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FP&A INNOVATION NOV 2015 | #8
Should CFOs Be Worried About Another Financial Crisis? It is now eight years since the last financial crisis, but have we learned from it? We ask whether CFOs should be worried that another one is round the corner | 5
Why Digital Should Be On The CFO’s Radar Technology is advancing rapidly, and companies face a constant battle to keep up. How much should CFOs be involved? | 20
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EDITOR’S LETTER W
elcome to the eighth edition of FP&A Innovation.
We are nearing the end of 2015. Technology has changed the business landscape, and world events have created a geo-political climate that could only be described as unhelpful for supply chains. The influx of data is proving a particular challenge for CFOs. They hold the key to much of it, and they are heavily increasingly involved with how to deal with it, as Kirsty Donavan discusses later in this issue. Scott Brennan, Global Managing Director of Accenture’s Finance & Enterprise Performance Unit, notes that: ‘About a third of the CFOs we talked to are playing a leading role in building a rationale for business transformation, and almost 60% indicated that investments in things like big data and analytics are going to be a source of competitive advantage.’ However, almost a third of CEOs responding to a 2014 survey by KPMG said that they believe their CFO lacks the knowledge required to deal with their business’s current challenges, and that they are not providing them with enough assistance. This suggests that many CFOs need to
gain a better understanding of what is now required of them, and learn the appropriate skills to carry it out. The CTO is vital to this, and the increasing overlap in their responsibilities offer a number of opportunities to share skills. A Gartner FEI CFO Technology Study found that 39% of IT organizations reported to the CFO, and their influence over the department went up 44% since 2010/2011. Rather than thinking of this as an imposition, both need to look at it as a chance to add value. This, rather than simple bean counting, is an example of where the CFO needs to be focusing their attention. They must work with other C-suite executives across their organization, and they need to make them appreciate that while their jobs now have overlaping skillsets. All involved must simply adjust their skill sets for the betterment of the company. 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 James Ovenden
editor Simon Barton
art director Oliver Godwin-Brown
contributors Aaron Fraser Amy Hill Kirsty Donavan Elliot Jay Emma Taylor
contents 05| SHOULD CFOS BE WORRIED ABOUT ANOTHER FINANCIAL CRISIS? It is now eight years since the last financial crisis, but have finance departments learned from it? We ask whether CFOs should be worried that another one is round the corner 11| HOW CAN EMBRACING ERRORS LEAD TO BETTER FORECASTING? Errors are often seen as the scourge of forecasting, but is there a silver lining for finance functions? Amy Hill investigates 17| THE CFO AND ANALYTICS Companies are now accumulating data at a rate of knots, and nowhere more so than in finance functions. We look at the CFO’s relationship with analytics 22| INTERVIEW WITH GLEN PARRILLO, THE CORPORATE CONTROLLER FOR ACCUWEATHER Adopting a data driven culture is seen as a simple fashion by many, but the truth is that it can significantly benefit companies today WRITE FOR US Do you want to contribute to our next issue? Contact jovenden@theiegroup.com for details
08| FORGING A LINK BETWEEN FINANCE AND HR Finance and HR departments are often at odds with one another. Aaron Fraser argues that they actually both have much to gain by working together
14| WOMEN IN FINANCE Gender inequality in the boardroom is a hot topic, especially in finance. Emma Taylor asks if the tide is turning
20 | WHY DIGITAL SHOULD BE ON THE CFO’S RADAR Technology is advancing rapidly, and companies face a constant battle to keep up. How much should CFOs be involved?
Should CFOs Be Worried About Another Financial Crisis?
the global economy is ‘slowly slipping’ into the Great Depres-
James Ovenden | Managing Editor
sion-like problems of the 1930s, and that central banks need to come together to define new ‘rules of the game’ to find a better solution to deal with it.
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SHOULD CFOS BE WORRIED ABOUT ANOTHER FINANCIAL CRISIS?
Murdoch warned of the precariousness of the global economy, tweeting that: ‘All prices dropping not just shares. Timely correction or sign of major global crisis in near future?’. Other billionaires have also expressed concerns Sam Zell and Carl Icahn among them. Perhaps the most direct warning has come from billionaire money manager, Crispin Odey, who said: ‘Everything points to it being a bubble. You can never know the height of a bubble, but by the time it gets to here, you haven’t got much time.’ Today it seems that every time the stock markets twitch, doom mongers race to offer their predictions of an impending financial armageddon. The dramatic fall in Chinese stock markets this summer, followed closely by a record 1,000 point fall in the US market, prompted another rash of pessimistic tweets, articles, and speeches. Economists and pundits were more or less standing out on street corners with megaphones
Governments are still looking at old solutions and old economic ideas, they are simply repackaging them under new names.
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and sandwich boards declaring the apocalypse. However, is talk of a financial crisis real, or is it just a case of pundits not wishing to look like they were caught unawares again? Following the post-2007 crisis ritual humiliation of economists, pundits, wealth mongers, and almost anyone who has anything to do with money who failed to see it coming - which was just about everyone - this is understandable. People have economic models that need to be respected, and if they miss another cataclysmic event, they may as well pack up and go home. The high calibre of some of those predicting another crisis, however, should be of huge concern. In August, Rupert
A number of notable Cassandras from the last crisis have also joined the bandwagon. Raghuram Rajan, the former IMF Chief Economist who famously warned of the 2007 financial crisis back in 2005 in his paper ‘Has Financial Development Made the World Riskier?’, has now warned that central banks are globally being pushed into ‘competitive monetary policy easing’. Rajan has warned that the global economy is ‘slowly slipping’ into the Great Depression-like problems of the 1930s, and that central banks need to come together to define new ‘rules of the game’ to find a better solution to deal with it. Andy Redleaf, a successful hedge fund manager who also saw the crisis coming, is also worried, telling CNBC: ‘I think it is a truly scary time.’
SHOULD CFOS BE WORRIED ABOUT ANOTHER FINANCIAL CRISIS?
Federal Reserve Board Vice Chairman Stanley Fischer has emphasized the need to be aware that the next crisis will ‘not be identical to the last one and that we need to be vigilant in both trying to foresee it and seeking to prevent it.’ After the last financial crisis, Paul Krugman warned that the idea people would have acted differently if they’d known what was coming was a delusion. Given the sheer volume of predictions this time around, regardless of any scepticism, it cannot be said that we are sleep walking into another crisis. We are walking in wide
awake, but despite the lessons of the past, governments appear to be no nearer to finding a solution. They are still looking at old solutions and old economic ideas, then simply repackaging them under new names. The tradition of all dead generations weighs like a nightmare on the brains of the living. The world has changed a lot since the last crisis though, and the CFO has a whole new set of tools at his disposal to survive. Many have rebuilt cautiously and diligently, keeping costs low and adopting new technologies
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that automate systems. For the CFO to guide their organization through a future crisis, they must hope for the best and plan for the worst. CFOs must develop and utilize a deep understanding of financials and liquidity to understand how volatile prices and demand will have an impact on the performance of their companies. If not, they will fail to manage threats which could bring down their company, and they may find that the financial resources required for countercyclical investments are no longer available.
The world has changed a lot since the last crisis though, and the CFO has a whole new set of tools at his disposal to survive.
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Forging A Link Between Finance And HR Aaron Fraser | Head Of Finance
It was commonly considered that while HR can benefit from getting financial input on how to structure bonus schemes and strategies, that finance can equally benefit from working with HR to understand how viewing employees as ‘assets’ rather than ‘costs’ can lead to a net positive effect on an organization’s long-term performance.
FORGING A LINK BETWEEN FINANCE AND HR
HR and finance departments are often seen as diametrically opposed, constantly in conflict, the East and West of business functions. Finance professionals see HR as having their head in the clouds. HR, meanwhile, sees finance as bean counting robots. There is, however, a huge body of research that suggests such attitudes are detrimental to company performance and stifle company growth. A report from the Chartered Institute of Management Accountants in 2009, for instance, came to the conclusion that there are a number of benefits to both functions that can be realized through the establishment of a mutual respect. Researcher John Innes, summarized the research, noting that: ‘It was commonly
A recent survey of 40 CFOs also found that 83% want help with talent management, and more than half are looking for support with succession planning. considered that while HR can benefit from getting financial input on how to structure bonus schemes and strategies, that finance can equally benefit from working with HR to understand how viewing employees as ‘assets’ rather than ‘costs’ can lead to a net positive effect on an organization’s long-term performance.’
Innes touches on the heart of the issue here. It can be easy for those in finance to see employees simply as costs, and training as further costs, with no obvious return coming from HR, who’s role it is to deal with them. They should, however, be looking at employees as assets, with training and other HR initiatives as investments that can grow these assets. This should be easily done. Finance departments also manage company assets, supporting revenue rather than directly driving it. By collaborating and working together, companies can achieve lower costs, streamlined operations, increased productivity, and major improvements in managing the talent within the organization. This is particularly true because of the influx of data now available to both HR and finance, made possible by cloud technology and improved analytics capabilities. The information that finance gathers on earnings, productivity and customer satisfaction offers a number of insights into the staffing and development needs of an organization. A recent survey of 40 CFOs found that 83% want help with talent management, and more than half are looking for support with succession planning. What finance manages in terms of salaries, bonuses, expenses and purchase orders all track back to the expectations and culture created by HR.
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Collaboration between HR and finance is critical in optimizing the decision making of both parties. Finance has all the information as to where employees are adding value and what processes are succeeding, while HR can help finance understand when training is necessary. Building the ties can be a case of merging the departments - as some companies have done - or it can be a more subtle approach
Collaboration between HR and finance is critical in optimizing the decision making of both parties. whereby controllers or the CFO take time explaining the numbers to HR leaders and help them understand why an initiative or a new software is not cost effective. HR’s expertise in areas such as recruitment, training and development, communication, motivation, dispute resolution, termination, can be equally useful to finance in looking past the numbers, and helping the finance function develop.
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ACCELERATING CORPORATE PERFORMANCE MANAGEMENT
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How Can Embracing Errors Lead To Better Forecasting? Amy Hill | International Events Director
Humanity needs errors. We learn from them. Success cannot exist without failure, in the same way that light cannot exist without dark. A child learns how to ride a bike by falling off and reaching an understanding of why it happened. They can then correct their technique so that they don’t do it again. This is how most human knowledge has been arrived at. A financial forecast is an estimate of a firm’s projected revenues and expenses that is worked out using its internal or historical data, as well as taking into account external market factors. Businesses’ decision-making processes rely heavily on forecasts, and getting them right is necessary for a company to be successful. They must also
Humanity needs errors. We learn from them. Success cannot exist without failure, in the same way that light cannot exist without dark
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HOW CAN EMBRACING ERRORS LEAD TO BETTER FORECASTING?
be made in sufficient time for management to change their plans if need be. To improve forecasting, all you have to do is eliminate bias and reduce variation to an acceptable level. Although errors may seem like poison for forecasting, they’re not. Bias is a pattern of error—consistent over-or-under forecasting. Finding and understanding errors, and then accounting for them in forecast models, is therefore central to the process of removing bias. Despite this, the majority of businesses still do not measure forecast error at all, meaning that theirs’ end up being no better than guesswork. Eliminating bias does not require big investment though, just an exceptionally finely tuned sense of what the errors are, where they come from, and how they can be either removed or mitigated against. Key to this is defining what errors are. As we need errors to understand success, so too do we need success to define errors. According to IBM, there are two
Measuring errors is about collecting the data that display these patterns and finding the difference between the forecast and actual outcomes
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types of error. Systematic error, and unsystematic error. Systematic error is a sequence of errors with the same sign (positive or negative) which often change in an unpredictable manner. Unsystematic error is a pattern of errors without extended sequences of the same sign. In a given set of circumstances, the level of variation is often predictable. Measuring errors is about collecting the data that display these patterns and finding the difference between the forecast and actual outcomes. However, there must be an element of caution in comparing that outcome with forecasts made far in advance. This is because there is a risk that you will be measuring the impact of a decision made in response to the forecast rather than the forecast quality itself. Errors should be calculated by comparing actuals to short-run
To improve forecasting, all you have to do is eliminate bias and reduce variation to an acceptable level forecasts - before any decision that you might make in response to a forecast has had time to have an effect. Once the errors have been found and measured, it is important to understand why they are occurring, and whether they are the result of human error, or a flaw in the forecasting models themselves. The models will then need to be adjusted to take into account the bias. Failing forecast models are easily rectified, or at least dramatically improved, by simple measurement practices.
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Women In Finance Emma Taylor | Deputy Head Of Finance
There are now 58 female CFOs at Fortune 500s, up from 57 in 2013
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WOMEN IN FINANCE
There is good news for women in board positions at Fortune 500 companies. There are now 26 female CEOs, up from 24 last year - the highest number since Fortune started compiling executive gender in 1998. This is obviously still a paltry proportion, but it at least suggests some semblance of progress, passing the 5% mark for the first time. In terms of the finance function, the numbers are slightly better. There are now 58 female CFOs at Fortune 500s, up from 57 in 2013, although this still represents only just over 10%. The slow progress is baffling considering the clear advantages of having women in board level positions. Research from McKinsey has shown that companies in the top quartile for gender diversity were 15% more likely to have financial returns above the national median for their industry, while those that had a racially and ethnically diverse group were 30% more likely.
The more opportunities that women get, and the more success that they see, the more girls who will be encouraged to enter the field from a younger age Finance is a world known for its Type A personalities - men hungry for power and money, and evidence seems to bare
Female CFOs are less tempted to employ riskier tax-avoidance measures and other potentially illegal tactics to increase profits this out when it comes to CFOs. According to Wake Forest University and University of North Carolina-Wilmington researchers, female CFOs are less tempted to employ riskier tax-avoidance measures and other potentially illegal tactics to increase profits. It would be easy to blame the lack of women in the C-suite on competitive men resistant to change attempting to keep women out at all costs - partly because this is likely true in many cases - but is this the sole reason? It is likely that the issues actually start far earlier, with maths and sciences still seen as masculine subjects, and the humanities more feminine. A report based on PISA 2012 data, The ABC of Gender Equality in Education, found that girls, even high-achieving girls, are more likely to express strong feelings of anxiety towards mathematics, and the number of boys studying maths at university is still far higher than the number of girls. Much of this is likely down to attitudes passed down from teachers and parents. Solving this and increasing the pool of talent available requires a massive shift in attitude across society.
more willing to take women into board level positions. Microsoft’s Amy Hood, for one, has proven a great success. Analysts have praised her for her cost-control savvy and ability to communicate with investors, and she has led a number of Microsoft’s acquisitions, including that of Skype. Ruth Porat, former Wall Street banker turned CFO of Google, is expected to make at least $70m in her first two years at the tech behemoth, and her status has been significantly improved thanks to Google’s stellar Q2 earnings, which sent stocks soaring 11%. The more opportunities that women get, and the more success that they see, the more females will be encouraged to enter the field from a younger age. Not only this, but it will show men in the boardroom who have perhaps been resistant to appointing women to boards because they don’t believe that they will be able to work with them, that they have the capability to improve their company.
There are signs that attitudes are changing at the top, at least. The big tech companies have shown themselves to be far
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THE CFO AND ANALYTICS Kirsty Donavan | Finance Thought Leader
According to a Deloitte survey 18% of respondents said that the CFO is now in charge of their analytics - coming second only to the ‘business unit or division head’ with 23%.
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The ready availability of big data and the growth of data analytics capabilities has fundamentally changed the way many companies operate. There is, however, still some debate as to who exactly within a firm holds responsibility for ensuring the data is fully exploited. Finance departments have always had huge amounts of data at their disposal, and they often have the best data talent among their staff. According to a Deloitte survey 18% of respondents said that the CFO is now in charge of their analytics - coming second only to the ‘business unit or division head’ with 23%. Having the CFO take responsibility for data makes sense both for them and for the company as a whole. Firstly, CFOs already ’own’ most of the data that companies are collecting from their own operations, supply chains, production processes and customer interactions. They also, by the very nature of their role, have the best view of their company as a whole, and therefore have the best awareness as to where investment in analytics is needed and the ROI. Analytics help the CFO fulfill many of their most important functions. It enables them to hedge against volatility and to respond faster, and with greater insight, to changes in the marketplace. Arguably more than any other C-Suite executive, the CFO
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THE CFO AND ANALYTICS
CFOs already ’own’ most of the data that companies are collecting from their own operations, supply chains, production processes and customer interactions. needs to make the most accurate predictions in their decision making processes. Forecasting financial performance, pricing products and services, strengthening operations, identifying new markets, improving margins, and assessing and monitoring risks, are all the responsibilities of the CFO that require detailed knowledge of a possible outcome. Having the right analytics software in place can help CFOs accurately predict the future by analyzing current and past trends. The modern CFO needs to be acting as a partner to the CEO, and drive growth across the organization. Many are already using analytics to identify business areas where they can bring value and competitive advantage (for example, drive operational insights). CFOs may be reluctant to take charge of analytics in operational areas because it’s not necessarily a ‘big picture’ issue, however, much of a company’s profit can fall between the operational cracks, and analytics is central to driving improved operational discipline. Many respondents to the Deloitte survey claimed that analytics was better if it was not in the hands of one person, and was instead dealt with by individ-
ual departments. Key to effective analytics is taking an holistic approach in which everyone is aware of and understands the plan and a data driven culture is put in place. A decentralized approach hinders this and is likely to spread confusion that could render it less effective. The CFO is best placed to lead a centralized approach.
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Why Digital Should Be On The CFO’s Rader Elliot Jay | FP&A thought leader
Firms are now failing 30 times faster than they were 30 years ago, and if they are to stay solvent and be competitive, they must embrace technology that cuts costs, increases efficiency, and drives profits.
The finance function, traditionally, has been a stronghold for accountants and numbers men, not forward thinking tech gurus. This is changing. The rise of digital has led many organizations to adjust their business models. Firms are now failing 30 times faster than they were 30 years ago, and if they are to stay solvent and be competitive, they must embrace technology that cuts costs, increases efficiency, and drives profits. To deal with this shift towards digital, there has been a dramatic transformation in the make-up of those who work in finance. Over the course of the past decade, the CFO’s role has grown from focusing purely on controls, budgeting and reporting, and become instead a broad leadership role that holds responsi-
All departments need digital, and finance holds the purse strings. bility for charting the company’s growth agenda while guarding against risk. To do this, they have to seek out creative solutions, and embrace bold deci-
WHY DIGITAL SHOULD BE ON THE CFOS RADER
sion making and innovation to overcome business challenges. According to Accenture’s 2014 High Performance Finance Study, 84% of CFOs are now being impacted by digital technology. They must have the skill set and knowledge to deal with this. Mark Evans, CFO of telecom firm O2, told IBTimes UK: ‘Like it or not, every business, regardless of sector, and everyone within your business, must grasp technology and be more courageous than ever before. That includes the CFO and the entire finance team.’ The Accenture study further found that digital is already on the CFO’s radar, with 72% of respondents saying that they are currently using Big Data and analytics for better decision making, and 71% saying they have moved finance and accounting to the Cloud. This is set to increase over the next two years, with 85% planning to move their operations to Cloud computing or Software as a Service (SaaS), and 82% set to embrace Big Data and/or analytics. All departments need digital, and finance holds the purse strings. The CFO and his team must therefore have a rich understanding of the benefits that digital can bring to a business, much of which will come if they adopt the technology and see the benefits themselves. They can then better champion how connectivity and digital investments can contribute value to the organization. They must look beyond ROI,
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Like it or not, every business, regardless of sector, and everyone within your business, must grasp technology and be more courageous than ever before. That includes the CFO and the entire finance team. and think about social metrics and real-time sentiment analysis alongside the usual measures that drive their decisions to get a complete picture of the health of new digital initiatives. CFOs face a number of challenges to digital transformation. Moving from legacy systems is one of the biggest obstacles, with the complexity of moving systems across often incurring substantial costs. CFOs also need to work closely with functions across the enterprise, and persuade others in the C-Suite that they must be involved in decisions around technology. They must develop a relationship with the CIO and the CTO, which may draw resistance for fear of a land grab. However, given the CFOs’ fiduciary responsibility to deliver shareholder value, it makes sense that they are leaders in digital business-model innovation.
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Interview with Glen Parrillo, the Corporate Controller for AccuWeather, Inc. Glen Parrillo is the Corporate Controller for AccuWeather, Inc., the world’s largest and fastest growing weather media company. Parrillo joined AccuWeather in 2013, and during his tenure, the company has successfully acquired three businesses, opened operations in Montreal, Korea, Japan, India, and China, and launched the new AccuWeather Network on Verizon FiOS. We sat down with him.
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INTERVIEW WITH GLEN PARRILLO
How did you get started in finance? My destiny was set at an early age when I took my first accounting class in high school as a junior. I would not call it love at first sight, but it seemed natural and easy to understand. I also dabbled in computers early on with some of the original computer software programming languages like COBOL. That financial knowledge, along with a blend of understanding the underlying systems, gave me a unique perspective on accounting. From there, I had a natural instinct to look at systems and how they provide output. Once out of college and after my stint with the Big 4, I started working with very entrepreneurial companies to launch or redesign businesses, redefine business plans, improve systems and technology, and optimize the financial reporting structure.
What unique challenges have you faced within your industry/in your current role/current company? AccuWeather is over 50 years old. I have been here for the last 30 months, so there is a lot of history to understand and appreciate. It is an amazing business that has transformed itself multiple times since its inception in the early 1960s. We
are again in another transition phase as the company has grown exceptionally well over the last 4 years. Changing the internal structure to match our growth is a constant challenge. The analogy I frequently use is changing the tires on a car while it is moving. There is not really another AccuWeather out there, so there is no established blueprint. We have to do a lot of quick thinking and adjusting on the fly.
traffic patterns, and other critical metrics in order to advance in a complex marketplace. In Finance, our customers are our business leaders. We listen to what they need, and we work very hard to generate the output that will help them navigate in the marketplace.
To what extent have you seen the finance function further integrate with other areas of the business in recent years? The Line of Business Managers need better and more accurate information to run their business. The demands they have to operate successfully are intense. In many ways, the information is new and raw. Consequently, the finance function has had to transform the way we do business as we have to constantly look at inputs and outputs. We constantly face daily challenges regarding analysis of new and uncharted information. In the past, we could rely on history and trends to tell us where we were going and how we could manage this business. That is no longer the case. We have to constantly interpret market analysis, financial data,
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