How CFOs Are Driving Digital Transformation Beyond The Finance Department

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‍Table of Contents

1. The Digital Transformation Of Finance - Going Where No One Has Gone Before
2. The CFOs Role In Digital Transformation
3. Driving The Digital Transformation Of Finance Function
4. Financial Transformation Case Study
5. Digital Readiness & Building An Innovation Appetite
6. The Future Of Finance

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The recent digital transformation of finance via financial technology and innovative business models may be considered akin to the industrial revolution of the early 19th century. From invention of the blockchain by Satoshi Nakamoto, the widespread adoption of mobile payments to equity crowdfunding and beyond, finance has entered a new digital age.   Since the turn of the decade, established organisations and startups alike have been riding this wave of financial digitalisation seeking ways to tap the well of its seemingly infinite potential. In business, the responsibility for executing digital transformation usually falls on the CMO, Head of Sales or most recently the newly created role, Chief Innovation Officer (CIO). Most organisations adopt a product centric approach when it comes to digital, but they may be missing out on fantastic opportunities in innovation of business processes and business models. Through on-demand dashboards and live cost analytics, finance departments should also partake in this great leap forward. It is the CFO’s role to drive this digital transformation, as time and time again we see organisations internally innovate with greater effect and cost benefit than ever before. Through the digital transformation of finance, organisations can ensure their competitiveness is maintained in the market.  

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The Digital Transformation of Finance – Boldly going where no one has gone before

Looking out unto the bold frontier of modern technology Technological innovation is by nature disruptive. In finance, digital transformation is being driven by ever evolving systems and processes, with new efficiencies being realised with every iteration.  Digital transformation is best defined as the utilisation of technology to bring about improvements in business. This includes refining existing digital processes, going “paperless” or even building on new trends to introduce new business lines to the organisation. Such is the nature of digital transformation in finance that for some, it can bring about the galvanisation of their innovative startup. Airbnb for example considered it to be a watershed moment when it could accept digital payments through their platform, rather than having to deal with an awkward cash exchange.  The popular view is that this is the limitation of digital transformation in finance, primarily set in the online space of e-commerce and social media, with payments strategy as the focus. To the keen observer, digital transformation in finance is not just reserved to payments. Digital transformation has demonstrated its ability to transform operations and business models, reporting and analytics and even build new product lines all together.  

In finance, digital transformation may be distilled into 4 macro trends: The rise of the digital native: Customers now have a keen eye for details when using digital products. With user experience now at the forefront of the customer centric strategy for organisations, it is now more important than ever to be able to communicate effectively through digital interfaces. Conversational interfaces are the new norm, and seamless simplicity is being favoured over complex, tech heavy design of the old Web 2.0 that some are used to. Decentralisation: The ability for organisations to ensure their data is secured through offsite services, through the transformative ability of cloud computing. This can be anything from using reactive servers with cloud backups to minimise downtime, to coupling with revolutionary new technologies. Financial data technology is now able to be decentralised data via technologies such as blockchain.

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With the right server application, banking and financial institutions can further cut costs by distributing ledgers further. Blockchain technologies such as Ethereum have the potential to revolutionise finance, in not only the data decentralisation sense, but also as their own form of alternative currency. Servicing the digital nomad: With mobile payments technology maturing into a fully-fledged industry, the digital nomad has arisen. Digital nomadism may be defined as the ability for individuals to be able to work completely remotely, with little to no contact with their employer barring the delivery of the work and exchange of payments. Companies such as Uber, Airbnb and closer to home Freelancer, Airtasker and Expert360 are the exemplification of this digital nomad. The ability for companies to address this newly formed market with payments and financial products has created opportunities in this space. On Demand Data: Most notably in the finance space, real-time on-demand data has become the new norm. With the Australian Federal Government's introduction of the New Payments Platform allowing for instant transactions and same day delivery of funds, businesses both large and small are being more motivated than ever to utilise cashless payments systems. This is coupled with the ability for organisations to see live data feeds of customer and user flow, sometimes even to the minute. Sales decisions are becoming quicker, and with the right systems may even evolve to instant transfer (coupled with the blockchain technology as above).

The CFO's Role In Digital Transformation

  Most digital transformation is driven from a customer-facing perspective, often owned by the Chief Officers of Digital, Sales and Marketing departments to ensure greater customer yield and revenue benefits. Often the role of the CFO is to enforce effective measures to ensure these revenue benefits are realised.  

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Source: IFS World However, in this new age of digital transformation and the role of the CFO (or outsourced CFO) needs to be understood with greater depth, as they now act as a key driver of digital transformation. The finance function of any given organisation oversees CAPEX and OPEX budgets, and most IT organisations report directly to the CFO. Project portfolios are generally managed exclusively under the signoff of finance, even if CEO endorsement is guaranteed.  CFOs nowadays have a clear stake in enterprise IT strategy and in shaping how the organisation may best realise their cost benefits. As the finance function is ultimately about the allocation of resources, CFOs can inadvertently establish a clear organisational culture for digital transformation without even realising it.

Now is more important than ever to CFOs to begin to realise that they can set the trends more than follow them. While in previous decades the finance function may have been able to be restricted to back-office financial administration, finance is now at the crossroads of IT strategy and business intelligence. CFOs are now able to dictate the core principles that organisations use to shape their overarching focus.  

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Driving Digital Transformation of Finance Function

  In close collaboration with I.T., finance can drive digital transformation. The CFO can almost be considered the quarterback of the organisation, setting the delivery of targets with each quarter with a strategic view to score the ever elusive digital “touchdown”. If finance can be the driving force behind digital transformation, how can it do so when the primary goal is to ensure budgets are stuck to like glue. It is this exact attitude that leads to CFOs adopting a conservative mentality in digital, effectively preserving the status quo. CFOs are by nature risk averse, so subverting this mentality becomes a challenge.

Finance as a function can drive the implementation of internal processes to upscale efficiency. Using their organisational view of resource and budget allocations, they may then pull this process change back to customer facing systems to create customer intimacy. From here, they may move I.T. strategy to focus on a new product and bring the budget in line for the next year.  The portfolio budget is a communication tool, and can be used to send message to the organisation. If done correctly it can serve as the company’s northern star. In turn, it can be used as a reflection of the performance of a digital strategy, as evidence of a digital strategy being executed proficiently.  In the breakdown of digital strategies for the mid-tier organisation below, there are 4 methods that CFOs have effectively utilised to drive digital transformation through finance. In the case study below, the organisation could instigate digital transformation through the utilisation of real time cost/benefit analysis of projects via a real-time finance report.  

A Case Study of Digital Transformation in Finance: Mid-tier Financial Institution

  Financial strategy is not an exact science. In the organisation, I was consulting in, the challenge for the CFO to create a scalable model for portfolio budget management to ensure operational efficiency while growing revenue, created a challenge whenever the model had been implemented. Digital transformation was primarily driven by the COO, strategy and operations.  The organisation had found itself limited by its own budgeting framework. Resources were simultaneously over and under-utilised. Projects were lacking required benefits drivers, with estimation tools being stretched in every direction to accommodate project owners’ ego-driven concepts. Budget governance occurred quarterly, with a near laser focus on the finer elements of each project without looking at the bigger picture at hand. Our consulting team was hired to increase portfolio efficiency at the governance level but soon recognised that organisational change was the real issue. The organisation had found itself unable to realise benefits from business cases, and in turn, the budget was unable to reflect the effort placed into digitalisation of process. The consulting team began to shift the strategic focus from an operationally driven strategy to a financially driven one. The CFO function was placed in charge of pursuing benefits based on the independent modelling of finance.  As a board, strategic thinking in digital transformation was centred on cost efficiency. By analysing their portfolio strategy, the team found the organisation had neglected the more potent strategy of cost-effectiveness in digital transformation. Through cost-efficient methods, the finance function was tasked to keep the portfolio within the allocated budget. This created a culture of digital transfer instead of digital transformation, where projects were undertaken to optimise processes instead of overhauling them. Costs were low, but benefits were unable to be realised due to a lack of investment and miserly spending through the portfolio. The portfolio experienced OPEX blowout, with project managers hesitating to do projects in fear of overspending, and subsequently ate into their CAPEX. To shift this board level vision around the company portfolio, the CFO began a strategy centred on cost-effectiveness. Success was measured in revenue benefits, but through the technological change from within, the company began to measure assistive (indirect) benefits or benefits that cannot directly be hard-line measured.  Through this shift in CFO mentality, revenue benefits began to be measured within a month of a product being released through the leveraging of Splunk big data analytics. Many of the financial models that the projects were undertaken for found themselves to be thoroughly scrutinised because of these analytics reports.  By bringing reporting and analytics into the technological age, the organisation could shift the roadmap rapidly and substantially. We found that prior to coming into the organisation, no two projects were analysed with the same process and benefits measures. Organisational habits were cemented from continuously reusing these new systems and with every new iteration of the project. As the organisation could continuously refine these processes and strategies around budgeting, the portfolio budget started to see itself grow internally, without the need for budget transferral from existing business lines. As the budget grew, the understanding of how projects with indirect benefits could help grow the business started to materialise. One example of this was the jewel in the crown of the portfolio that year; “Project Zero” (not its real name). Project Zero was designed to allow for reactive servers to be reactive to new customers i.e. when customer traffic was low, servers would go into hibernation. The traffic data from these project fed into a real-time dashboard through Microsoft Power BI. This massive task saw unexpected benefits beyond the intended cost savings project, such as faster customer service, minimised downtime and an overall increase in customer experience. The CFO may be able to act as the central point for cultivating the organisational appetite for digital transformation, by setting the tone for the budgeting process and subsequent resource allocation. Where the goal is solely revenue benefits, the CFO may be able to see outside the box to “beyond the numbers”, and with a broad view as to how the portfolio may achieve synchronicity. While it may not be the sole point of making projects happen, finance can also view indirect benefits to create future value in the organisation, rather than trying to beat last year’s revenue forecast. 

Key to Project Zero was the integration of Microsoft Power BI, an example of which is given above.

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Digital Readiness And Building An Innovation Appetite As A CFO

  Innovation isn’t easy. Large organisations are well-oiled machines with the sole purpose of building products with greater efficiency. Disruption and innovation, two of the necessary ingredients in digital transformation can only happen if organisations are able to create an environment conducive to this type of behaviour. Entrepreneur Steve Blank said it best when describing innovation where “we’ve created a world where innovation is not just each hot new technology, but a perpetual motion machine”.  To drive that innovation, CFOs need to be able to listen to the market to find these incumbent digital products. It is important to understand that sometimes the contrary ideas and concepts can be the key to the next disruptive product. The appetite for innovation describes an organisation’s ability to build change portfolios that are specifically designed to innovate and improve their business model, product lines and internal processes. Most organisations hire consultants to facilitate this kind of change, but this of course can end up increasing OPEX at the end of the year. The innovation appetite is a concept coined by author M. Pilar Opazo from the eponymously titled book “Appetite for Innovation”. Coined from years studying at the world’s most famous restaurant elBulli, Opazo’s view is that an organisation’s appetite for innovation stems from an ability to create a culture of idea mobilisation to encourage the organisation to innovate. The CFO in turn, by being a traditionally conservative, bottom line focused function, can drive innovation within the organisation through facilitating idea mobilisation, through the finance function.  The CFO can challenge and push the organisation to innovate by challenging other functions to mobilise their ideas into products. It is only the CFO who can define what “failure” or success looks like with a project, and with that responsibility it is the CFO who may view these learnings as opportunities instead of failures.  With years of budgets spent on systems optimisation and productivity encouragement, it’s understandable that most CFOs would shy away from investment high risk, seemingly speculative tech industries, but this is where digital transformation happens.  It takes both time and the co-operation from internal and external parties, and for most organisations causes significant discomfort. In the past, I’ve seen some organisations experience these hunger pains in the form of structural changes, leading to protests by senior team members who find themselves having to change and think differently after years of habits. If the CFO has their finger on the pulse, and a real understanding of the impact of digitalisation, they can in turn drive this digital transformation through their own personal innovation appetite. By setting their targets in their portfolio budget to push their digital boundaries, the innovative CFO may in turn build an organisational readiness for the impending digital transformation.  

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The Future of Finance - What Lies Ahead

  The recipe for digital transformation lies in the mix of changes in business model with changes in business culture. If finance as a function can introduce these two elements, it can ultimately drive this transformation. In the future, finance teams will play a much greater hand in digital through cyber security, data governance as well as controlling the data flow. Organisations will find themselves investing more in security experts to prevent costly and dangerous data breaches. CFOs in turn will find themselves playing a guardian role for this data, as the cost of security breaches in finance increase.

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Through digital transformation, Finance becomes the engine room for analytics in the business, providing key empirical evidence for the strategic decisions of the board. CFOs in turn will find themselves generating more effective methods to read and interpret data, as the need for qualitative data creates more efficient uses for the budget to create benefits and insights. Finance can then engage stakeholders with more personalised analyses, helping them to be more engaged through these insights. Through digital transformation, CFOs must now be able to challenge the core principles behind the business. The innovative CFO asks questions as to how the business continues to establish recurring revenue, and in turn how this can be disrupted by new technologies. CFOs will not have to start asking questions of the finance function at a strategic level, with the ability to go beyond the role of gatekeeper that many organisations fit them into. After the initial move to drive digital transformation from this innovative CFO, finance may still be the final hurdle to get past on the way to approval for a new project, and the onus is also on the business to challenge their internal perception of finance. While finance as a function may be trusted as a gatekeeper, it is up to the business as to whether it lets the finance function challenge itself and collaborate on moving forward.  Finance in the future will find itself at the crossroads in many organisations. It may need to reinvent itself to stay relevant, but that doesn’t mean it does not show the potential to create new challenges and opportunities in the business. For the innovative CFO, having not only the knowledge of digital but the instinct to drive it is the most important factor to drive digital transformation. If a CFO can bring digital into the forefront of budgeting and analytics, this can set the scene may be set for an organisation-wide strategic digital play. While it may take a bit of time for the organisation to know where to push this digital play, the results for the business are often spectacular. Digital transformation is getting CFOs back into strategy. The innovative CFO will not be a second COO, but instead will be able generate improved risk awareness in board decision making. As the external conditions of become increasingly complex, and amidst greater economic uncertainty both here and abroad, the innovative CFO needs to engage in predictive finance to ensure the future of the business. It’s easy to look behind us in retrospect and measure past performance as a means for future returns, but the future is not set. By driving digital transformation, finance can stop looking back at history to measure and predict the future, and instead look forward to having its hand in writing the future of the organisation.