The Contemporary CFO

How Finance Leaders Can Drive Business Transformation, Performance and Growth in a Connected World

Michael Haupt

• Publisher: Kogan Page
• Year: 2021
• ISBN:
  9781398602915
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

The digital revolution is changing our world and the fundamentals of business faster than anyone expected, and the responsibility for leading key aspects of enterprise-wide business transformation often falls to the Chief Financial Officer (CFO). This book provides motivation and guidance for current and future finance leaders to navigate an increasingly unpredictable, dynamic, complex and connected world. As businesses are forced to change fundamentally or accept the reality of being left behind, the CFO has a particularly important part to play in preparing for this change - not only for their own function but for the business as a whole. So what is the role of CFOs in delivering digital business transformation? What can they do to manage business resources and performance more dynamically? How can CFOs contribute to the creation and management of new business models, such as digital business platforms and ecosystems? And what can finance leaders do to enable sustainable growth and long-term multi-stakeholder value creation?These and many more key questions are tackled in The Contemporary CFO, which draws on practical experience of transforming leading global businesses and on extensive, original research, including in-depth interviews with a wide range of corporate leaders. CFOs are used to managing change but delivering a complex business transformation on top of an already demanding role can be challenging. This essential guide includes the latest thinking, trends and perspectives to help finance leaders navigate the demands of the connected world successfully.

PART ONE

The engineer perspective (and the art of design thinking)

01

Introduction

Learning from history

History provides us with several examples of what happens when long-standing business models are called into question by revolutionary technology innovations. One of the most illustrative examples is the introduction of electricity in the 19th century. At the time, most factories were powered by big steam engines positioned in the basement to supply power to all machines. When electricity arrived, the majority of companies decided to buy electric motors, only to simply place them where the steam engines used to be. Unsurprisingly, the new motors did not result in significant productivity improvements. In fact, the opportunity to save energy costs was offset by the investments needed to embed the new electrical motors.

It took most companies 20 to 30 years, or about one generation of management and engineers, to realize that electricity was much more than just an efficient source of energy. It was an opportunity to remove long-standing constraints in how a factory was organized; for instance, moving from a single common source to multiple, independent and distributed sources of power – a concept that triggered a major revolution at the time.

The electrification of factories allowed pioneering companies to adopt a new business model: efficient mass production. This was the dominating business model in most industries throughout the 20th century, and has remained so until well into the 21st century. Henry Ford, arguably history’s greatest pioneer of efficient mass production, initiated this breakthrough by introducing highly specialized, moving assembly lines for producing the famous Ford Model T in 1913. In the early days, Ford built cars the same way as everybody else – one at a time. By introducing automation, in combination with a re-engineered production process, Ford and his engineers introduced the assembly line. Applying Adam’s Smith principle of labour division, Ford placed workers at appointed stations and the chassis was hauled along between them using strong rope.¹ The chassis stopped at each station, where parts were fitted, until it was finally complete. Each department in the manufacturing process was broken down into sub-processes and assembly lines. As Ford was heard to remark, ‘everything in the plant moved’.² As a result, production speeds increased – sometimes they were up to four times faster.

Producing cars more quickly than paint could dry, at less than half the cost, immensely influenced our economic thinking and management theory throughout the 20th century. In fact, most of the leading companies in successive decades became large and successful because they leveraged the same principles that Ford used to achieve efficient production and delivery of standardized products and services at scale.

History not only reminds us of the business model that most of the large established companies were once designed for, and that remained the model during the first decades of the 21st century, but also raises three important points of caution as businesses enter an unpredictable future.

First, in times of disruptive change, many leading established businesses can be slow to adapt. The introduction of electricity may have produced big winners, such as Ford, but there were plenty of losers too – primarily large and well-established businesses that failed to act quickly and decisively enough. In a short period, it drove the highest rate of business failure for incumbent companies in the 20th century outside of the Great Depression. But these big companies did not fail because they were not aware of what was happening, or because they did not have access to the best engineers; they failed because they had become so proficient and successful that many suffered from so-called ‘status quo bias’. Held back by their own size and blinded by their own success, they did not anticipate the huge impact of technology innovation and, therefore, subsequently missed opportunities to transform their businesses early enough to survive.³

Second, history also shows us that although the implementation of new technology is necessary, many companies are insufficiently prepared to cope with a major economic shift. Transformational change requires established companies to have the courage to reimagine and re-engineer their core business and operating models. These models will be enabled by technology, but also require a clear focus on new customer needs, products and services, together with the core business processes and organizational capabilities to deliver them. This was Henry Ford’s vision: to completely re-engineer production processes and redesign his factories from top to bottom so that his workers, no longer dependent on one centralized power source, could employ their skills and tools in the most efficient way possible.

Third, the winning businesses during the Industrial Revolution were those that focused on exploring how electricity could enable them to become more efficient, rather than those companies that made generating electricity their business. Companies that built on-site generators for electricity made the mistake of identifying energy production as a source of competitive advantage, rather than using it to drive innovation and competitive advantage within their own area of expertise.

Keeping these historical learnings in mind, we can turn our view towards the ongoing digital transformation of businesses. Based on the principles of scalable efficiencies that were applied by Henry Ford and other pioneers of the previous Industrial Revolution, many leading companies have achieved significant growth and productivity. For a long time, these organizations were able to maintain and extend their competitive edge through continuous, but incremental, improvements to their operating models. In these traditional operating models, however, scale inevitably reaches a point of diminishing returns, which creates a limitation that digital business models are designed to overcome. Granted, it may take several attempts and some time for a new digital business model to generate profits comparable to those of incumbents (which is why they may remain undetected and underestimated at first), but once they are operating successfully they can accelerate growth at exponential levels, thereby rapidly disrupting established markets and companies.

Collisions between traditional and emerging digital operating models are taking place across all industries. In fact, it is difficult to think of any established business that is not facing an urgent need to fundamentally transform its business and operating model. Digital technology innovations, from cloud computing to 3D printing, offer exciting new opportunities for companies to reimagine how to operate across all areas of the business. From a finance perspective, for example, these technological innovations have given rise to a ‘new digital toolkit for CFOs’, which includes new platform technologies such as cloud computing, blockchain and in-memory computing, advanced data analytics and visualization technologies, and new cognitive technologies including robotics process automation (RPA), machine learning and artificial intelligence (AI), as well as collaboration and crowdsourcing platforms (see box).⁴

THE NEW DIGITAL TOOLKIT FOR CFOS

The following seven digital technologies should be embedded in the CFO’s toolkit. These technologies can, individually or in combination with each other, be used to enable the digital transformation and modernization of finance-owned and finance-supported business capabilities and activities. Some of these technologies are foundational (especially cloud computing, in-memory computing, cognitive computing, blockchain and collaboration), which means that they can be used as a platform on their own, often to enable the use of other technologies and applications (such as data visualization, data analytics, machine learning, artificial intelligence and crowdsourcing):

• cloud computing: a method of data storage using the internet, allowing finance to use key solutions and services ‘as-a-service’ without making large investments in building internal technology;
• in-memory computing: a way of storing information in main memory to achieve faster response times and the ability to process significantly greater volumes of data;
• cognitive computing: a portfolio of technologies, including AI, that can be used to mimic (RPA) or to simulate human skills such as speech recognition, natural language processing or learning;
• collaboration platforms: technologies used to support collaboration across employees, be it to share knowledge or gain insights, for example also through crowdsourcing;
• blockchain: a platform for digital assets where transactions are verified, and securely stored on a digital distributed ledger, without a governing central authority;
• visualization: technologies that use innovative visualization techniques and enhanced user interfaces to help humans explore and present large and complex sets of data;
• advanced analytics: the continued development of enhanced methods of analysing large data sets (big data) using new techniques and tools.

Thinking differently about digital transformation

One of the key challenges of digital transformation is that both the problem and the expected outcome are often difficult to define upfront. Most of us, especially those working in finance, however, are used to spending a lot of time analysing a problem in detail, assuming that a thorough upfront assessment of a particular situation and potential solutions, together with a detailed plan, can lower the risks that come with change.

There are several problems with this approach – not least that defining a problem in conventional ways tends to lead to unimaginative incremental solutions rather than more transformational change. In these situations, the Art of Design Thinking can help as it uses a more fluid and human-centric approach. Design thinking is not about shaping a prettier solution, but is more to do with developing technology-enabled solutions to address new customer and employee needs. This might sound simple, but in practice it sets a high bar for most companies that often struggle to design a solution that simultaneously achieves functional utility, ease of use and efficient and effective use of resources and technology, while creating impactful customer experiences.

Put simply, design thinking means finding new solutions by focusing on the human. At its core, working as a designer involves studying people at work, and developing ‘personas’ to understand their perspectives, unmet needs, challenges and expectations. Thinking like a designer can transform the way organizations develop products, services, processes and strategy by bringing together what is desirable from a human point of view with what is technologically feasible and economically viable, often using rapid prototyping as a way to imagine, develop, validate and evolve n...

Table of contents

• List of figures
• About the author
• Preface
• Acknowledgements
• Donations of royalties and disclaimer
• Introduction
• Part One The engineer perspective (and the art of design thinking)
• Part Two The entrepreneur perspective (and the art of systems thinking)
• Part Three The economist perspective (and the art of network thinking)
• Bibliography
• Index