CFOs who drive Finance to operate as an economic advisor will be more effective business partners.
In this report we set out a framework for understanding the role of the CFO in achieving profitable growth.
Using the “CFO as economic advisor” concept as a transformational framework will help ensure that improved financial performance will be the primary driver of everything that Finance does above and beyond the basics of ensuring statutory, regulatory and fiscal compliance.
Building on Porter's “Value Chain” — as a universally accepted framework for understanding the linked activities that take place within a business — we developed a model for demonstrating how performance management data could be improved; we have also broadened it to include important decision points across the full spectrum of organizational activity.
This can help CFOs to quickly determine where they need to be able to deliver insight to the business, and how that insight can drive effective cost optimization and profitable growth.
A framework built from value chain fundamentals
The framework does not involve a radical new paradigm; it draws on universally accepted value chain fundamentals.
We believe that by using it, CFOs will be able to channel their function's performance management efforts toward providing insight in the areas that will be of most value and, in doing so, they will successfully fulfill the aspirational strategic and commercial role that should be at the heart of successful business partnering.
Dealing with economic challenges
The credit crunch and subsequent recession left many organizations in a state of turmoil. As a consequence, the Finance functions of businesses in affected sectors have focused sharply on reducing costs in an attempt to protect profits in the face of stagnating or falling revenues.
However, without a clear understanding of the drivers of cost, many CFOs have found it difficult to ascertain where and how to make savings beyond the most obvious discretionary spend items.
Furthermore, some of the resultant cost cutting may have alleviated the short-term pressures, but it may have had a damaging impact on the company's underlying capabilities. These are the exact same capabilities that will be required to take advantage of any resurgence in economic conditions in order to restart revenue growth.
The problem often stems from businesses having poor understanding of the nature of costs in terms of how they contribute to revenue, and a structural bias toward fixed costs rather than variable ones. Thus, most cost-reduction programs are constrained to focus on making arbitrary quick wins by attacking the more obvious discretionary variable costs.
With the increasing levels of confidence and talk of recovery, businesses are still focused on costs, but they are increasingly showing a level of sophistication that has moved away from an unsustainable approach to one that can be characterized as “cost optimization,” to achieve long-term, sustainable goals.
There are two important lessons to emerge from this:
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Transparency of the true cost base
Many organizations still do not have the information nor the processes that allow for an informed transparency of the true cost base, or a clear understanding of how costs correlate to value-creating activities within the business. As a result, cost reduction strategies continue to risk being unsustainable and potentially harmful to long-term prospects for growth.
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Benefits of a variable cost base
Despite the global trends in outsourcing and in de-risking supply chains, it has become obvious that many apparently successful businesses have continued to rely on traditional models of maintaining full control over their supply chains and the associated heavy bias toward fixed costs that goes with it.
However, leading organizations have proven that switching away from fixed costs to a more variable cost base is an effective way of becoming agile enough to de-risk unpredictability in demand and vulnerability in supply; this transformation requires a change in attitude to business and operating models.
Have the lessons of the financial crash been learned and sufficiently committed to corporate memory or, as we move back into growth, will the same old patterns of behavior emerge again?
Will Finance professionals be able to impose financial rigor into resource allocation decisions?
Can growth be driven in a sustainable way through the optimization of costs?
This paper considers the role of Finance in fulfilling these obligations across the following topics: