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Why digital should be on the CFO’s radar

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  • Introduction

    Digital is fundamentally changing how companies do business. Enabled by data and technology, digital is a continuous form of disruption to business models, products, services and experiences. It has radically changed the way people consume content, communicate and access products and services.

    New companies are popping up overnight even as existing companies work to gain the agility to compete in today’s increasingly complex market landscape. Today’s survivors and tomorrow’s winners understand the opportunities and the risks that digital creates.

    They are exploiting the opportunities and managing the risks by making their organizations essentially digital.

    No executive should be more concerned about the opportunities and risks digital represents for their business than the CFO.

    Digital technologies are fertile grounds for innovation, which lead to new products and services, new channels to market, greater efficiency and more effective, measurable marketing spend. As a result, digital is already reshaping many industries, giving the early adopters a clear competitive advantage that can disrupt the industry as a whole, and forcing other players to either follow behind or lose their ability to compete.

    Market leaders in industries at the fore of the digital revolution, such as media and entertainment (M&E) and technology, have learned that digital is not something they needed to adopt at a point in time. It is a continuous reinvention of how they link with customers, consumers and employees to create different ways of working.

    Other industries are still on the cusp of their digital transformation. For example, the pharmaceutical industry is starting to use digital technology to shift its focus from selling medication, to selling health outcomes. In a few years' time, wrist watches may stream data about blood pressure and other vital health measures to the cloud.

    The automotive industry is also starting to use digital technology to create peer-to-peer car sharing businesses. Cars may soon be digitally connected to other drivers, traffic conditions, insurance companies, the police and the parts of the supply chain that monitor the different parts of a car that get serviced. These changes will fundamentally alter the automotive industry.

    Digital can also disrupt the competitive landscape by levelling playing fields, giving small start-up companies or non-traditional competitors the same level of market access as an established company. Organizations that were once on the periphery of your industry can suddenly become a real threat to the core of your business, thanks to innovative use of digital technology.

    Digital is not a technology or marketing issue and therefore cannot be thought of in isolation. It is changing how business is done, and will be one of the defining characteristics of this era.

    For CFOs, it presents massive opportunities to create shareholder value and grow the business as well as new and unforeseen risks that can put a company’s finances, brand and reputation in harm’s way.

  • What role should CFOs play in digital?

    In the last decade, the CFO’s role has expanded from its core focus on controls, budgeting and reporting to a broad leadership role responsible for charting the company’s growth agenda while protecting the organization from risk. In fulfilling this role, CFOs will increasingly need to understand the power of digital to support them, while also understanding the associated risks.

    Take digital out of the silos

    For many CFOs, the term digital evokes technology channels and tools such as social media, cloud technology and mobility. But leading CFOs understand that digital represents an ever broadening field.

    Areas where digital is already having a major impact in many industries include business strategy and operating models, product and service innovation, supply chain efficiency and flexibility, tax and legal compliance, and customer targeting and experience. For example, in the luxury industry, the customer has historically derived brand value from the service they receive when they enter a shop or showroom. The ability to purchase or share high-end goods online alters this brand experience.

    When embraced at the heart of a business, digital can redefine the entire value chain. It serves as a powerful tool for achieving a company’s strategy and influences what that strategy should be.

    Get the balance between innovation and risk management

    To seize the potential of digital, CFOs need to work closely with functions across the enterprise. Collaborating with others will help CFOs understand how the technological landscape is evolving and what the functional needs are so that they can make the right investments to encourage and enable innovation and support the business' growth.

    One of the greatest risks associated with digital is being surpassed by the competition through lack of innovation, or inaction. But there are other risks associated with digital that CFOs need to manage proactively – such as reputational risks associated with data usage and cybersecurity, or tax obligations relating to e-commerce.

    CFOs need to implement the right governance framework and safeguards to manage these risks and sustain business continuity.

    Tap into expertise of “digital natives”

    To embrace digital’s potential for the business CFOs need to consider that they may have skill and knowledge gaps to address. The key to bridging this gap will be to work closely with the Chief information Officer (CIO) and the Chief Marketing Officer (CMO), who are likely to be closer to both market trends and technological innovations.

    Collaboration across the c-suite is crucial to embedding a whole of organization approach to digital - in a recent EY study, CIOs said they are most effective when they collaborate with other C-suite executives.

    CFOs should also be rethinking what skills are lacking within their finance function, as well as those gaps that will emerge as digital becomes more pervasive. CFOs need to look across the organization and recruit digital natives, those who know how to use and apply technology and data to solve problems quickly.

    CIOs and CMOs historically have had digital natives on their teams, but the finance function has not. As demand for these skills grows across all industries, and all parts of the business, a war for digital talent is now on.

    Much of the innovation and growth is being driven by those who didn’t grow up in legacy companies, but who have grown up in a digital world.

    Finding the right talent to meet your business needs requires a strategic plan that maps your workforce against your business strategy.

    In five years’ time, digital will be a standard way of doing business. CFOs need to prepare today’s finance function to meet the business needs of tomorrow.

    Take a holistic view

    Whether they have chosen to embrace it or not, no company today is untouched by digital, perhaps only because their employees and customers are talking about them on social media. But in most companies that have stayed at the periphery of digital change, the CFO will likely find that there is digital spend happening in pockets across the organization. Companies are diverting more money to digital advertising, IT development or consulting with third parties on social media. The CFO should have both a clear view of exactly what is being spent on digital, and the value that is being generated. They often have neither.

    For many companies, digital is already a standard way of doing business. In five years' time, it will be every business' standard.

  • Manage risks to realize value

    CFOs need to manage digital risk

    EY - Digital  disruption

    The regulatory world is catching up with digital advancements. As companies seek to do more with digital technology and data, regulators are looking to set boundaries. CFOs need to be aware of how the regulatory landscape is evolving differently around the world, and ensure their companies' data practices comply, or else face the prospect of serious financial or reputational damage. [See a transcript of this video]

    While the value digital can bring to an organization is immense, it can be completely undermined if the associated risks are not managed. The most significant of these risks is being squeezed out of the market because of inaction in an evolving competitive landscape. However, there are also significant regulatory, reputational and financial risks relating to how companies manage the data they collect.

    The digital revolution has been rapid, but regulation is catching up. Remaining compliant, however, is an ongoing challenge, as regulation varies from country to country. While some countries, such as the United States, prioritize data sharing, others prioritize individuals' privacy.

    In the European Union, new legislation to be introduced on 1 January 2015 allows for companies that infringe data laws to be fined up to the value of 5% of their global turnover. CFOs therefore need to be confident that the data being collected across their entire organization is being managed holistically. They also need to ensure that the company's data is being registered correctly with the appropriate authorities – particularly if they intend to sell the data they have collected to a third party. Assuming that all data that the company collects is for the company to use is a common error.

    The European court recently ruled that individuals have a 'right to be forgotten.' Companies must have the processes and IT systems in place to ensure that an individual that wishes to be completely wiped from a company's records, can be.

    While CFOs won't be directly involved in data collection, they should ensure the IT systems and processes are in place to protect their data from inappropriate or illegal use.

    Increasingly today, organizations are competing not only on their financial performance but on their social responsibility performance. Those that can demonstrate that their data management practices respect and protect their customers' privacy achieve reputational benefits that enhance shareholder value. Legal compliance, therefore, is an absolute minimum.

  • The implications for media and entertainment

    While digital affects all industries, M&E are among those that have been most impacted. The most obvious influence of digital on this industry is the way it has transformed the delivery and consumption of media and entertainment.

    There was a time when print newspapers and magazines delivered the news, and television shows arrived through a cable and were transmitted by a tube television in the family room.

    Today, multiple outlets create news and distribute it through a variety of devices. Consumers today have access to hundreds of television channels and the ability to watch them anywhere and anytime.

    For M&E CFOs, the future of digital is now. The top three challenges they are grappling with are:

    • Platform/technology disintermediation
    • Getting consumers to pay fair value for content
    • Structural and regulatory uncertainty in select markets

    In EY’s recent survey of global M&E CFOs, 74% said the evolution of digital and online distribution is a priority for their organization. CFOs are positioning for growth and they see digital and data analytics as the means to achieve it.

    Consumers have more devices and greater access to faster broadband speeds, enabling them to do more on social media, in the cloud and on the go. The speed at which digital is moving, combine with consumers’ unquenchable appetites, is fundamentally changing the business landscape for M&E companies.

    To put it in perspective, the telephone, a ground-breaking invention in its time, took 75 years to connect 50 million people around the world. Today, popular gaming apps have done it in 30 days.

    The capacity and scale of digital’s capabilities is presenting enormous opportunities for M&E CFOs. Yet, it is not without its challenges. First among these is the removal of intermediaries or distributors in the M&E value chain. Consumers can now access content directly without having to go through a traditional “middleman.”

    This direct-to-consumer approach is turning business models upside down and leaves many M&E companies wondering who truly owns the customer relationship. Tied into this challenge is the inability of M&E companies to pay “fair value” for content, when there is ever-growing competition from celebrities and consumers that also produce huge volumes of material, often for free.

    Never before has the old adage “content is king” been more true, as M&E companies must compete with new competitors and prove to consumers that their content is worth its price.

    Because of the proliferation of content, M&E executives are also seeking new ways to engage with consumers. Seventy-two percent of CFOs surveyed believe that interactive media, social media and gaming will be areas of great growth opportunity.

    Like all industries, it has been difficult in M&E to find the talent they need to transform their companies. As a result, CFOs in the industry say they are investing in digital staff faster than digital revenue is growing.

    As well as this, companies are looking to recruit personnel that are multi-skilled - who can sell digital products and services, engage with consumers and market these products differently.

    For M&E CFOs, the future is now. A greater use of analytics will provide greater insights that help CFOs formulate their next steps and how their digital investments are performing.

    According to EY’s Global Media & Entertainment’s 2014 CFO study, more than 60% said having the right insights allows them to make better decisions. Fifty-two percent plan to make improving decision analytics or improving systems and processes a priority.

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