Finance in a digital world – Jens Madrian

5 July 2016

This article first appeared as a blog post by Jens Madrian, CFO and CCO of London-based Reactive Technologies. Madrian writes about the changing role of finance in the digital landscape, and the importance of looking beyond efficiency and cost savings in the development of a transformation strategy.

In business, as in the animal kingdom, it is survival of the fittest. Every year, companies that were once household names go to the wall, others struggle to survive and others make it big - but every market sees a flood of new entrants. The evolutionary cycle revolves every day in the business world. Kodak, Blockbuster, Woolworths and Ryanair all responded, for better or worse, to the digital revolution, which has been a megatrend presenting opportunities for some and threats for others.

The organisations that have thrived and will thrive in this rapidly changing world are radically different compared with the organisations from the 1990s and early 2000s. In particular, their finance teams will give a new competitive edge by driving insight and innovation quickly and responsively across the organisation. Finance teams have a crucial role to play in ensuring that businesses grow and prosper.

The digital revolution has had an enormous impact on consumers' purchasing behaviour, the way they select their providers and the loyalty they feel towards those providers. Having worked for many years in operational leadership roles, I see finance as having a laser focus on performance. Measuring performance, however, is largely a retrospective activity. We have become very good at looking backwards but less good at looking forwards. The past is concrete, the future is more blurred - I understand - but CFOs must have an opinion on where the business is heading in relation to what customers want. CFOs need to challenge the business in the right way to formulate a strategy and operational plans in response.

Look in the rear-view mirror

This is a long journey, but the starting point rests with the finance team, particularly the business partners responsible for managing the financial side of the relationship. The team must understand the commercial and operational side of the business, and how it works. If the team is trying to evaluate commercial data and it doesn't really have an idea behind it, the process becomes really difficult. A prerequisite is a good understanding of the underlying business model and operational KPIs. The finance team must have helped strategically plot the business's journey. Transforming operational (leading) KPIs into financial (lagging) KPIs in a logically deductive way is fundamental to predict the impact they will have on financials.

I once had a boardroom experience while evaluating and deciding on our digital strategy. The business case for a digital transformation was well founded: streamlining processes and significant cost-reduction opportunities meant a substantial internal rate of return and quick payback. I had rarely seen such a financial no-brainer but something nagged at me.

As good finance professionals, we were evaluating an investment with the mindset: 'I give the business money, but when do I get my actual return?'. As a result, the business case and the whole transformation plan are often limited to saving costs and improving efficiency rather than also focussing on innovation and driving top-line growth. When we refocused as a team, we found we became more innovative about how to move from an efficient business to one that is truly engaged with its customers.

A change in perspective

This 'outside-in' perspective has led to the organisation transforming its whole structure, values and culture, rather than simply opening up a new sales channel. The reflection was profound for me. There was an issue with the underlying mindset in finance and the business, a mental model I have seen in many other large companies over the years. The business believes it needs to formulate a strategy that would get past finance. The thinking seems restricted whenever the initial conclusion is that the finance team 'won't go for it'. I realise how debilitating this can be for any decision-makers. How many ideas went unexplored because of this attitude? How often was the status quo protected at the expense of action?

Finance was complicit in this approach, of course, but we spotted our decision-making bias early and rectified our thinking. This started to change the mindset across the whole organisation and allowed people to think more about innovation and the art of the possible. The result is that sustained digital investment has started to drive increases in customer satisfaction, and create a higher customer and portfolio lifetime value.

Digital transformation has resulted in other interesting changes, such as finance teams playing a more active role in data governance, cybersecurity, data-flow controls and investing in expertise to protect the company.

The expansion of the finance role has already been under way for years, working together with third parties to outsource some of the finance services, particularly accounting services, which are mostly transactional and repetitively scalable by nature. Another example of the impact of digital transformation on the finance function is the cloud-based fast-close process. For everyone doing the year-end, it has traditionally been a process where one piece happens after the other, which consumes a lot of time. In the cloud-based environment, you are able to work in parallel on different parts of the close process, condensing time, without compromising the integrity of the data. For some finance professionals, that may still sound revolutionary, but for every digital professional looking at it from a pure data perspective, it's the most normal thing in the world.

This development also leaves the CFO in an interesting position. The CFO needs his or her control to spread beyond the finance function of the organisation to the service providing the fast close, because it is the board and ultimately the CFO held liable for the year-end's accuracy. I would certainly want to understand in detail what's happening, how processes are interacting and how figures were arrived at.

As part of the stewardship role, I can see the creation of centres of expertise, where specialised financial knowledge such as pension, tax or treasury is bundled. This tends to happen in large corporations across all parts of the business to maximise impact on efficiency, and to invite talent to join a pool of similar functional specialists.

Finance's role as efficiency driver has also changed. The digital transformation is turning finance into the insight engine for the business, giving informational support for strategic decisions along with business performance measurements and reviews. We need to pay more attention to generating and maintaining the quality of our data: the better the data, the more efficiently we can use our budget to create returns through analysis and insight. As a consequence, by using this insight, we can better engage customers.

Finance has also changed its role of partner by becoming plugged into the business, ensuring that it aligns with the wider business strategy. I have noticed that the best finance business partners are curious about how the business works, how it makes money, and what it is trying to do on a strategic level. This curiosity, and the ability to ask the right commercial and operational questions, is a fundamental attribute of a great finance business partner. This means that finance professionals need to develop new skills, become conversant in digital language and master technical know-how so they can challenge the business and hold them to their promises. As finance professionals, we need to be curious and look behind the mask to see what the most likely financial outcome will be.

This has been by far the most difficult thing to accomplish: people who have trained their whole careers in one discipline now need to stretch themselves in another. Aside from the specialist finance careers in centres of expertise, I cannot see chimney careers in finance becoming the norm, particularly not for finance business partners. Instead, I expect some job movement between business and finance. This will more likely become the norm.

Only by challenging ourselves as finance professionals, will we continue to add value and be relevant in a changing business world. Finance has so much to add, but it needs to change in order to unlock this potential.

Jens Madrian is the CFO and CCO of Reactive Technologies. Madrian is an operational CFO with extensive international and transformational experience in large retail and customer-centric operations. He previously worked as CFO at RWE npower.