T H E L E A D I N G V O I C E I N F I N A N C E I N N O VAT I O N
FP&A INNOVATION APR 2016 | #10
THE FINANCES INVOLVED IN A PRESIDENTIAL CAMPAIGN | 12
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Why Some Decision Makers Don’t Rely on FP&A The value of FP&A comes from anticipating the future, yet many still fail to incorporate it into their decision making processes. Is this a failure of FP&A professionals, or something else? | 10
The New Age of the Digital CFO Finance leaders need to ensure that they are putting technology and digitization at the heart of their thinking. Fundamentally, they need to be digital first. | 14
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ISSUE 10
EDITOR’S LETTER Welcome to the 10th Edition of the FP&A Innovation Magazine
The next quarter sees a number of risks that CFOs should have been considering come to a head. In the UK, the EU Referendum could see the country go it alone - with warnings coming from all areas, including the IMF, of potentially dire consequences for the global economy should they choose to do so. Financial leaders should already be preparing for such an eventuality, but a recent Deloitte survey suggests that many are failing to do so. Later in this magazine, Pedro Yiakoumi looks at what CFOs should be doing to prepare for another financial crisis. Another issue many are concerned about is the rise of Donald Trump. While much of what comes out of his mouth is hard to reconcile with reality, he has touched on an issue that even his counterpoint on the left, Bernie Sanders, has touched on - how presidential campaigns are
financed. The rise of the SuperPAC may have proved extremely beneficial to candidates like Hillary Clinton, but are they fair? Or are they driving a corrupt system that favors the interests of large corporations over the general public’s? Aaron Fraser investigates the problem later in this issue. In order to deal with a turbulent economy, you need to have a good CFO in place. Many unicorns have managed to succeed perfectly well without one, but Kirsty Donavan argues that another financial crisis may expose this as the vulnerability that it is. The real question is not whether or not to employ a CFO, but what skillsets are necessary in the modern world - particularly when it comes to dealing with the rapid technological advancements taking place. These can often prove a blessing, but adoption of new technologies can raise more
problems than they solve for finance leaders who lack the understanding to fully exploit them. In future, CFOs who put digital first will hold a tremendous advantage over those who don’t. Last quarter, we also saw Internation Women’s Month. In this issue, Amy Hill considers the problem of a lack of gender diversity in the finance industry, and asks whether it is the masculine environment that makes it difficult for women to attain the high level positions. As always, if you are interested in contributing or have any feedback on the magazine, please contact me at jovenden@theiegroup.com. James Ovenden Managing Editor
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contents 6 | WHY SOME UNICORNS LACK A CFO
12 | THE FINANCES INVOLVED IN A PRESIDENTIAL CAMPAIGN
For the tech industry, disruption is often the name of the game, and this includes doing away with old corporate structures. For many, this means not having a CFO. But is this the sensible option?
The question to become the leader of the free world is a long and intensive process. Aaron Fraser takes a look at how candidates fund their campaigns, and whether it could be changed
8 | IS GENDER BIAS BEHIND THE LACK OF WOMEN IN FINANCE?
14 | THE NEW AGE OF THE DIGITAL CFO
The lack of women in finance is well publicized, but what are the root causes? Is it a problem of the education system, or does the entire finance culture work against women? Amy Hill investigates
Finance leaders need to ensure that they are putting technology and digitization at the heart of their thinking. Fundamentally, they need to be digital first. Elliot Jay looks at how to achieve this 16 | CFOS NEED TO START PLANNING NOW TO SURVIVE THE NEXT CRISIS
10 | WHY SOME DECISION MAKERS DON’T RELY ON FP&A
The value of FP&A comes from anticipating the future, yet many still fail to incorporate it into their decision making processes. Is this a failure of FP&A professionals, or something else?
The ramifications of the 2008 financial crisis are still being felt today. As alarm bells ring that another crash could take place, what can CFOs do to better insulate themselves?
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contributors kirsty donovan, amy hill, aaron fraser, elliott jay, pedro yiakoumi
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Kirsty Donovan, FP&A Commentator:
WHY SOME UNICORNS LACK A CFO The phrase ‘unicorn’ was little heard of a few years ago, mainly because there were so few of them.
THE PHRASE ‘UNICORN’ was little heard of a few years ago, mainly because there were so few of them. Indeed, the word itself was used precisely because it conveyed that sense of rarity otherwise they’d be called them pigeons or mice. However, the last couple of years has seen an explosion in the number of companies valued at more than $1bn. Back in October, Business Insider reported that 1.3 ‘unicorn’ companies were created every week in 2015. Messaging platform Slack, for example, is now worth $2.8bn, while online HR provider Zenefits is worth in excess of $4.5bn. There is now a certain shame for companies who have not yet attained unicorn status. The poster child for the unicorn boom is Uber. Uber is the most valuable private startup in the U.S., worth an estimated $64 billion. What’s really unique about Uber though, other than its sheer size, is its decision to go without a CFO, having left the post vacant since March 2015, when Brent Callinicos stepped down from the position.
7 A company spokeswoman explained in an emailed statement that, ’We have not been looking for a CFO and we have not spoken to a single CFO candidate since Brent left. We have a deep bench and the team is managing things very effectively.’ Many have focused on the implications for their attempt to launch an IPO. Under SarbanesOxley, companies are required to have a CEO, a chief accounting officer, and a CFO. It’s usually advisable that CFOs are in their role for at the very least a year before a company goes public - longer for a company of Uber’s size - so the lack of haste Uber is showing in its search for Callinicos’s replacement would indicate they’ve no plans to launch any time soon. However, this argument suggests that the only reason a company needs a CFO if it’s launching an IPO? But is this the case? And if it is, should wannabeunicorns be following their lead? Other unicorns have similarly decided to eschew the traditional CFO, including Slack and Zenefits. And it’s not just unicorns. At least seven U.S. companies with revenue above $5 billion don’t have an official chief financial officer, including CBS and Oracle. To say that the role has been simply gotten rid of at the firms would obviously be misleading, it’s more the case that the responsibilities have been shared around. The CFO articulates a company's financial strategy, both internally and to external investors. It would seem logical that this is better being centralized. It could be that the volume of venture capital is delaying companies’ attempts to go private, and they do not feel a pressing need. However, businesses aspiring to reach unicorn status are finding it increasingly hard to raise the capital they need, and a CFO will likely become a necessity. It is also likely that we will see many more IPOs launched as funding dries up.
The decision of established companies like CBS and Oracle to go without a CFO, however, suggests that there’s more to it than simply thinking they can get away without one. While it’s true that not all smaller businesses need a CFO, as their financial pictures simply aren’t complex enough to warrant one, high value-companies are likely to need one given the challenges of fast growth they usually have. It may simply come down to the lack of available talent out there to fill the roles. William Austen, president and chief executive officer of Bemis, a supplier of packaging materials, claims that: ‘The CFO role is a critically important role, and I’m not going to settle for any candidate. It has to be the right candidate, and I will take the time to find the right partner for me with the right chemistry for myself and the rest of the leadership team.’
Unicorns have always prided themselves on doing this differently, and their rapid growth without a CFO suggests that they are doing ok. With the drop-off in venture capital, however, they could find themselves in a different situation and facing new challenges that require a CFO at the helm
Unicorns have always prided themselves on doing this differently, and their rapid growth without a CFO suggests that they are doing ok. With the drop-off in venture capital, however, they could find themselves in a different situation and facing new challenges that require a CFO at the helm. Ross Fubini, a partner at Canaan Partners, in Menlo Park, California, notes that ‘the role will start mattering more in this climate. Private capital is starting to say now we are willing to put more money into high-growth companies, but we want to know which parts are performing well.’ Often, it is only the CFO that has this kind of overview of a company’s finances that will satisfy investors.
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Is Gender Bias Behind The Lack Of Women In Finance? Amy Hill, Finance Commentator
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THE FINANCE INDUSTRY is typically portrayed as a male dominated environment with discrimination towards women ingrained in its ideology. In films about the sector, like Wolf of Wall Street and Inside Job, women are typically seen to be objects, and those who actually work in finance are excluded and humiliated at every turn. This wouldn’t be so bad if the films were fictitious, but they’re not. Wolf of Wall Street is based on a true story, and Inside Job is a documentary.
they had been the subject of inappropriate behavior. Though, the situation could be worse. At least there’s not many women there to experience such naked hostility. Studies conducted by the Harvard Business School found that just 9% of senior roles in venture capital are held by women, 6% at private equity firms, and a measly 3% at hedge funds. This, despite the fact women account for 4050% of the graduate intake at most major City employers.
The truth behind these representations is borne out by a wealth of statistics. According to a survey by Opportunity Now, the gender equality arm of the Business in the Community (BITC) charity, over 50% of women in finance say they have experienced bullying in the last three years, while 12% of women also reported that they had been sexual harassed. A Financial Times study of the fund industry backs this up, with 28% saying they had experienced harassment, and an additional 54% said that
In their defense, the major financial firms appear to be making an effort to get more women on board. Large banks like Citigroup have women’s networks and in-house mentoring programs typically available to most new female recruits, as well as generous maternity packages. At a very senior level at least, banks seem to have realized the importance of getting women on board. The economic benefits of having women on board would suggest they’re
9 making the right move. A review of 2,360 companies by Credit Suisse Research Institute over a six-year period found that it was ‘on average better to have invested in corporates with women on their management boards than in those without‌ companies with one or more women on the board have delivered higher average returns on equity, lower gearing, better average growth and higher price/book value multiples.’ However, while banks are making big noises, their initiatives appear to be doing little. The number of women in senior management is not going up, and anecdotal evidence suggests that sexism is still rampant. The main issue is that the entire culture in finance is one that rewards risk and an absence of empathy. Women, statistically, tend to be better at conflict management, empathy, self-awareness, and
risk management. These are all qualities that are the antithesis to those promoted in finance, but they are very much needed to right the well-publicized and incredibly damaging ills in the industry. Women have, and do, flourish in finance because many also lack empathy and embrace risk, but maybe if virtues more traditionally associated with femininity were encouraged as opposed to showy programs, not only would the gender imbalance be corrected, but the industry as a whole would be less prone to massive scandals. One of the reasons that the generous maternity packages offered by banks have failed is that many women believe that if they take them up, they will lose ground to male colleagues. Citigroup, PwC and Deloitte are among those planning to push new fathers to take
more paternity leave when new UK rules come into force in April. This should help employers see women and men as equally likely to go on parental leave, and go some way to eliminating the unconscious bias among male managers against hiring and promoting women because they fear them disappearing for a year. It should also help promote a cultural change among the general staff. Opportunity Now has suggested conducting equal pay audits and ensuring that company bosses are visible in leading the fight against inappropriate sexist behavior. Regulated quotas have also been put forward as a good option. These provide a temporary solution to the issues. If finance is to embrace women, and women are to embrace finance, the whole industry needs to re-evaluate.
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James Ovenden, Managing Editor
WHY DECISION MAKERS DON’T RELY ON FP&A ACCORDING TO RECENT RESEARCH by corporate advisory firm CEB, 25% of decisionmakers are not using financial analysis in their decision-making processes. Meanwhile, 61% of FP&A directors use it selectively to validate a gut instinct, and nearly half of decision-makers misinterpret the analysis. The value of FP&A comes from anticipating the future. Running scenarios for the financial impact of what-if events, and understanding trends and how they could impact the future, is where FP&A really becomes useful. The key reason that decision makers are not using FP&A as much as they could, or should, for their decision making is that the analysis provided either does not always fit this criteria, is not presented in such a way that it can be seen to fit the criteria, or simply that the data is not accurate enough. The first thing that finance leaders need to do is utilize the technologies that make FP&A more effective. A report by Grant Thornton and the American Productivity and Quality Center (APQC) found that only 24% of finance leaders use any predictive analytics techniques, and instead rely on data focused on the past. FP&A needs to work closer with IT departments and data scientists to bring predictive and prescriptive analytics into play. They also need to look more towards explanatory analytics.
Predictive analytics is highly useful, but it can only gives you a likely outcome if nothing changes. Obviously, you can run a number of different scenarios to see the outcome of different decisions, but it still fails to tell you why an outcome is likely. Explanatory analytics tells you why something will happen, which enables you to really alter the outcome. This is at the heart of ensuring FP&A becomes as integral to decision making as it should. FP&A teams need to move away just providing answers, and focus on providing potential problems. By concentrating on giving decision makers the right answers and recommendations, they are really just obscuring the alternatives and financial tradeoffs implied by the recommendations. FP&A teams need to anticipate the impact of decisions in the long term, and engage with stakeholders to show them issues around them. They also need to pinpoint and correct decisionmaker prejudices, and raise questions of the conventional wisdoms around the processes being applied. Fundamentally, how decision-makers go about making their choices is outside of finance’s control. What FP&A can do is ensure that access to good quality, accurate, data is available whenever and wherever it is needed, and that analysis is presented in a way that is easily understood and its value well communicated.
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James Ovenden, Managing Editor
the finances involved in a...
Presidential Campaign
THE US POLITICAL SYSTEM is not one that has been widely emulated. None of the hundred or so countries organized since the second world war have imitated America’s political system, and nowhere in the world has even remotely considered copying the circus that is a US election. In most first world countries, election campaigns last around four to eight weeks, with limits on television access to ensure that it’s fair. In the US, it seems someone is in the oval office ten minutes before the primaries begin all over again.
This year’s primaries have seen a bewildering array of candidates and issues, but they have seen significant amounts of money donated. Indeed, the one good thing about these primaries has been that both Bernie Sanders and Donald Trump have brought the issue of campaign funding to the fore. Trump’s has largely been self-funded, while Sanders has made use of record amounts of small donations. These days, candidates have to spend almost all of their time and resources raising money. This is a relatively new phenomenon, though. Between 1976 and 1996, major presidential candidates were able to focus most of their time on talking to voters because of a law enacted in 1971 that allowed millions of Americans to check a box on their annual IRS returns which earmarked
$3 of their taxes to go into the Presidential Election Campaign Fund. The idea was that this would ensure presidents would not be beholden to wealthy interests. Now, it’s different. The financing of electoral campaigns at the federal level in the United States is supervised by the Federal Election Commission (FEC), an independent government agency. Most campaign spending is privately financed, but to some limited extent, public financing is available for qualifying candidates for the President of the United States during both the primaries and the general election. The amount an individual can give directly to a candidate is limited to $2500, while it is $30,800 to a national party committee and $10,000 to a state, district or local party committees. Organizations are also fp&a innovation
12 limited by federal law in what they’re allowed to contribute to candidates, campaigns, political parties, other FEC-regulated groups and corporations, and unions cannot donate money directly to candidates or national party committees. There are, however, ways around this, primarily enabled by socalled ‘Super PAC’ (political action committee), which has driven a significant portion of funding in these primaries, particularly for Hillary Clinton and Jeb Bush. Super PACs were made possible by a Supreme Court decision in early 2010, Citizens United v. Federal Election Commission, that effectively allowed unlimited contributions for political purposes to these committees. Unlike regular PACs, which have been around since the 1940s and are limited by FEC spending restrictions, Super PACs can raise and spend as much as they want on behalf of a particular candidate, party, or political issue. If a PAC contributes directly to candidates, the most a person can donate to the PAC is $5,000. Super PACs, on the other hand, can receive unlimited contributions from individuals, corporations, or unions.
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Super PACs are supposedly required to disclose their donors and are not allowed to coordinate with the candidates or agendas they advocate, but the FEC appears to be trying to find ways around this for them. In perhaps the most extreme example of how much leeway is being afforded to the Super PACs, the FEC declared that Karl Rove’s Super PAC ‘American Crossroads’ advertisements were not ‘coordinated’ with campaigns, even if the candidates appeared in the ads and consulted with the Super PAC on developing the scripts, and they were, therefore, free to fund them as they saw fit. The FEC has also seen fit to rule that it is not coordination if a candidate solicits funds for a Super PAC. Gore Vidal once wrote, ‘Any individual who is able to raise $25 million to be considered presidential is not going to be any use to the people at large. He will represent oil, or aerospace, or banking, or whatever moneyed entities are paying for him.’ He wrote this before the rise of Super PACs, which has arguably made things worse whilst limiting access to candidates for citizens.
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14 ELLIOT JAY, FINANCE COMMENTATOR
The New Age Of The Digital CFO The finance function’s importance in driving company profitability has grown drastically over the last decade, and is set to increase even further in upcoming years. IN A GLOBAL SURVEY of finance professionals by CFO Research, published in September 2015, 89% of respondents said they expect the finance function’s influence on their company’s business decisions to increase over the next five years, with 31% saying they expect their influence to increase substantially. In order to facilitate this new importance, finance leaders need to ensure that they are putting technology and digitization at the heart of their thinking. Eighty-five percent of those surveyed agreed that, over the next five years, their companies’ success will increasingly depend on their ability to adapt to the rapid pace of change and greater business complexity, yet just 44% believe their finance functions are currently well equipped to produce meaningful business analysis and reporting that can keep up with this pace. The only way that they will be able to this is if they fully exploit technologies such as intelligent automation, the cloud, and analytics. Finance has always been at the forefront of technological adoption. CFOs have already used hardware and software to some extent to streamline and automate core processes, enabling significant improvements in finance operations and more time for analysis as fp&a innovation
15 opposed to traditional ‘bean counting’ tasks. Mobile computing, online collaboration tools, and cloud computing allow greater freedom for finance professionals to work flexibly, from anywhere at any time. They also provide new capabilities for storing and analyzing the vast swathes of data that finance functions are accumulating so it can be leveraged to better company performance. Despite these obvious advantages, however, many are not using it to the extent they could be. According to the CFO research, 75% of the respondents believe their companies must get better at making effective use of much larger, unstructured data sets, and 79% say their companies must develop or acquire capabilities in advanced analytics that they do not currently possess. That is to say, the kind of sophisticated analytical tools and methods that can predict outcomes, which is vital for decision making, as well as improving risk assessment, and modeling of complex business scenarios.
the silos that stand in the way of integrating data, and that leverages fast, flexible, and powerful new cloud-computing technologies. CFOs are also in control of the budget, so they need to know which departments to allocate technology budget to, and which technologies are necessary investments, which can best be guided by IT. Such a partnership between IT and finance is also vital for selecting the right tools. It’s unreasonable to expect finance professionals to be technology geniuses, and tools with low skill requirements will allow for quicker and easier implementation by finance professionals.
Mobile computing, online collaboration tools, and cloud computing allow greater freedom for finance professionals to work flexibly, from anywhere at any time.
At the moment, finance risks being left behind by more digitally savvy lines of business when it comes to providing management with the insights vital for company growth, and losing its status as a vital business partner. CFOs and their finance teams must aggressively seize the opportunities being afforded them by new digital technologies to prevent this from happening.
Obviously, finance functions need to ensure that they have the knowledge and skill set in place to best make use of these technologies. Failure to constantly maintain and develop knowledge of technologies beneficial to finance function operations also comes at great detriment to a function’s ability to run effectively. They also need to predict what these are ahead of time. Late adopters risk losing tremendous ground to competitors who get in before them. CFOs and their finance teams need to collaborate with CIOs and those in IT departments to build this knowledge. A reciprocal relationship can also help to overcome some of the other obstacles that may be standing in the way of smooth technological implementation. There needs to be a company-wide commitment made to obliterating
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CFO’S NEED TO START PLANNING NOW TO SURVIVE THE NEXT CRISIS
THAT BEING SAID, they’ve been gathering for a while and the heavens have yet to open. However, financial market turbulence, slowing growth in China, falling asset prices, and a host of other portents of doom have led the IMF to tell a group of 20 nations that they need to take ‘bold multilateral actions’ to stimulate growth and limit risk. The chances of another crisis are very real, and CFOs need to start preparing now if their companies are to stand the best chance of surviving and recovering.
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If the media and politicians are to be believed, storm clouds are gathering over the global economy.
CFOs need to ensure that their firms are as well insulated from global shocks and that they’ve mitigated against financial risks that could occur in a downturn. They need to ensure that their supply chains are strong and contingencies are in place for customers delaying payments. Contracts also need to take into account the likely currency fluctuations. They need to be ready to help re-position their company to suit the changing market, making sure that they have the right data in the right place to recognize when things are going badly and when the company needs to make changes in the first place.
17 The immediate temptation for CFOs faced with adverse market conditions is to cut costs and reduce investment. This may appease shareholders, but if done badly, it can hamper growth and undermine a company’s competitiveness when the economic climate improves. Cuts need to be made intelligently, rather than just applied across the board. Marketing departments, for example, may seem like an obvious place to start when CFOs start cutting budgets, but the best evidence suggests that cutting underperforming marketing efforts while maintaining investment in areas that are working will leave a company in the best position. Digging your way out of a financial crisis is a collaborative effort, and assembling a cross-functional task force that includes team members from the finance function, as well as representatives from the sales, supply chain, production, and business-management function, will show where cuts and investments should be made.
These decisions should not be made when the crisis begins though. The important thing is to have a plan in place, and not to get left having to make quick decisions when a crisis jumps up on you. CFOs should learn the lessons of the last crash, and ensure that they know where to cut and where to invest ahead of time. Technology has evolved tremendously since 2008, and companies now have access to a wealth of data and the tools to analyze it so as to predict the outcomes of their decisions. They can also use this data to get an idea of risks way ahead of time, and act appropriately to counteract them. Indecisiveness is often cited as a fatal quality for a CFO, but rash decisions can be equally damaging. CFOs don’t want to be in a position where they have to be choosing between the two, but they also have to be ready to change a plan if it’s not working. In a global crisis, you sometimes have no idea what’s going to happen next, and whether something will work. Finance leaders need to review their own plans objectively, asking ‘Is this what I thought would happen’, and acknowledge when it isn’t working. The CFO should prepare strategies to suit a number of scenarios built upon different likely macroeconomic assumptions, planning for the worst but hoping for the best.
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Finding the Right CFO for your company Maisy Hockey, FP&A Innovation Summit Organiser
The finance function’s importance in driving company profitability has grown drastically over the last decade, and is set to increase even further in upcoming years. THE ‘WHEN’ IS NOW earlier than ever, and the ‘who’ is rapidly changing as a result of the evolving responsibilities in the modern business world. Whereas before, budgets and forecasts were usually set quarterly and it did not make financial sense to hire a CFO until the company had really significant turnover, modern technology - automation, Big Data, and the Cloud - have enabled finance functions to provide rolling forecasts and update risk mitigation processes in response to events in real time, influencing company strategy in ways far outside their traditional wheelhouse.
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A CFO in a multinational company is working within a far more complex structure, and must exert a considerable amount of influence over staff to be effective
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The key to hiring a CFO is therefore often finding someone who will work the best alongside company leaders - someone who holds similar values, understands the goals, and is a good cultural fit for the company
Today, the modern CFO must work in close partnership with the CEO. The key to hiring a CFO is therefore often finding someone who will work the best alongside company leaders - someone who holds similar values, understands the goals, and is a good cultural fit for the company. Of course, this does not mean simply hiring someone who will agree with the CEO on every decision. The best CFOs will compliment the CEO’s skill set, providing pragmatic, riskfocused interrogation of ideas, and they will not be cowed in the face of enthusiasm. Indeed, it is really important that the CEO is honest with themselves as to whether they even have the flexibility to accommodate a partnership with a CFO in the first place, or whether it’s better to work with a finance director in the background instead. Aside from personality, the qualities needed from a CFO largely come down to the size of a firm and what it does. For companies who are turning over below, say, $5 million a year, and have less than 30 employees, it is probably more cost effective to outsource financial tasks. For startups and growing companies for whom it makes financial sense, however, it is important to hire someone with experience in dealing with rapid growth. Other things startups need to think about is not hiring too high. Startups often don’t need someone who is already at CFO-level (whose salaries often average over $200,000), but will be equally well served by someone like a controller or director of finance and at a fraction of the price.
Larger, global companies, on the other hand, will obviously be looking for different qualities. A CFO in a multinational company is working within a far more complex structure, and must exert a considerable amount of influence over staff to be effective. Often, it makes sense for such companies to hire internally, as they will already have the networks and industry knowledge in place necessary to bring about real change. The kind of candidate that a company should be looking at also depends on what skills the company already has. If your organization struggles with efficiently performing basic financial tasks,then it makes sense to look for a CFO with considerable experience working in a variety of finance roles. On the other hand, a company that needs more from a CFO in terms of developing strategy and managing operations will require more of a generalist - someone who has not necessarily worked exclusively in the finance function but has a wider range of experience. Obviously, there are always factors to consider when hiring anybody, and what is needed from a CFO is changing so fast that, almost as important as getting in the right person, is ensuring that anyone who does come in has their skills and knowledge totally up to date.
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