Five Traits Of The Strategic CFO

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Strategy&, Contributor

February 17, 2015

by Deniz CaglarMatt Mani, and Josh Peters

If you are a chief financial officer, you are probably already aware that your role is undergoing a historic transformation. You are no longer seen primarily as a wielder of the sharp pencil. Instead, you are the mouthpiece of focused investment, asking the right questions and providing the right insights so that everyone understands when to say no and how to say yes. You help the company turn down many activities so that the few most important can thrive. The deciding factor is strategic value. The allocation of resources must now favor a company’s most distinctive capabilities—those differentiating things it does particularly well that enable it to outperform competitors over time.

To be a strategically oriented CFO in companies that differentiate themselves this way, you will need to develop certain skills, talents, experience, and support. This new role also accentuates your ongoing position as a voice of reason on M&A—favoring acquisitions that fit well with the company’s capabilities system, and recommending divestitures of products and services that don’t. Finally, you are called upon to facilitate change and collaboration in addition to financial tracking and compliance.

Value Chain Insight

Although the CFO is typically the company officer charged with optimizing performance, many CFOs do not (or cannot) spend enough time helping business leaders understand the factors that could affect them. Realizing the true performance potential of the company requires the CFO to develop an unbiased, holistic, end-to-end view of the company’s full value chain—from customer needs to back-office operations to suppliers’ contributions to competitors’ positioning—and pinpoint the places that need attention. The CFO should then help business leaders convert these insights into specific action items and initiatives.

Finance can also reinforce the idea that coherent strategic choices and cross-functional collaboration will ultimately lead to a consistent rise in stock price and shareholder value. This represents a shift of orientation. For decades, managers and shareholders have conducted a philosophical battle: Does managing for shareholder value lead to long-term growth? Or vice versa? The CFO has traditionally put creating value for shareholders first. But now, when success depends on building distinctive capabilities, the CFO is increasingly the advocate of long-term investment. To help those in the finance function gain the insight they need, leading CFOs make sure everyone—whether the CFO’s direct report or an incoming intern—spends time in the business units and with customers.

Leveraging Business Drivers

All CFOs define the metrics that track performance, which means defining the ways in which success is recognized. Since the numbers reveal trends, risks, and opportunities, these metrics also determine the company’s awareness of the outside world. A strategically oriented CFO can thus ensure that the whole company focuses on a few key business drivers that convey a broad understanding of the value proposition and how the company fulfills it. Such a CEO is among the company’s principal levers for articulating and delivering its strategic agenda.

Some well-established financial metrics, including margins, EBITDA, and share price, are ill suited for strategic decision making. They are too internally focused, or they are lagging indicators that show progress against preset expectations rather than showing how to create value in the future. Leading CFOs develop industry-specific and company-specific metrics that better orient behavior toward customer value, link the business planning cycle to developing better capabilities, or encourage the prudent use of assets and other resources. A few of the many possible examples: OPACC (operating profit after capital charge), market share as a percentage of market potential, revenue-weighted asset/resource utilization, and market favorability rating. These metrics should not be treated as static; the finance function must continually revise and refine them as needed to match changes in consumer behavior, technology, regulation, and other external factors. In fact, continually evolving your metrics to ensure you are focusing on the right factors is itself a distinct managerial proficiency that finance must own and develop.

“I think the hardest thing in business is actually finding out the right things to work on,” notes Brad Halverson, group president and CFO of Caterpillar, where OPACC is a key metric. “If your measures don’t drive focus on customers and competitors, then you probably have the wrong measures. When you look externally, the clarity of what you have to do becomes a lot simpler.”

To identify and track value drivers for each business, successful CFOs draw on all the sources of information available: enterprise-wide operational data, capital market trends, and vast amounts of financial and nonfinancial data. They take advantage of the deluge of data now available on business activity: market and company data, financial results, and data gathered from online employee and customer activity. At some companies, the IT function reports up through the CFO. At others, the CFO works in partnership with the CIO to develop analytics capabilities, thus arming the businesses with the data and operations insight needed to enhance performance.

Attention to Talent

Leading CFOs invest a great deal of their time in recruiting, meeting personally with team members at a variety of levels within the function, and making sure people recognize that the company is committed to their success. That’s because the caliber of the finance staff is crucial to the success of the company.

The most successful CFOs we know tend to start their tenure with an unsparing gap analysis of their own team. They often get directly involved in recruiting new talent; in providing formal training, mentoring, and personal coaching for promising staff members; and in rethinking the competencies required for promotion. These days, along with the expected level of financial acumen, those competencies might include strategic thinking, strong leadership and communication skills, or operational insights.

Fran Shammo, CFO of Verizon, has implemented a sweeping transformation of the finance function, in part to change the way talent is developed. The career path at that company, for example, now involves rotation through a variety of geographically disparate and operationally diverse assignments. “If you never get to the wireless division or a regional office,” says Shammo, “you don’t gain the perspective of the customer. If you focus only on the numbers, you’re not looking at the competitive environment or customer need, and you could lead the business down the wrong path.”

Cultural Engagement

The most effective CFOs use their influence to help make the organization stronger and more flexible in general, and more resilient in the face of shifts and disruptions. These CFOs move beyond encouraging people to use resources efficiently to more sophisticated efforts such as helping build the kind of culture where people naturally want to invest only in projects linked to the capabilities that matter most. Cultural engagement is a stretch for many numbers-oriented, analytically inclined CFOs. But if they can master the skills, it gives them great impact.

“We often say around here, ‘You need to know your numbers,’” notes Philip Rewcastle, CFO of the Consumer Lending Group at Wells Fargo. “Financial literacy has always been a core capability. But we’re shifting the emphasis of our performance measurement culture. It’s not just the result that matters—‘I got this done’—but how you got that done. Did you build consensus? Did you do it in a collaborative way? We’re building this view of what’s important into the leadership competencies we expect, the training we provide our people, and so on.”

To instill a high-performance culture, the most effective CFOs set an example of the right kind of leadership. They use all the planning and performance management processes of the enterprise—strategy development, annual budgeting, resource allocation, investment planning, and periodic performance reviews—as opportunities to set and reinforce behaviors consistent with the company’s stated strategy and performance expectations. The business units are used to hearing no within the context of these interventions, so you, as the representative of the finance function, need to change the message. You must set a pattern in which no is used primarily for projects without strategic relevance, and is followed up with coaching and guidance to help people align their projects to the distinctive capabilities on which your company relies.

Integrity and Presence

To the outside world, CFOs have long been regarded as the financial gatekeepers of the corporation, the guardian of shareholder value. Now they are also the internal conscience, ensuring that all projects are aligned to create enduring value, and that people aren’t distracted. As John Rogers, CFO of Sainsbury’s, says, “It’s absolutely critical for a CFO to have a natural integrity. You need somebody who’s capable of walking that…tightrope between supporting the individual businesses and making the right decisions for the overall enterprise. It’s quite a delicate balancing act.”

Integrity is not just a matter of probity; it requires skillful communications, and the kind of authentic leadership style that is sometimes called presence. You have to set a tone of transparency and candor, forming trusting relationships in all directions: with the CEO, business unit leaders, regulators, and the board.

Perhaps the most important relationships you build are those you have with other functional leaders. The old days, when you competed for resources and a seat at the table, are gone. Today, you cannot be successful unless you collaborate closely with the chief information officer to manage data, with the head of human resources to shape the culture, with the business unit presidents to invest in the right places to create value, with the chief operating officer to gain the most value from operational investments, and with all of them to design and build cross-functional capabilities. Spend time with these leaders developing ways that they can use finance to improve their effectiveness and distinguish worthwhile projects from lower-priority, less strategic distractions.

This article has been adapted from strategy+business. To learn more, check out the full article, “The Redefined No of the CFO.”

This article was written by Strategy& from Forbes and was legally licensed through the NewsCred publisher network.

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