The Chief Performance Officer

Governance scandals and accounting failures, such as Enron, Worldcom and Parmalat have rightly led regulators and shareholders to seek additional assurance and transparency around the value preservation role that finance must play in safeguarding the assets of the enterprise.

Our conversations with the CFO Executive Board's membership have led us to the view that value preservation activities alone are merely the 'price to play' for the CFO. Despite the pressure all CFOs are currently under to preserve value, the more successful are also seizing the second element of their role.

This involves not only recording enterprise performance but also driving it. This means taking on non-traditional finance activities such as advising the CEO and general managers on corporate strategy, the revenue model and corporate structure, and driving decisions on how to configure the company's portfolio of businesses. We call this new role the Chief Performance Officer.

WHEN STRENGTHS BECOME WEAKNESSES

Our analysis of the CFO's traditional strengths demonstrates that some of the core competencies of the finance function may have unintended consequences and act as inhibitors to enterprise growth. We have identified three such inhibitors:

Operational budgeting. Finance's traditional accounting perspective limits the use of the operating budget to a focus on cost control. Viewing the operating budget as a control mechanism misses the point that these funds may be a potential catalyst for growth. Resources used for strategic growth projects are often buried within the annual operating budget, resulting in a lack of focus on some of the levers that could matter most for the organisation.

Traditional metrics. Finance's reliance on financial metrics allows it to report on past performance, but not to evaluate future growth, where uncertainty prevails. For example, one company shared with us its experience of relying only on traditional financial metrics to evaluate all capital expenditure proposals, regardless of type. The company's aim was to evaluate all projects in a standardised manner to avoid a politicised resource allocation process.

Unfortunately, this reliance on typical evaluation factors weeded out the projects with the highest level of uncertainty - in other words, it cut most high-growth potential projects. These projects lagged behind others whose business cases were built on robust historical data.

Reporting, not predicting. Finance's responsibility to report on performance results in a relentless focus on measuring performance against goals rather than a focus on uncovering growth potential. Finance executives agree that they spend too much time scrutinising financial reporting accuracy and performance-against-goals, and too little uncovering performance opportunities or threats. Even more problematic is when finance's critical utilisation of performance data encourages a culture of secrecy between finance and the business units.

LEVERAGE OPERATIONAL BUDGETS

CFOs should move beyond treating operational budgets strictly as a control mechanism. By mining operating budgets to unlock excess resources, CFOs can fund more growth projects across the organisation.

Finance is in danger of missing the bigger picture as it spends a disproportionate amount of time evaluating the capital budget, even though its size is often only 10% of that of the operating budget. This over-analysis is driven by the easier link between capital spending and strategy and the greater authority of finance in authorising capital expenditure decisions.

That said, the massive resources often trapped in the operating budget demand further examination, as they could sometimes be better deployed to fund growth. Progressive companies make their operating budgets more transparent; some are structuring their business unit operating budgets by strategic objective so that they can isolate the funds required to maintain business-as-usual activities and those targeting growth.

These companies gain visibility into planned operating expenditures that:

• Support new products or segments: what resources does the line need in order to sell more? What resources are being used to drive market share?

• Support new initiatives: what resources does the line need to improve its competitive position?

• Encourage cross-unit visibility and cooperation: what cross-business benefits does, or could, the company obtain from the requested resources?

The sharper focus helps the CFO use the operating budget to drive the very best investment decisions. Critical resources are redirected away from lower impact projects to the more value-adding opportunities that emerge across business units.

A NEW ROLE IN FUNDING GROWTH

Accelerate the launch of growth ideas and the termination of underperforming projects. CFOs should improve finance's participation in both the beginning and the end of the project funding evaluation process; at the front end, finance should accelerate the evaluation of growth projects to allow more growth bets to be placed.

Once projects are implemented, finance should also allow for earlier dismissal of underperforming ideas to lower the cost of failure. The typical finance team errs on the side of late intervention on innovation decisions. They step into the process when business units come 'cap-in-hand' to request funding.

The reflexive demand for financial rigour applied during project evaluation translates into stringent return thresholds that virtually guarantee the absence of truly innovative ideas. New-to-world products are given short shrift since the traditional measures of success cannot adequately capture the conditions of uncertainty under which truly innovative ideas emerge.

Progressive CFOs don't take preconceived notions of business drivers as gospel. Instead, they take part in identifying new drivers and anticipating new directions for the company. They play a leading role in pulling the various and necessary elements of the business together, to determine options and strategies for moving forward. They direct the finance team to provide the tools and technical guidance needed to succeed.

These CFOs can more often ensure the success of idea generation by pulling finance involvement forward and by providing qualitative guidance first, in the form of innovation definition and strategy clarification.

OPEN-ENDED ANALYSIS

By stressing the use of 'open-ended' analyses, such as simulations, sensitivity and scenario analyses, and real options techniques, progressive finance teams can ensure a healthy conversation about potential ideas before applying the more traditional finance tools of NPV, competitive / consumer benefit and portfolio analyses.

The critical step is for finance to supplement the traditional finance role at business case evaluation with new roles in idea-screening, concept evaluation and knowledge capture. Once the programme is up and running, innovation demands a focus on the predictive measures of success, and those measures may not be where you expect them to be.

The key is to get as far out ahead on the performance curve as possible so that critical decisions regarding assessment and redirecting of funds can be made productively. By focusing on predictive drivers of performance, progressive finance teams can pull forward their assessments of product success or failure.

This allows a more rapid response to product failure and improves the company's ability to mitigate the impact of that failure. In short, it avoids projects being 'doomed to completion' once the initial hurdles have been cleared.

PERFORMANCE COACH RATHER THAN CRITIC

The challenge of trying to identify true stretch potential lies in finance's lack of visibility into, and knowledge of, the operating contexts of the units whose performance they seek to improve. And finance limits its ability to truly impact performance improvements by its reflexive dependence on business unit reviews as control mechanisms rather than strategic sessions designed to surface opportunities.

Business unit reviews are not just opportunities to identify performance success or failure at one business unit. Rather, they are an opportunity to leverage capabilities at one business unit to drive improvements at another. In order to get a bigger impact out of the business unit review process, progressive CFOs are implementing a peer assessment effort which allows them to take a step back from their traditional performance critic role, becoming instead a silent partner in the identification of potentially performanceimproving strategies.

So instead of being the athletics coach who tells his charge to run faster, the CFO ought to be the performance coach who identifies ways to improve.

EYES AND EARS OF THE COMPANY

Fortunately, the CFO can draw upon numerous structures and resources to drive this effort. The key is to keep one's ear to the ground and rely on embedded finance resources to provide the kind of historical and forward-looking analysis that can identify critical emerging issues and opportunities that operating units might be able to take advantage of.

The most productive role for the CFO here is to aggregate various views into performance possibilities and shepherd the conversations towards productive outcomes. In many respects, the CFO is the filter between the possible and the probable. The value preservation imperative is correct and a renewed focus is to be welcomed. However, those focusing only on financial stewardship are unlikely to be successful in the long term. The era of the CFO as chief performance officer is well under way. FDE

ABOUT THE CFO EXECUTIVE BOARD

The CFO Executive Board consists of senior executives with a shared commitment to stewarding corporate finance management. Membership offers a set of unique services and tools designed to assist finance leaders in building new capabilities, both personally and in the teams they manage. The Board achieves this by addressing their most pressing managerial, communications and decisionmaking challenges.