Why the modern CFO needs to dislike the numbers

Den Howlett Profile picture for user gonzodaddy May 18, 2018
Are the finance role changes outlined in a recent report an accurate reflection of the needs of the modern CFO? I offer an alternative point of view.

bean counter 1
Still true today?

Sit down, relax, grab your favorite beverage. This is a long critique.

I recently saw a FinancialForce pitch that has Constellation Research's Ray Wang talking about "The five role shifts for a customer-centric approach." It forms the Executive Summary for a State of Finance 2018 report that FinancialForce commissioned. You should download the report - it is well worth the reading.

As an ex-CFO and partner in a UK firm of Chartered Accountants, I was curious. And it got me thinking.

As has become the 'thing' these days, commentary needs to have a catchy set of hooks to get attention but I found the top three 'things' identified by Wang in the pitch a tad unappealing. Why?

I've been following the SaaS (aka cloud) accounting market since 2006. I made outlandish predictions about SaaS accounting market growth in 2007-9 and was quite certain that the professional accountant was doomed to imminent dinosaur style extinction. I spent days and weeks hunting down professionals who 'got' the notion that SaaS freed them up to provide new types of service. I had fun beating up ICAEW (US types think regional CPA group) about the abysmal levels of SaaS adoption.

So yes, it is easy to characterize accounting types as living in the past, and yes, finance types have been slow to jump on new things but often for good reason that makes the more impatient amongst us observers less than charitable on occasion.

They were bean counters but today?

The problem I saw and which was horribly frustrating is that for many small businesses, which constitute more than 90% of all businesses, compliance work is as much as clients want. They're happy as long as their taxes are minimized and they are kept the right side of the compliance line.

Owner-managers often know just enough about finance to be successful without having a CFO breathing down their necks, although their use as proxies for cost-cutting is always useful. I say the latter from bitter personal experience of doling out bad news at times of recession.

In large businesses, the primary role of the CFO is to keep The Street sweet (aka compliance of sorts) and again being the first voice used to justify cost slashing.

All of those main job descriptions carry the 'bean counter' moniker writ large.

The cost method framework paradox

So when I see that Wang has as job 1: From bean counter to business model strategist, I kinda go: Yeah, maybe...but how? Let's take manufacturing as an example where what a finance type does can appear confusing.

Accountants in manufacturing environments are often relied upon to report how costs compare with expectations that are set against output.

The problem is the manner in which cost is frequently calculated is based upon hypothetical assumptions that were developed out of the Taylorian model of labor cost and utilization which itself was a way of developing models of efficiency. As we know, Taylor fudged many of his claimed insights for Bethlehem Steel and others so is it any wonder that standard costing as the primary system of variance analysis is flawed?

I mention this because when I was training, we were taught two primary methods of costing. Standard (or absorption) and marginal/direct (or opportunity) costing. I never understood how standard costing was supposed to relate to the real world because I intuitively knew that two or more people doing the same job would take two or more amounts of time to complete the same task. At the same time, I also knew that absorbing fixed production costs based upon some arbitrary volume measurement per annum was equally flawed because there would always be unexpected changes in volume output.

What's more, as manufacturing becomes more complex, the application of standard costing as a reliable method of cost allocation and measurement for reporting purposes gets increasingly difficult.

On the other hand, marginal costing made much more sense because it isolated the direct costs of producing a unit of output from those costs that are much more difficult to accurately allocate let alone control. At a time when direct labor costs as a proportion of total cost were much higher, but frequently fixed per hour rather than per piece, this was an important aspect of understanding decision making.

And trying to explain to business decision makers that standard costing was needed for reporting (there were associated accounting standards related to this issue) but that was not something upon which they could confidently rely for decision making, was tricky.

It often led to the idea that accountants know the cost of everything but the value of nothing.

Needless to say, factory automation took away a large part (but not all) of the problems associated with standard costing because machines can predictably produce given quantities of a good ost of the time. Even so, it is still in widespread use for legal and tax reasons - bean counting as Wang would have it.

The standard cost issue is even worse in services organizations to the point where, in many cases, professional services businesses would rather record time and materials and pass that on with a profit addition rather than deal with fixed price contracts and the gnarly problem of getting the right bums on the right seats at the right price.

Disliking the numbers

Well trained CFOs know these problems and have adapted but it is important for everyone to understand that they are often required to wear two hats and that charting a course within those constraints is neither easy nor especially pleasurable.

It's a good reason why the more skeptical CFOs dislike the numbers. They know in their heart of hearts that the accounting profession hasn't evolved on a theoretical basis for many years and yet we're stuck with a system that won't be going away in the next generation, despite the best efforts of some financial analysts to dream up their own measures of what is important to measure and what you can ignore.

They also know that accounting as the backbone of measuring business performance is a black art of sorts, masquerading as a science. There's an old joke that says if you line up six accountants with the same set of accounts and ask for a prediction you'll get seven different results. Which neatly brings me to role shift 2:

Looking back to go forward

From static forecasts to rolling agile forecasts. The shift from quarterly close to monthly close to weekly close and now even daily close requires a new degree of agility. Forecasting must account for multiple models and a constantly changing set of variables and the use of technologies such as artificial intelligence. Organizations must build agility across a wide range of business risk scenarios, such as price wars, natural disasters, and terrorism.

Sorry Ray but my eyes rolled (sic) with that one.

I was preparing weekly reports for a dozen or more construction sites in the 1970s, a time when the UK experienced a horrific recession. It was the only way to be in a position to act quickly in a market that went from the boom (and rampant inflation) to bust (and a drying up of sales) in six months. We got the work done with the aid of Kalamazoo accounting machines that rattled the office floor, pen, paper, and nascent electronic calculators. Distribution was by way of photocopier and bike courier. Those were the days (not!)

Huge value in agility

You never forget those experiences, nor the lessons learned, especially the need to focus on the most important cost elements.

Once you've been through that kind of hell, you appreciate there is huge value in agile decision making, even if it is looking through the one-week-old rear view mirror to look forward another few days. You sure as heck quickly shifted fixed costs out and renegotiated piece rates as often as possible.

As for AI, puhleeease. It's hard enough for finance departments to find and use non-accounting data of the type that D&B or Bloomberg provides let alone unstructured data the business is already generating. So how the heck anyone expects AI to be of use any time soon is a mystery.

The state of the art today is largely limited to pushing down budget and forecast management to the LoB, with finance maintaining a watching brief with questions to be asked as budgets and forecasts are prepared and revised.

In the cases I've reviewed over the last couple of years, finance has become agiler although there are plenty of examples where the budget process runs 8-12 weeks.

Industrial accounting types recognize there is something they really have to do in order to be that strategic helper. Get their hands dirty by understanding what LoB folk are actually trying to accomplish rather than pore over figures on a page. It's one of the best ways to understand a business and interpret the outcomes shown by the accounting information. And that plays to role shift 3:

Getting inside their heads

From adult supervision to co-innovation partner. The CFO has often served as the creator of policies, enforcer of policies and steward of the organization’s risk and liability. Going forward, the CFO must also add co-innovation partner to the job description. Business units need finance expertise to craft new offerings and adjust business models.

Having seen my share of accounting scandals, adult supervision is not an expression that sits easily with me but I get the point.

As to co-innovation, there's nothing new in LoB needing assistance from finance. I built a career doing just that with the specific remit of helping finance capital projects and M&A activity. Unlike the dewy-eyed investors that got taken to the cleaners via Theranos, the banking institutions I dealt with needed a slew of due diligence backup before they'd hand over a penny.

Both client and bank routinely relied on professionals to steer everyone in the right general direction. Clients were risk takers who often needed unbridled enthusiasm tempered by a degree of fact-checking. Bankers are risk averse and want to know the downsides. Sitting between them is a useful exercise in balancing needs but also searching for optimal outcomes. That's what savvy finance people do.

But how? We're back to grubbing around in the dirt that is the world of LoB people. If you want to query assumptions, you have to know what the business does and how it works. Some of the best CFOs I've met know more about the businesses they serve than individual LoBs.

I'd argue that while the manufacturing sector may often appear laggardly, there are plenty of examples where finance is active if not embedded as part of the ongoing decision and risk assessment process within management structures.

Wang has a couple of other points not made public unless you sign up and download the report, both of which I have touched on in this analysis and with which I don't have much disagreement except to say they are already happening much more frequently than is implied.

Where do I think (some of) the problems lay?

Where I find the greatest frustration is in the availability of the tools needed to answer industry-specific questions and the more granular questions that relate directly to the business.

Melding finance and HR data, for example, is far from a done deal. Understanding how the models of hiring process impact the ability to acquire the best talent is rarely understood in any depth. Despite their frequently perceived linkage, would CHROs welcome the kind of forensic analysis with which some CFOs are familiar?

Having peer data against which to benchmark is surprisingly difficult to obtain. I've argued on many occasions that SaaS providers are in the best possible position to provide useful aggregated data back to their customer portfolios. Yet a combination of fear, bias, and regulation risk has prevented SaaS providers generally from making benchmark data available. Or maybe they don't have the means to understand what benchmark data ought to look like? Those conversations are remarkably difficult and will remain so until CFOs actively seek that information.

My take

Wang's analysis is old news - at least to me and, I suspect the many CFOs I've come to know over the years. Perhaps the nature of what I do means I gravitate towards those who are doing interesting things and therefore my early learned biases have simply been confirmed and amplified.

While it is true that many companies and their CFOs are stuck in another time, I find that's more to do with what the available tools can deliver rather than a lack of willingness to be seen as part of the decision making process. I think it is also important to recognize that as naturally risk-averse, CFOs are not going to pick up the latest shiny new object as quickly as others. I rarely meet a CFO willing to be labeled as an early adopter.

Despite the risk-taking appetite of today's generation of business people, I firmly believe there is a place and value for the level-headed 'ah but' of the seasoned finance professional who, by nature prefers to be data-driven, than relying on gut instincts.

In short, management would do well to covet the cool, if apparently detached head of the CFO. As we've discussed before, communication between different professional types is a pre-requisite to the execution of any successful business strategy. Last I heard, no-one is immune from that challenge.

There is one issue that has not been discussed but is important. Business today is often focused on efficiency and threat mitigation rather than innovation.  Much of the expected outcomes from technology advances hinges on making business more efficient. That's often a pseudonym for cost-cutting, the mechanics of which CFOs are both familiar and comfortable.

Finally, the days of the accountant as the trusty knight from the Round Table, acting as fiscal hero replete with an immaculately pressed suit and starched shirt are long gone. It's an image as irrelevant as that of the bean counter.

Endnote: Despite my critique, and asI said at the top of this story, the report produced by FinancialForce is well worth the reading. It is encouraging.

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