The top financial managers in many of North America’s largest companies are feeling rather good nowadays as 2014 get underway. In fact, optimism remains high, just as it had throughout much of 2013. Still, challenges loom, experts at Deloitte say. Leo Rommel reports what issues CFOs will be juggling with in the months ahead – and how driving innovation is among the most critical.
A large handful of challenges await North American CFOs in 2014, none more imperative than taking a greater role in fostering discipline in their organizations’ innovation process, industry experts at Deloitte say.
And according to those who attended Deloitte’s recent annual CFO Vision Conference, it’s a role that is already being requested of the CFO by a majority of CEOs.
“The first thing I would say is we still see a pointed optimism among CFOs heading into 2014,” says Ajit Kambil, Global Research Director for Deloitte’s CFO Program, which outlined a list of issues, challenges, and risks confronting chief financial officers of large organizations this year.
“We found that in our surveys, most CFOs are more optimistic about this year and about this quarter than they were in prior quarters,” he adds. “That’s a plus considering they remain very uncertain about the economy.”
The list identifies major macro themes such as economic and regulatory uncertainties and the end of economic stimulus, plus specific challenges centered on refinancing risk, cyber security’s role in internal audit, investor relations, and retooling finance functions.
“They are really being asked to grow their companies,” Kambil says of CFOs.
His colleague, Geoff Tuff, Principal at Deloitte Consulting LLP, echoed similar sentiments.
“We’re finally starting to see, over the last couple of years, attention toward figuring out how to start growing again after some pretty dramatic cost cutting dominated the performance managment agenda,” Tuff says.
And one sure-fire way to grow and expand, both experts strongly suggest, is through innovation.
“As CFOs and other executives begin to see that the methods they used previously to grow their companies have either tapped out or are no longer relevant, they’ll be looking more seriously into the field of innovation,” Tuff says.
Findings from a poll of 100 large company CFOs at the aforementioned conference, held back in November in Washington, D.C., confirm both experts’ theories.
The survey revealed that 51 percent of CFOs have been asked by their chief executive officers to play a key role in evaluating, financing, and driving innovation in their companies.
Of the remaining CFOs, about 36 percent confirmed their CEO expects them to support and enable the execution of innovation decisions as companies continue to strive for bottom line growth in the current economic environment.
Nevertheless, data from Deloitte’s third-quarter CFO Signals survey – which tracks the thinking and actions of CFOs from many of North America’s largest and most influential organizations – showed that the majority of CFOs have only been involved in innovation at a peripheral level to date. That means they’ve merely provided analysis or had a voice in their company’s innovation program instead of taking a more active, decisive role as a catalyst or strategist on innovation.
Consequently a must-do resolution for most CFOs in 2014 should be to reverse course and dive headfirst into their company’s innovation programs, expanding them and investing in them more, says Sanford Cockrell III, global leader and U.S. national manager partner at Deloitte.
“Innovation is a key source of growth in this economic environment, but the reality is that much of the time, organizations fail to return the cost of capital on it,” Cockrell says. “CFOs have an opportunity to get more actively involved, injecting focus and discipline into the innovation process, managing the investment risk that innovation presents, and evaluating innovation’s success.”
Just about 95 percent of the CFOs who attended the said conference late last year stated that their organization’s growth focus in 2014 will remain on current offerings and geographies for their business.
Within this group, nearly half – 45 percent, to be exact – stated that their main focus will be on current offerings in current markets. An additional 26 percent, meanwhile, will be focused on new offerings in their current geographies, Deloitte reports, and 24 percent on current offerings in new geographies.
This bias toward known areas of focus, according to experts, is reflected in the 84 percent of CFOs who said that their organization’s innovation program will be at least 60 percent focused on their core business lines.
“For many companies, focusing innovation on the core makes sense, but it would be a mistake to think this means just focusing on the product side,” Cockrell says. “It’s important to look beyond pure product or service innovation.”
He adds: “Driving innovation in the profit and pricing model, supply chain, and production are often overlooked, but all are areas that CFOs are adept at bringing insight to and boosting returns on innovation investment.”
While it’s debatable how CFOs should get more involved in their companies’ innovation programs, there’s little doubt that they must be more involved, beginning this year, Tuff says.
“Certainly the challenge that we’ve given to CFOs is to have them play an essential role in making sure that innovation is not random and that it doesn’t evolve into just creativity and brainstorming sessions, but that there’s a real practical approach behind it,” Tuff says.
He adds, “I would like to see, at the very top of the agenda of companies focused on growth, a dramatic push for more discussion on innovation.”
Tuff says CFOs need to understand how their firm’s resources are being utilized to drive greater growth through innovation, then use varying metrics of value to properly evaluate how different types of innovation are being fostered.
“At its heart innovation is inherently a risky proposition,” he says. “If the finance function of a company does nothing else, it can properly determine where growth resources are being used and understand the potential impact innovation can provide. That would be a good step in the right direction.”
Kambil adds that innovation, which is getting increasingly more sophisticated, is driven by the fact that constantly-evolving technology continues to drive the convergence of various industries.
“I think there’s still tremendous opportunity as we come out of this period of recession to greatly shape innovation,” he says.
Tuff adds that the most valuable types of innovation happen “when you can get different functions within a company to work together to present a new business model” to industry.
“Companies are now beginning to look at industries and opportunities in completely different ways than they have in the past,” he says. “And it requires everyone in a company to think and act and look at their companies and industries differently as industries lines get blurred.”
Economic, Regulatory and Security Concerns
But other ongoing issues and developing challenges, aside from stimulating more innovation, await CFOs in the months ahead, experts say.
Economic uncertainty is one of them – and its impact on decision making. Even with the budget deal that was reached by year’s end in 2013, economic unpredictability remains a major challenge for CFOs, Kambil says.
This uncertainty undermines CFOs ability to make effective investment decisions, Tuff says, and the persistent low-growth economic environment is beginning to change the way companies run themselves.
“There are still many challenges for companies and their CFOs surrounding both economical uncertainty and regulatory uncertainty,” Kambil says. “I actually find that the bigger uncertainty area is sort of in what I call regulatory ambiguity rather than economical uncertainty.”
That’s another issue raised by Deloitte: CFOs continue to fear the steady increase in regulation – and the expense of complying with it. More are finding that they’re devoting more and more of their time to regulatory affairs.
This is because regulators are creating considerable uncertainty and ambiguity, Kambil says, and some CFOs are freezing key investment decisions until there is more clarity.
CFOs in the financial, healthcare, and energy sector, in particular, are concerned about ongoing regulatory issues, Tuff says.
“One of the things I find when I speak with CFOs is the sense that it’s just not uncertainty about the lack of information in what the interest rate will be, for examples, and other economical issues such as that, but it’s not clear how regulators will operationalize legislation in their industries.”
At the same time, capital, liquidity, and other reform requirements on Wall Street continue to be a chief concern for CFOs looking at lending and refinancing conditions for 2014 and beyond.
And their limited ability to control or manage this risk adds an extra dimension to the problem.
Cyber security – and the increasing audit focus on it – also made the list of CFOs’ top concerns, Deloitte says. This area has, of course, been traditionally the CIOs main domain, but times have changed, participants at the recent Deloitte CFO Vision conference said.
With cyber security becoming a top focus for internal audit, the issue is falling firmly into the CFOs camp, requiring a closer working relationship with their CIO and CTO, Kambil says.
“We’ve seen interest and concerns surround cyber security go way up,” he says. “Aside from innovation, it was probably the most discussed topic at our conference.”
Why? Just take a look at all the media reports about recent cyber security breaches.
“There are a lot of people thinking, hey, this could happen to my company, and we need to think through how we would respond to such an event and more importantly, what resources we will need to prevent it,” Kambil says.
Tuff adds, “It’s hard to imagine a greater financial risk. If that’s not on or near the top of the list of concerns for CFOs, it should be.”
A Growing Job Description
The role of CFOs in their organizations will continue to broaden in 2014, Deloitte says.
It will become even more about supporting their organization’s growth with insightful data and information on business performance while driving business planning, strategy, and becoming more hands on in product and service innovation.
Many will also be tasked with maintaining a strong investor and public relations platform – roles that traditionally were outside CFOs’ main agenda. But many nowadays are continuously asking themselves how good their company’s external communications abilities really are, and as such, are taking more of hands-on role in such operations.
With shareholder activism on the rise, and a likely strong M&A environment, on the horizon, a number of CFOs have reported that effective communication will be vital, according to Deloitte.
But perhaps none as imperative as innovation, Tuff says “I certainly wonder, given the opportunity, whether CFOs will capitalize on these challenges and get more directly involved in their company’s innovation programs and change the profile that they have within their organizations,” he says. “I certainly see with our clients that everyone within their companies is very open to CFOs playing a more direct role in the innovation process, but I’m also seeing, especially at the less senior level in the finance function, reluctance to changing the old ways of doing things, and I hope that changes this year.”
About Deloitte’s CFO Program
The CFO Program brings together a multidisciplinary team of Deloitte leaders and subject matter specialists to help CFOs stay ahead in the face of growing challenges and demands. The Program harnesses our organization’s broad capabilities to deliver forward thinking and fresh insights for every stage of a CFO’s career – helping CFOs manage the complexities of their roles, tackle their organization’s most compelling challenges and adapt to strategic shifts in the market.