Checklist for the 21st-Century CFO

Posting Date: March 23, 2006

By: Jeremy Hope

Peter F. Drucker wrote: “In the post-capitalist society it is safe to assume that anyone with any knowledge will have to acquire new knowledge every four or five years or else become obsolete.” 

Too many CFOs have failed to heed Drucker’s advice. They remain prisoners of dysfunctional systems and mental models that were developed for a role that is fast becoming obsolete. Many spent their formative years working in accounting departments and had little contact with other people inside the organization. They focused on recording transactions, managing budgets, getting the accounts out on time and preparing tax returns. They weren’t expected to be part of the team running the business.

Today's CFOs are expected to be business generalists, risk management experts and business intelligence sources. They are expected to provide instant replies to just about any question that the CEO asks about business performance.

In addition to these pressures, the CFO has to overcome the resistance of a number of people with vested interests in preserving the status quo. These are often people whose skill is in spinning, fudging and manipulating information so that higher-level managers see and hear only a customized (and usually sanitized) version of the truth.

To break free from generally accepted practices and systems takes belief and courage. But the CFO should be encouraged by the numbers of organizations that are making these changes. Many are getting the message about information overload and fewer are being seduced by all embracing panaceas and IT systems. The clear message sent to managers throughout the organization is one that says that the CFO and the finance team are reducing the nonvalue-adding work that frustrates all managers. And they are raising their game and building their capability (and credibility) as analysts and advisers. They are now in a position to be welcomed into the business development team as trusted and valued partners.

To facilitate that transformation, the following is a Checklist for the 21st-Century CFO:

• Lead a crusade against more complexity. Make your aim clarity, simplicity, transparency and accountability.
• Aim for a unified, intergraded group general ledger but reject more micromanagement. Manage data at the appropriate level in the organization. Focus senior management and the board on the bigger performance picture.
• Separate the signals from the noise. See activities and financial data as patterns and trends and deal with abnormalities. Ignore normal fluctuations.
• Provide clear principles, boundaries and guidelines so that managers can manage their own data and make their own decisions.
• Manage by exception and trust people to do what they should do properly (e.g., complete expense forms) but be extremely tough on deliberate abuses of this trust (use random sampling to deter abuses).
• Identify the root causes of low-value work and eliminate them. Be brutal with the number of general ledger accounts—it has a knock-on effect up the measurement and reporting chain.
• Centralize and standardize routine work such as payroll, benefits administration, some software development and procurement. Streamline transaction processing by improving systems integration, reducing detailed analysis or, where appropriate, separating its management from mainstream finance (for example, by establishing one or two highly efficient shared services centers). If this is too difficult, then consider outsourcing.
• Eradicate budgeting detail and complexity. More detail doesn’t lead to more accuracy. In fact, it is more likely to have the opposite effect. Less planning leads to fewer reports. Consider abandoning budgeting altogether.
• Cut back on measurement to the point where only six or seven measures are used at every level.
• Root out redundant reports. You have probably twice as many reports as you need, and they are more expensive to produce than you think. Just stop producing them and see what happens.
• Use only “one truth” as far as the numbers are concerned.
• Be skeptical about investing in additional IT systems and improvement projects. Start with examining existing systems, looking outside-in and from end-to-end. Understand how work flows and identify how the system can be improved. Only then consider whether IT will provide a value-adding solution.

This article is excerpted from Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add Greater Value, by Jeremy Hope. Copyright 2006 Jeremy Hope. Reprinted by permission of Harvard Business School Press. All rights reserved.