Times are a changing
“Just as organizations continuously evolve with the ever-changing global business climate, the role of a CFO is bound to change. A CFO needs to go beyond being 'the finance operations expert' to become a corporate strategist who can enhance the firm’s valuation and brand, and win over stakeholders’ trust and goodwill.”
— Maureen O'Connell, Former CFO of Scholastic
The office of finance, the role of the CFO, and the expectations from FP&A have changed as much or more than any other function in the business over the last 10 to 20 years. The Modern office of finance is not the boring, governance and control-focused back-office organization it used to be, and that is a good thing. Do a google search on Modern CFO, and you will get 20 million results. The Modern CFO of today is very different from the CFO of 10-20 years ago, and along these lines, I asked chat GTP to compare a Modern CFO to a CFO from just ten years ago and put it in a list. Below are the results:
Question: What makes a CFO a modern CFO, and how does that compare to a CFO from ten years ago? Please put the results in a two-by-two comparative list.
ChatGPT Response: Here's a two-by-two comparative list of the characteristics that differentiate a modern CFO from a CFO ten years ago:
Here's a two by two comparative list of the characteristics that differentiate a modern CFO from a CFO ten years ago:
The modern CFO has evolved from focusing primarily on financial reporting and compliance to being a strategic partner to the CEO and other executives. A modern CFO is more technologically proficient and can leverage data-driven decision-making to drive business results. Additionally, a modern CFO has a broader skill set that includes financial acumen, business analytics, effective communication, and cross-functional collaboration.
The write-up from ChatGPT does a great job of comparing and contrasting the “Old CFO” to the “Modern CFO.” The role finance and the CFO play today focused much more on being commercially astute, data-driven business partners than ever before. If we want to have a seat at the table and help businesses achieve strategic targets, we must transition to being a more data-driven and data-oriented organization.
One way the office of finance can move finance toward achieving this goal is by focusing on finance observability.
Before we explain what finance observability is, we should define what observability is and why it is so important. Observability is the ability to know what is going on with a complex system internally by only monitoring external measures. If a system is said to be observable, it means that it is easy to monitor, identify the root cause of issues and then fix them.
Finance observability is about being able to monitor the business health of a company in real-time through the use of tools, technology, and data. This real-time ability to monitor business health leads to better decision-making across the organization. This is why we are seeing such a push for the office of finance, the CFO, and in particular, FP&A to be more comfortable with data. If finance is going to be able to monitor the business's operational and financial health, we must start by focusing on data. This requires working with the organization to ensure quality data is available for real-time monitoring and analysis. Ensuring one’s data house is in order allows for the data to be used to continuously monitor the business and drive actionable insights for the organization.
Many modern CFOs are taking ownership of data and data analytics teams to ensure that all operational and financial data is available to the finance team to aid the business in making smarter decisions. I saw this happen at my last company when we hired a new CFO. One of the first things he did was move our data analytics team under finance. In addition to making this change, he also required the business to provide him with a plan to accelerate several data transformation projects designed to enhance and improve our ability to monitor and report on the business's health primarily through operational metrics. Recently, the importance of a data-minded CFO was reiterated when Casey Woo, a serial start-up CFO, commented on a recent finance podcast that, “The office of the CFO will become the office of business intelligence.”
The above experiences cemented for me the idea that CFOs today must ensure they have access to and are closely involved in managing operational and financial data. Without data, many decisions will be made on gut-feel, leading to suboptimal outcomes.
The evidence is overwhelming, as study after study has shown that companies perform better when they are a data-driven company.
- Companies with CEOs that make data-driven decisions are 77% more likely to succeed. (Deloitte)
- A McKinsey study found that data-driven companies outperform competitors by up to 20 percent. ( Data-driven companies perform better in almost every metric. Here's why | LinkedIn
- Tom Davenport and Randy Bean recently wrote as part of the often-quoted Big Data and Ai Executive Survey that “Data, and the ability to make sense of it, has been one of the greatest drivers of innovation in both business and society in recent decades, and a primary driver of economic success in the 21st century.”
Despite overwhelming evidence that being a data-driven organization and having a finance team that can quickly and efficiently access operational and finance data improves the company’s overall financial health, many organizations still struggle with data.
Similar to how study after study shows the best organizations are data-driven organizations, study after study shows that most companies cannot manage data.
- A recent survey sponsored by Sage found that the number one frustration with closing the books was data integrity/data quality. Canadian finance teams are under pressure to deliver accurate real-time insights, finds new Sage report
- 75% of FP&A’s time is spent either gathering data or administering the process vs. spending time on value-add analysis per an AFP and APQC study. Preparing for the Next Level of Financial Planning & Analysis (afponline.org)
- CFOs in a survey said that to meet the needs of the job, they need better data integration (56%), better training (48%), more advanced technology (42%). Technology and Talent Top CFO Priorities for 2022 and Beyond | Business Wire
One can draw two conclusions from the above data:
- Data-driven organizations perform better.
- Most companies are not able to meet their data needs today.
For finance to meet the needs of the business and transform their office into a strategic, focused office of value creators, they will need to help lead the charge at the company to evolve the systems and the data strategy to be a data-driven organization. This requires the right processes, skills, and technology to meet this mandate.
As a company ensures it has a proper data management strategy and suitable systems in place, it will be able to monitor data continuously and provide actionable data-driven insights. However, as one builds this culture, one must be cautious to remember that this process is an evolution and not a transformation, as it takes continuous effort to maintain a data-driven culture.
With proper data and systems comes the ability to monitor our data continuously. This requires close monitoring of financial and operational metrics for finance to be effective. One of the challenges with monitoring financial metrics is that they are often a lagging indicator and will not make us aware of an issue until it has often become a full-scale problem. Take revenue, for example. If we look at revenue at the end of the month when the financial statements come out and it has dropped, this is too late and only tells us we have a problem after the fact.
With continuous monitoring of leading indicator metrics, we can identify and take action on issues when they happen. The table below compares some leading operational metrics and potential corresponding lagging indicators.
Every finance professional needs the ability to link operational and financial metrics together for the business. Furthermore, finance then needs the ability to monitor the operational metrics that drive performance continuously. Nothing engenders trust with our business partners like identifying potential opportunities and issues along with potential solutions because we have been monitoring the key metrics and analyzing the data to provide data-driven insights.
One tool that is specifically designed to help the business continuously monitor its data and achieve FInance Observability is Bluecopa. Bluecopa is a modern finance operations platform that makes continuous monitoring and identifying actionable data-driven insights possible.
Actionable Data-Driven Insights
“We are surrounded by Data, but starved for insights.”
-Jay Baer, Marketing and Customer Experience Expert
Data by itself is of little value; it is what you do as an organization with the data that matters. I still remember vividly when my co-work told me about a project he worked on during his PhD in which he wanted to focus on a certain subset of the data but was told by his professor to ignore that data and focus on a different area within that data. He said a year later, he was reading about a professor who was awarded a Nobel Prize, and as he researched the data used to find the discovery, he learned the data his professor had told him to ignore contained information that would have led to the same discovery as the winner of the Nobel Prize that year. While this example may seem extreme, it highlights how often one has valuable insights all around them but is unable to find them because of an inability to separate the signal from the noise.
When working with data, one must be able to do the following to gain valuable insights and inform better decision-making from data:
- Know where to gather the data
- Develop a hypothesis on which to test the data
- Conduct an analysis of the data
- Summarize findings and insights in such a way that actions can be taken
- Convey the story behind the data to the business
- Follow-ups to ensure action is taken to implement recommendations
An example of how this might work in real life includes the following. The business comes to us to inform us that the average order value per customer is down nearly 40%. We work with them to agree upon what data we should analyze first and come up with some possible hypotheses for what is driving the lower customer order value over the last month. We then analyze the data looking for patterns and trends that would explain lower customer order value. As we analyzed the data, we found that several products our customers normally buy were out of stock. With this newfound information, we can summarize the data and provide recommendations on preventing future stockouts of popular products. We present the data to the business and provide several recommendations on actions that can be taken to increase order value in the future. After the presentation, we follow up with the business to ensure recommendations are implemented.
As the role of finance continues to change and evolve, one thing is clear: without the right tools, data, and skillsets, finance will not be able to achieve the mandate placed before it to be a strategic business partner. Moving forward, finance must be more focused on driving value creation through continuously monitoring operational and financial data and providing data-driven insights that the business can use regularly.
Finance must be willing to invest in the right technology to achieve Finance Observability. One such tool designed to help fast-growing enterprises achieve that goal is Bluecopa, The Modern Finance Operations Platform. Click here to learn more about how Bluecopa can help you in your journey to transforming the office of finance into a modern finance organization focused on serving as strategic partners for the business.
Paul is a Finance Professional with 12+ years of finance and FP&A experience, including business unit CFO roles. Paul earned a business bachelor's degree from BYU and an MBA and Master of Science in Information Management from Arizona State University. Paul has worked in several different industries, including the US Government, Travel Services, Finance, Automotive, Cyber Security, and more. Paul has a strong background in financial planning, financial modeling, report building, and business partnering. He is known for his deep understanding of the FP&A software planning space and has recently published an FP&A software market guide. He is also a big advocate of Microsoft Excel and is a LinkedIn influencer. Paul runs his own business providing training services, is a content creator, and hosting the popular FP&A Podcast called FP&A Today. Paul also provides consulting services for small and mid-sized companies.