The four forces disrupting finance leadership

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In our 2010 research, we examined the growing breadth of the CFO role, and identified six core areas of the CFO’s responsibilities. While these core elements of the role remain true and relevant for finance leaders today, our latest research shows that four new forces are changing the expectations placed on CFOs: digital; data; risk and uncertainty; and stakeholder scrutiny and regulation.

 
EY - The four forces disrupting finance leadership
  • Force 1: Digital

    Caught in the eye of a perfect digital storm

    The challenge for CFOs

    Lack of understanding

    Among the finance leaders we surveyed, 58% said that they need to build their understanding of digital, smart technologies and sophisticated data analytics in order to deliver against their critical strategic priorities.

    Digital disruption can feel like being caught between the promise of rain and the threat of drought. On the one hand, digitization offers the opportunity for new business models and revenue streams. But on the other hand, digitization makes the organization vulnerable to competition from new players and agile incumbents and creates exposure to new risk.

    Digital opportunity

    • Changing business models create opportunities for new products and services and recurring revenue streams.
    • Technology is helping to transform operations, reduce operational expenditure and support more flexible, scalable systems and processes.

    CFO concern

    • Finance leaders must completely re-evaluate their underlying assumptions regarding business models, pricing, revenue streams and the related financial models.
    • Cyber threats are on the rise. As part of their risk agenda, CFOs must work with the CIO to establish a governance framework for quantifying digital risks, prioritizing and protecting digital assets, and mediating across functional and technology silos to create an integrated approach that drives value creation.
     

    “With financial communication, the world has changed,” says Jacques Tierny, CFO at Gemalto, a world leader in digital security “In a tech company, the investors know the business deeply. They have talked with suppliers, they have talked with clients, and so on in the eco-system. They know if there is a threat to the business and they are able to criticize our strategy and contribute interesting points. What these guys tell me is very helpful for my operational colleagues. It’s not only preaching to investors, but listening and coming back home with the message.”

    To help their organizations profit from digital opportunities, finance leaders like Jacques Tierny are using a traditional finance skill: striking a balance between innovation-led growth and prudent risk management. They are collaborating with colleagues to develop their understanding of how the technological landscape is evolving and what strategic investments are needed to encourage and enable innovation and support the business’s growth. Many CFOs are not there yet.

    In our research, 58% of finance leaders say that they “need to build their understanding of digital, smart technologies and sophisticated data analytics” in order to deliver against their critical strategic priorities. This is a priority across all sectors, with finance leaders in markets such as media and entertainment and automotive particularly focused on this area (Chart 1).

    “Historically, most risk management processes have not been data-rich. As we move into the new world of technology that enables us to get data much more quickly, I believe data-driven insight will play a very important part in making better risk-based decisions quicker,” says Jonathan Blackmore, EMEIA Risk Leader, EY.

    “This is because you can use data from multiple sources either to look for trends or predict potential risk events. In the future, that will be a key trend, because there is so much information available that you can begin to correlate different data sources to build up patterns and trends.”

    Chart 1: Building digital know-how is a priority across sectors

    EY - Building digital know-how is a priority across sectors

    Critical digital knowledge for the future: blockchain and robotics process automation

    For finance leaders, it will be critical that they build their understanding of two disruptive technologies: blockchain and robotics process automation (RPA).

    Blockchain, which underpinned bitcoin, allows data to be exchanged via a decentralized ledger that is extremely difficult to tamper with, as a shared network of computers around the world verifies it. It could fundamentally change the role of the finance function in areas such as corporate reporting, where it could transform the speed of reporting and theoretically allow transactions to be recorded and logged in real time, helping to provide greater transparency and trust in a company’s financial accounts.

    RPA has been gaining momentum and can reduce the need for people to perform back-office processes. As well as being extremely accurate, software robots are estimated to cost one-third the price of an offshore full-time employee (FTE) and as little as one-fifth the price of an onshore FTE. It has significant implications for how finance functions perform rules-driven, transactional processes. It will also dramatically change the training ground for junior finance professionals.

    The CFO’s role in digital readiness

    Finance leaders need to understand and embrace a digital business model They must also play a key role in building the organization’s readiness and confidence to act and react with urgency.

    Effective finance leaders must:

    • Understand the organization’s ability to deliver on its digital strategy. CFOs need to assess their organization’s current digital maturity and understand its key priorities, enterprise-wide digital budget and investments. That way, they can play a key role in helping to make coordinated and focused investment in areas that create real value.
    • Build the organization’s confidence and capability to navigate the digital economy. CFOs must prepare their organizations for digital disruptions and help give them the confidence to handle them. Issues to tackle include global tax implications for how goods and services are sold, where companies base their operations, robotics, the accelerated globalization of the world economy and disruptive new competitors.

    The digitally savvy drive growth

    Digital offers enormous opportunities for organizations to enter new markets, transform existing products and introduce new business and delivery models. And finance leaders who are focused on growth seem to be embracing digital faster than the rest.

    Our research shows that finance leaders whose number one priority over the next five years is to drive growth are more likely to be seeking to build their understanding of digital technologies than those who are focused on organizational transformation, cost efficiency or risk management (Chart 2).

    However, it’s important for finance leaders to understand that digital is not just important for the growth it can bring, but also for its potential cost efficiencies through operational transformation. Even if driving growth is not top of your agenda, digital should be.

    Chart 2: Focus on growth places premium on CFO’s digital know-how

    EY - Focus on growth places premium on CFO’s digital know-how
  • Force 2: Data

    The disruption that will transform finance

    The challenge for CFOs

    Harnessing the power of data analytics

    Data and analytics are crucial for CFOs on a journey to transform the finance function from a reporting entity to a group that guides strategy through business intelligence.

    Data and analytics are changing the way CFOs think about business problems.

    “Data science moves us from the accounting role of reporting the past to the finance role of guiding the future,” says Kelly Wong, CFO at KIDO Group. “I think that’s one of the most exciting things I’ve seen happen in finance in many years.”

    Our research shows that 57% of group CFOs believe that delivering the data and advanced analytics for business intelligence and management information will be a critical capability for tomorrow’s finance function. However, many organizations are struggling to turn the promise of data analytics into the reality of improved performance. In a recent EY and Forbes Insights survey of 564 executives in large global enterprises, most admit that they still do not have an effective strategy for competing in a digital world and struggle with getting business users to adopt analytics insights.

    This presents an important opportunity for CFOs to step in and transform their organizations by turning the promise of data analytics into measurable performance gains.

    Finance extends its influence

    And finance leaders are ideally positioned to define a role for themselves and the finance function that goes beyond pure finance-related data analytics.

    “There’s no doubt that CFOs need to be a champion and driver for the use of analytics in all current core financial processes under his or her remit today,” says Chris Mazzei, Global Chief Analytics Officer, EY. “But you can start to extend out from that. Financial data, as well as other data, is a key input to many other business decision processes, whether it’s procurement, supply chain, operational-type decisions or risk management-type decisions.

    “The CFO can be a driver of the application of analytics in many of those areas. Not necessarily ‘owning’ that area, but acting as a catalyst for encouraging and driving the use of analytics in other business processes outside core finance.”

    Winning data analytics: investing in the human element

    In the past five years, 50% of CFOs in our survey have increased the amount of time they dedicate to using advanced analytics to provide insight to the CEO and other senior leaders.

    As CFOs become more focused on deriving strategic insight from data, they increasingly see the need for investment in the right people, as well as the right technology.

    Over the past few years, many organizations have spent millions of dollars on technology to mine and manage data, but achieved disappointing returns. This is often because they spend relatively little on drawing actionable insights out of the data and convincing people to use them — that is, the human element of analytics.

    In order to realize the potential of data and analytics for their organization, CFOs will need to focus increasingly on this crucial — and complicated — area.

    The CFO’s role in building better data analytics

    To make these efforts into a long-term competitive advantage, CFOs will need to assess the potential disruption for the organization as a whole, and define the role that they and their finance function should play. In some cases, this will mean leading an enterprise-wide analytics capability; in others, it might mean providing crucial inputs.

    Either way, the CFO has an important role to play in moving the organization toward more business value from analytics.

    The organization as a whole must:

    • Make data integral to the business strategy
    • Align analytics delivery and business requirements
    • Instill the right leadership and culture

    CFOs should focus on:

    • Providing the training to help individuals recognize decision biases — the psychological assumptions that often lead to poor decision-making.
    • Providing easy-to-use tools for users of data.
    • Transforming the analytics-based insights into actions, and aligning incentives, rewards and measurement accordingly

    Powering data analytics in power and utilities

    Among our respondents, CFOs from the power and utilities industry are most likely to say that they spend more time today than five years ago on providing analysis and insight to support the CEO and senior leadership. This is likely reflecting the broader transformation taking place within that sector. As smart energy disrupts power and utilities, and as pressure mounts to reshape the energy-generation mix, the sector’s finance leaders need to spend an increasing amount of time on strategic analysis with their business peers.

    Chart 3: More time spent on data and analysis today than five years ago

    EY - More time spent on data and analysis today than five years ago
  • Force 3: Risk and uncertainty

    Decision-making in volatile times

    The challenge for CFOs

    Risk management is becoming a critical finance capability

    Managing all types of risk — strategic, reputational, regulatory and cyber risk - are growing parts of the finance remit, particularly in larger organizations, where 66% of our respondents say it’s a critical future capability.

    Today, organizations and their finance leaders are challenged by a rapidly changing risk landscape.

    Finding enough certainty to be able to make decisions in this volatile risk landscape is a major challenge for CFOs, and they are taking an increasing role in risk management. In the future, CFOs anticipate that the role will be even bigger, particularly in large organizations (see Chart 4).

    Chart 4: The business will seek risk management capability from finance in the future

    EY - The business will seek risk management capability from finance in the future

    “The world we live in is much more connected,” says Jonathan Blackmore, EMEIA Advisory Risk Leader, EY. “Risk events in one part of the world can impact the entire world very, very quickly. CFOs and others need to be thinking about how they keep an eye on the future and what is happening in their markets, in their sectors and more broadly where they operate, so they can anticipate these risk events. We shouldn't be waiting for something to happen.”

    For example, a data breech can lead to a disastrous domino effect on enterprise value. Therefore, it is critical for CFOs to understand the cybersecurity that protects their organization’s most valuable data assets and systems, and to know that they are prepared to respond to a breach at any moment.

    Toward strategic risk management

    However, in this volatile and fast-moving environment, it is difficult — but necessary — for CFOs to find the time to move beyond mitigating the risk implications of decisions that have already been made to managing strategic risk. Managing the risk and return implications of strategic choices that offer potential positive upside can be crucial to driving a growth agenda, and is the key to balancing the tension between the clamour for growth and the realities of the macroeconomic environment.

    At the UK’s Taylor Wimpey, which builds and sells more than 13,000 homes a year, and where the organization has to invest in buying land for long-term development potential, strategic risk management is second nature.

    “You have to make the right judgments,” explains Group Finance Director Ryan Mangold. “One of those judgments is about maintaining the quality of the business by ensuring that we are investing very wisely and appropriately and understanding the risks being priced correctly. In our sector, that translates into margins or investments that we will make today that will take five to seven years to come through the P&L.”

    Managing strategic risk
    The business strategy The strategic risk
    Expansion into new and emerging markets Minimal ROI in new sales and distribution channels
    Development of social and mobile platforms Low adoption rate of digital platforms by consumers

    Our research shows that strategic risk is already an increasing focus for CFOs. Half of group CFOs, for example, say they are spending more time on it today than they were five years ago (Chart 5). However, many finance leaders believe that they need to do more to build their skills in this area. Of the respondents who are focused on risk as their primary priority in the future, 61% say they will need to improve their strategic risk management skills. This is in line with a 2015 EY survey on governance, risk and compliance, which showed that 85% of respondents indicated opportunity exists to further improve the linkage between risk and business performance.

    Chart 5: Group CFOs devoting increased time to strategic risk

    EY - Group CFOs devoting increased time to strategic risk

    The CFO’s role in building a strategic risk management capability

    Robust strategic risk management requires effort and leadership from a range of leaders in the business. To play their part effectively, CFOs must:

    • Think beyond preventable risks. Identify and surface strategic risks that organizations may not have otherwise thought of, including risks whose value-generation potential may outweigh the possible negative consequences.
    • Address risk directly. Bring up risk in strategic and business planning discussions and routinely evaluate the risk profile and its impact on business strategy.
    • Make investments in key risk talent. Take the time and resources to recruit talent with the strategy and advanced analytics skills needed to enhance the risk function.
  • Force 4: Stakeholder scrutiny and regulation

    The CFO as a public person

    The CFO’s challenge

    Finding time to manage stakeholders’ conflicting demands

    Fifty percent of survey respondents say they will need to improve their skills in managing relationships, including with investors, the CEO, boards and other members of the C-suite.

    CFOs are caught between a rock and a hard place when it comes to managing stakeholder relationships. CFOs increasingly have to juggle the requirements of regulators with the demands of investors, and other stakeholders.

    Dr. Stefan Kirsten, CFO of Vonovia, likens these responsibilities to those of senior government leaders. “I'm the foreign secretary of the company,” he says. “I'm the one who spends one or two days a month in the office. You're traveling extensively, permanently meeting with regulators, trade associations and stock exchanges.

    “In the mid-90s, I remember investor relations being a very exotic function. Now it’s 40% of my time. If I add public — as in government — and rating agency relationships, it’s two-thirds of my time. That is a dramatic change.”

    Disclosure effectiveness: giving stakeholders the information they need

    A 2015 research report from EY and the Financial Executives Research Foundation — "Disclosure effectiveness: companies embrace the call to action ” — found that 74% of the companies surveyed are taking action to improve their financial reports. The benefits of doing so included positive feedback from senior management, board members, investors and analysts who found the information easier to read and digest — allowing them to make more informed decisions.

    “Time is a big issue. Investors require time. The board of directors, and the audit committee, require time. We have a global management team that meets six to eight times a year — at various locations around the globe. Plus, I have my own management team and a global finance council. Just making sure everybody is informed takes up quite some time.”

    Peter Vekslund, Executive Vice President & CFO, PANDORA A/S

    In our research, 50% of finance leaders say they will need to improve their stakeholder management skills. This is particularly true for emerging markets finance leaders, where the skills to respond to increased scrutiny may not be as mature as in more developed markets (See Chart 6).

    Chart 6: Emerging markets finance leaders determined to build stakeholder skills

    EY - Emerging markets finance leaders determined to build stakeholder skills

    Relationships with regulators increase in importance

    In the past, customers might have had the most significant potential economic impact on a business. Today, intense regulatory scrutiny means that policymakers are an increasingly important relationship for finance leaders.

    In a recent EY survey of 1,000 finance leaders, 48% of respondents reported having to comply with more than 10 sets of reporting standards, and a third work with 16 or more reporting systems.

    In our research, 57% of finance leaders believe that the future finance function needs to improve its regulatory knowledge to keep abreast of a changing and uncertain regulatory playing field.

    Responding to regulatory scrutiny is a core pressure on the finance leader that is compounded by ever-increasing responsibilities.

    “The downturn at the beginning of the 21st century was unique in that it was also a time when broad regulatory scrutiny across all industries was increasing dramatically,” says Tony Klimas, Global Finance Performance Improvement Advisory Leader, EY.

    “But today, CFOs also have to worry about areas like digital and analytics — and playing all these new roles — while still having to worry about the increased scrutiny from regulators, from government and from the public. That scrutiny never really went away. The traditional role around stewardship has only gotten harder and more permanently etched into their responsibilities.”

    Managing the increasing scrutiny and complexity of the regulatory environment will be as much about management of relationships as it is capability. By effectively managing relationships, organizations can collaborate with regulators and play their part in shaping policy.

    “In the future, not only adapting, but also helping to form the regulatory environment through stronger collaboration with other social groups, especially the political environment, will become increasingly important. We are becoming more and more public people.”

    Dr. Stefan Kirsten, CFO, Vonovia

    The CFO’s role in strengthening stakeholder relationships

    The high expectations of stakeholders and the increasing scrutiny of regulators are not likely to fade in the future. CFOs will need to practice ways to respond to conflicting demands more effectively:

    • Prioritize the stakeholder relationships that are most important. Analyze critical stakeholder relationships and build a strong understanding of what drives them.
    • Communicate proactively. With their increasingly public profile, CFOs need to take a strategic approach to managing communication with the media, customers, investors and regulators, either personally or via other parts of the business.
    • Tell a consistent value story. In order to be credible and build trust, CFOs need to have a consistent story about the business for all stakeholders.

    The ethics of decision-making

    In recent years, increasing media scrutiny of the ethics of organizations’ behavior has changed customer, investor and regulator expectations. For organizations that put aside ethical considerations in the pursuit of financial objectives, punishment from customers and the financial markets can be swift.

    As CFOs become the increasingly-public face of company performance, they need to pay far closer attention not just to the legality of their organizations’ actions, but to the social and ethical consequences.

    Tony Staffieri, CFO of Rogers Communications says: “The financial markets will only get more and more sophisticated. As a CFO, I think you need to be seen as credible and trustworthy. The investment community needs to know that when push comes to shove, you’ll do the right thing. Throughout your career, never compromise your moral compass. And let it be known what it is.”

    Having a clearly defined “purpose” for the organization — an ultimate objective that goes beyond financial goals — helps provide a framework for this decision-making. In our survey, we found that 71% of finance leaders agreed that they will be increasingly responsible for the “ethics of decision-making in support of the organization's purpose.”

    While this is a priority for finance leaders of all ages, it is a greater focus for younger CFOs (see Chart 7). Younger CFOs have grown up in a business world where corporate social responsibility (CSR) has escalated as a major issue for companies, as they respond to the scrutiny of regulators, customers, employees and investors.

    Chart 7: Ethical decision-making an increasing focus, particularly for young CFOs

    EY - Ethical decision-making an increasing focus, particularly for young CFOs

    Today, companies are reporting on far broader measures of value, which provides an opportunity to demonstrate that ethical decision-making is happening and build the organization’s reputation. “The reporting exercise is not a compliance exercise anymore,” says Juan Costa Climent, Global Climate Change and Sustainability Services Leader, EY. “Companies are interested in better aligning internal management and decision-making with what they report to the market. Part of that report has to include different kinds of information: value for investors and value for society. Unless those drivers become part of the internal decision-making process — and part of the business's strategy — it's not possible to guarantee that the business is creating value in a sustainable way and with a long-term perspective.”

Contacts

  • Hanne Jesca Bax
    EY EMEIA Managing Partner Markets & Accounts, Ernst & Young Nederland LLP
    Tel: +31 88 40 71325
  • Robert Brand
    EY Global CFO Agenda Leader
    Tel: +1 201 872 5692
  • Rick Fezell
    EY Americas EY Vice Chair — Accounts
    Tel: +1 312 879 6568
  • Annette Kimmitt
    EY Asia-Pacific Accounts Leader
    Tel: +61 3 9288 8141
  • Tony Klimas
    EY Global Finance Performance Improvement
    Advisory Leader
    Tel: +1 212 773 5949