How the CFO can be an effective partner to the CEO
11 MINS READ
CFOs have been heavily involved in their companies’ digital transformations. Even with the COVID-19 pandemic, global spending on digitizing business practices, products and services is expected to grow by more than 10% to reach $1.3 trillion in 2020.
Now CFOs must work closely with chief executives to steer their enterprises through the worst economic crisis in a generation. This CEO-CFO partnership—whether it is effective or not—will determine whether enterprises can withstand the financial impact of this crisis and move their organizations forward.
Recent TCS research sheds new light on the unprecedented pressure that the pandemic has unleashed on organizations and particularly on their finance functions. A global survey of 287 companies with more than $1 billion in revenue found in July that 68% of them saw revenues decline.1 Moreover:
A global survey of 287 companies with more than $1 billion in revenue found in July that 68% of them saw revenues decline.
For finance organizations with a mission to mitigate risks, shore up liquidity, understand how performance is changing and know precisely where the company and its customers stand, lacking such capabilities is a wakeup call. Not having a sufficiently digital finance function means lacking accurate real-time data, and therefore navigating the crisis without a reliable compass.
These organizations are now racing to catch up. Most are maintaining or accelerating their digital investments despite revenue pressures and the need to operate remotely. Companies have realized that such investment is critical to resilience and competitiveness during the pandemic and beyond. The investment also enables the CFO to better manage the organization’s finances and support the CEO.
The CFO’s unique role during a crisis
A successful CFO generally sees herself as a strategic partner to the CEO.
But during uncertain times, the CFO’s role typically changes. Risks and responsibilities rise. In some cases, crises also pose strategic opportunities. Some key matters that the CFO needs to address during a crisis include:
External business risks. During uncertain times, litigation is likely to rise. Contracts that protect commercial and legal interests help the organization stay focused and avoid unnecessary distractions. At the same time, having measures in place that help the company access what is rightfully due—such as contract clause monitoring, and early warning indicators—can assist with revenue growth and profitability.
Talent. As crisis-related anxiety levels soar, small steps can reinforce employee morale, loyalty and engagement. The CFO should ensure that payroll is processed on time, particularly if employees are concerned about the company’s stability. Additionally, the CFO should support empathetic policies for workers affected by the crisis.
Especially in a services company or any organization with a sizeable resource pool, it is beneficial in the short term to carry, as necessary, excess staffing capacity that will get absorbed once growth returns. This can help morale while boosting productivity when it is most needed. And the organization can manage other costs to pay for the investment.
Driving growth. Uncertain times also present an opportunity to take a fresh look at the business and consider deploying different processes or frameworks. The finance function can help plan for such initiatives, building scenario analyses of how proposed changes will impact efficiency or optimization. The function is also a key player in executing finalized plans.
The CFO should also look at market penetration to assess opportunities for expanding the organization’s horizons. Embarking on such projects demands not only investment capabilities but also the long-term conviction needed to make big moves despite economic turmoil. A wise decision during a crisis often delivers the best returns.
A final consideration on growth involves the volatile currency and financial markets. It is critical for the treasury team to manage the enterprise’s currency and interest-rate exposures and continually take appropriate measures. This will help the CEO and business teams focus on business response, recovery and revival.
Accurate forecasting. Always important, and it becomes even more consequential in times of uncertainty and disruption, when forecasts are more difficult. Of course, maintaining transparency and avoiding surprises is also important for investors and market participants.
Mergers and acquisitions. There is usually a distinct ramp-up in M&A activities during a crisis. The pandemic could present opportunities at attractive valuations. Companies often look to divest their non-core activities, which could constitute core businesses for another company. Having deployable funds and a long-term vision assists in such decisions. The CFO can play an important role by keeping the organization in a state of readiness.
Establishing the CFO as a Strategic Partner to the CEO
TCS has observed that companies with highly digital finance functions have performed better over time, and particularly during the crisis.
A CFO can be an effective partner to the CEO by seizing the opportunity to deploy digital capabilities that can improve efficiency and inform the executive team’s strategic decisions.
In brief, a highly digital finance function helps a company and its CEO in several key ways. It is able to close the books and report financial results publicly on time and without extra manual effort. Digitization ensures that team members can produce financial statements regardless of where they are working, and a timely release of financial results helps to reassure stakeholders that the company is operating smoothly despite crisis-related disruptions.
Additionally, a digital finance function can more easily identify troublesome business areas and offer helpful ideas for addressing their challenges. For instance, the department can help determine which costs are strategic and should not be cut, and which costs can be delayed or reduced. Finally, the digital CFO can keep a close watch on collections, liquidity and likely delinquencies and take proactive steps to mitigate risks. These capabilities are always advantageous but given the sudden and intense disruption that many companies are experiencing during the pandemic, they are more important than ever.
TCS’ Finance Department’s Digital Transformation
Our observations about the effectiveness of highly digital finance offices are based not only on research and client experience,
but also on the TCS finance department’s digital transformation. This experience offers instructive lessons for CFOs across industries, particularly during the current crisis.
The pandemic hit TCS at perhaps the worst possible time for the finance function, just a few short weeks before the fiscal year ended (March 31, 2020). Yet even though all members of our finance team and auditors were working remotely from their homes, we were the first Indian public company to announce our fully audited results of operations from more than 50 countries where we do business. Results were released on schedule2 in April. This, at a time when, for instance, the U.S. Securities and Exchange Commission had issued a 45-day earnings extension3 and a number of companies in the S&P 500 were delaying their quarterly earnings releases.4
Moreover, TCS was the first company in India to hold a virtual annual shareholder meeting. This occurred on June 11, 2020, the same date that had been scheduled months before the pandemic hit. This was only possible because we had extensively digitized our finance function over nearly two decades.
TCS is a $22 billion company with 470,000 employees and more than a thousand large customers. Such a business cannot run efficiently or effectively without an integrated, enterprise-wide, single-instance financial accounting and reporting system. We undertake so many transactions that no one person—or even team of people—in finance can see patterns rapidly or with the needed microscopic granularity. Technology is the lynchpin, the enabler.
Four Key Lessons in Building a Powerful Digital Finance Function
Over many years of digital transformation experience working with clients and within TCS, we have drawn four key lessons for building a powerful digital finance function that enables the CFO to be a strong and effective partner to the CEO.
First: The entire finance value chain needs to be digital—from order to cash, procurement to payment, employee on-boarding to separation, treasury, taxation, governance, internal controls and so on.
Second: Finance must ensure prompt availability of business performance data, establishing a near real-time single version of the truth.
Third: The finance function must identify, track and act upon non-financial metrics that are leading indicators of future financial performance.
And fourth: Finance professionals must be embedded in business units as valuable business support enablers.
Each point fits into a bigger picture: providing data-driven insights that elevate the quality of business analysis and communication throughout the enterprise, while making the CFO an indispensable C-suite partner to the chief executive. Let us look at each lesson in more detail.
The experience should be automated, hosted in the cloud and harness the power of AI whenever possible. This should apply to all business-related transactions that are contracted, serviced and paid for. Touchpoints across the whole value chain need to be covered, including customers, suppliers and partners, financial services entities and regulatory agencies. The idea: The company is only as strong as its weakest link. Companies with highly digitized finance operations do not have pieces of the value chain that are manual and/or paper-based.
Making the entire chain digital takes time. TCS began the project in 2002, expanding and fine-tuning it each year with investments in people, technology and more streamlined ways of working. We have deployed shared services, machine learning, robotic process automation (RPA) and chatbots. These technologies have freed up many of our finance and accounting staff from routine, repeatable tasks, enabling them to devote time and effort to value-adding business support, compliance work and process improvement activities across our 160 business units and groups.
The results more than justify the investment. Since 2010, TCS’ revenue more than tripled from $6.3B to $22B while the finance headcount grew by 50% and remains below 1,000 employees, about 0.2% of the entire company.
Data reliability is essential for good business decisions, and therefore a digital transformation of the finance function must be robust enough to ensure that data represents an indisputable single version of the truth.
The finance team can help colleagues around an enterprise understand the value of this tenet by demonstrating the value of this data. For example, TCS’ finance team, working with the CIO, has created readyto-use presentations for all stakeholders showing key performance indicators (KPIs) around revenue, margin, cash flows, balance sheet strength and headcount, among other items. The entire process is automated, with information flowing directly from data warehouses to consumers of information in the form of slide presentations.
In addition, the finance group has developed intuitive visualization dashboards that integrate a variety of information. This enables intelligent analytics across all business units, allowing managers to “speak the same language” and see the same report cards on their business.
In every company there are many vital signs that affect cost, revenue and profits but are not directly about money. A digitally strong finance team with a single version of the truth can manage with these indicators, confident that they are working with accurate data and focused on improving the indicators to drive results. Among the metrics:
Customer demand metrics include tracking the deal pipeline across various stages of the sales cycle, from initial prospecting to contract sign-off. Other crucial demand metrics include the qualified pipeline (which has higher probability of closure), order book value during a given period, ratios of qualified pipeline to overall pipeline and orders booked to revenue. Different business groups, such as those focused on industry, markets and service lines, can take actions based on the data to improve performance.
Customer satisfaction. Post-project surveys, supplemented by focused customer satisfaction surveys carried out periodically across more stakeholders in the customer’s organization, provides an opportunity to take immediate action on any customer complaints or concerns.
Project delivery metrics are also crucial to financial performance. For instance, TCS measures more than 25 key metrics on all ongoing projects, tracking each one’s progress. “Red” projects signify difficulties in completing on-time or on-cost. The signal gives the company the opportunity to take immediate corrective actions: conducting regular reviews, analyzing root causes and drawing lessons for the future. This improves customer satisfaction and ensures that a company delivers on promises and avoids penalties and disputes.
Employee retention. Excessive employee attrition, especially of key professionals and high performers, affects morale, disrupts business and increases overall costs through spending on recruitment and training.
Assigning finance professions to work alongside business unit leaders serves two purposes: first, it ensures that each business unit adheres to corporate finance guidelines, including conforming to international accounting standards and compliance with tax laws in every jurisdiction, as well as ensuring robust cost and profitability management, and effective administration of internal controls. And second, it helps the unit manage its business, including understanding how to use financial data to target revenue growth, sustain profitability and generate high cash conversion ratios.
TCS’ experience is useful here. In 2008, the company reorganized into new business units, each having end-to-end responsibility for business development, sales and project delivery globally across a set of customers in every industry vertical. Each business unit hosted an embedded finance team member. Over the years these units have taken on responsibility for their operations’ financial results.
At TCS, finance team members are also embedded in non-business groups such as HR, administration, infrastructure development, internal IT and research and innovation. They help these groups run their operations and make decisions based on data and a more informed appreciation of financial implications.
Embedding finance professionals in business units is a technique that any company can use to its benefit. Once there, business finance professionals strike a fine balance, helping the various units achieve their respective goals while ensuring robust governance and effective controls.
Such a function is a means by which the CFO can be an indispensable partner to the CEO in running an organization that is resilient and financially stable.
Digitization also enables the CFO and C-suite colleague to ensure that the organization maintains adequate liquidity, generates strong cash flow, reduces the working capital cycle, and mitigates enterprise risks. A digitally transformed finance function also empowers the CFO to prioritize strategic investments and interventions that let the enterprise realize its core purpose.
Of course, digital transformation cannot be achieved overnight. The initiatives and investments need to be made over time. Teams must be trained and oriented toward working in a highly digitized environment with a culture of adaptability tied to the organization’s purpose.
For the journey to succeed, having the right team is essential. Digital finance teams are content to let technology serve as bean counters while they focus on the company’s goals. They form an organization that enable business unit leaders to understand what is happening based on key metrics and help implement interventions to deliver better results. This way the CFO can fulfill their role as an effective partner to the CEO and help the organization thrive.
1 TCS COVID-19 Business Impact Study 2020, polling 287 executives in large North American, European and Asia-Pacific companies, all with over $1B in revenue, and 63% with over $5B revenue. See https://www.tcs.com/business-impact-survey-2020
2 “TCS Closes FY20 with Strong Deal Wins,” April 16, 2020, accessed at: https://www.tcs.com/financial-statements#year=2020-21&quarter=quarter4
3 SEC press release, June 26, 2020, accessed at: https://www.sec.gov/news/public-statement/updatecommissions-targeted-regulatory-relief-assist-market-participants.
4 “The Coronavirus Is Pushing Companies to Delay Quarterly Earnings,” Bloomberg, accessed at: https://www.bloomberg.com/news/articles/2020-04-15/the-coronavirus-is-pushing-companies-to-delay-quarterly-earnings.