tools enable CFOs to extract meaningful information from large datasets, allowing them to identify trends, anticipate risks, and make accurate predictions. According to PwC’s August 2022 Pulse Survey, 47% of CFOs said that building predictive models and scenario analysis capabilities is their main priority. 53% of the survey’s respondents also said that they planned on leveraging data analytics, AI, automation, and cloud solutions in order to drive digital transformation throughout the organization and automate as many processes as possible.
Given the current geopolitical tensions, global economic slowdown, inflation, and rising interest rates, CFOs would do well to focus on data-driven scenario planning that allows them to mitigate the complex risks of an increasingly complex business environment. They should also lead the charge in business agility, positioning their businesses to respond quickly to new laws and increasing regulations from governments around the world.
The digital age has brought about new risks and challenges for organizations. CFOs have taken on a crucial role in managing these risks and ensuring the financial stability of the company. They play a pivotal role in cybersecurity efforts, fraud prevention, and regulatory compliance.
The Pulse survey discovered that 40% of all respondents felt that more frequent and/or broader cyber attacks posed a serious risk, while another 38% felt that they were a moderate risk. Acquiring and retaining talent was also seen as a serious risk, while only 30% of the respondents felt that recession was a serious risk.
CFOs should be able to identify, assess, and manage risks effectively, as well as communicate with the executive team and the board of directors regarding the nature of the risks and the management strategies being deployed.
CFOs are no longer confined to the finance department; they are now actively involved in engaging stakeholders across the organization. They collaborate with other C-suite executives to align financial goals with strategic objectives. They have to navigate the differing goals of the various stakeholders, both internal and external, and find a balance that satisfies everyone. This includes project managers, finance teams, other C-suite executives, and investors, as well as customers, business partners, and regulators.
Today’s CFOs need to understand the various stakeholder groups and how they each add value to the company’s processes and therefore how best to communicate with and influence them. They must work towards creating a forum where each group can express their views freely. Emotional intelligence and clear communication are important skills for CFOs in their new, all-encompassing roles. “A CFO must communicate complex financial information to non-financial stakeholders in a clear and concise manner. They must also be able to build relationships with external stakeholders, including investors, analysts, and regulators.” says Deepak Narayanan, Founder & CEO, Practus.
The role of the Chief Financial Officer has transformed considerably in the digital age. Gone are the days when they were solely responsible for number crunching and financial reporting. Today, they have emerged as strategic partners, leveraging technology, data analytics, and financial insights to drive decision-making and support organizational growth. As technology further disrupts traditional business models, CFOs are embracing digital tools and advanced analytics to gain valuable insights. They play a crucial role in strategic decision-making, actively contributing to initiatives that shape the future of their organizations. By driving technology adoption and innovation, CFOs streamline processes, improve efficiency, and automate routine tasks, enabling them to focus on more strategic activities.
Furthermore, CFOs have taken on a critical role in risk management, ensuring financial stability, cybersecurity, and compliance within organizations. They engage stakeholders across the organization, collaborating with other executives to align financial goals with strategic objectives. Effective stakeholder engagement and clear communication skills are essential for CFOs to navigate the differing goals and perspectives of various stakeholders. Therefore, the modern CFO is a strategic partner and catalyst for change in the digital age. Their ability to harness technology, analyze data, manage risks, and engage stakeholders positions them as key drivers of organizational success. By embracing their expanded role and leveraging their diverse skill set, CFOs are poised to guide their organizations through the complexities of the digital landscape and achieve sustainable growth in the years to come.