This article was first published on October 29, 2020.
Editor's note: For the latest insight in our Future of Finance series, please visit our articles on Improving Financial Planning and Analysis (FP&A) and Finance Workforce Transformation.
When a group of chief financial officers (CFOs) were recently asked to describe their role, 70 percent of the CFOs said, “as a true strategic advisor to the business.”
Today, CFOs have a critical seat at the senior leadership table, with organizations reaching to Finance not only for survival, but to also look ahead, forecast, and drive future growth.
This value-added shift has allowed financial institutions to become more efficient and ultimately more cost effective. However, many organizations are not completely well positioned yet — the business may not have the right infrastructure in place, the necessary talent or the essential forecasting data and analytics.
COVID-19 has further accelerated these initiatives. Many assumptions and needs that were made prior to the pandemic have become stronger realizations. What follows is our first insight in “The Future of Finance” series. Here, we take a deep dive into the evolving role of the CFO and offer success factors for how Finance teams within the banking and insurance industry can thrive, drive growth, and better position the company for the future. Although this report focuses on financial institutions, the insights we share can be leveraged by non-financial companies. Below is the web version of "Unlocking The Strategic-Minded CFO," for the PDF version, please click here.
Building a Finance function that is positioned to strategically support the business can be instrumental in making the right types of decisions required for this environment.
WHAT HAVE WE LEARNED IN THE LAST SIX MONTHS?
For one, COVID-19 has reinforced the broader, strategic advisor role that chief financial officers and their teams are taking on within the business. With many competitive forces and challenges in the marketplace, having a Finance function that is positioned to strategically support the business can be instrumental in making the right types of decisions required for this environment. Especially now, it’s paramount for businesses to have faster, smarter, and more dynamic forecasting tools and capabilities than previously — along with talent that has greater technical knowledge and a strategic-oriented skill set. Finance teams need the ability to dive in deeper and link their actions into what is going on in the market. This requires the investment dollars to build a better and more effective infrastructure, however it may not always align with cost control initiatives.
During our discussions with Finance teams, we have found that only 25 percent of chief financial officers feel that their Financial Planning and Analysis (FP&A) function is driving effective business decisions, and only 19 percent feel that it is efficient. There is a significant need for FP&A performance improvement by using better, seamless technology, more agility, and strategies driven by dynamic, real-time data.
Second, given the shifting market dynamics, cost remains a core focus for CFOs, and Finance will need to continue to lead the way in cost control. Cost management and protecting margins was already challenging for financial institutions due to the low interest rate environment and COVID-19 has exacerbated this issue. For example, banks are under increased pressure due to the revenue shortfall related to decreased interest rates; as such, costs continue to be a strong focus. And with the pandemic’s uncertain grip on the economy, banks are setting aside loan loss provisions to cover potential increases in defaults. Today, businesses need to build greater cost transparency within their organizations to enable better decision making and improve cost management over the long term.
Today, businesses are reaching to CFOs and Finance not only for survival, but to also look ahead, forecast, and better position the company for a post-COVID world.
Third, there is an imperative to make investments in areas such as digital, leading to the need to free up capital through cost cutting initiatives. Now, companies are quickly innovating, and projects of this nature are being prioritized and targeted for an accelerated start. Companies looking to gain market share are having to invest heavily in building out better interaction tools that consumers are craving, including websites and new apps that rival disruptors and make the customer experience easy, convenient and seamless.
At Oliver Wyman, we have been working with clients to solve these issues and to help them take practical actions to thrive in this market. With our first insight in this series, we offer our perspectives and market insights from working with leading global financial institutions; present the challenges and trends ahead; and weigh in on the success factors you will need to remain competitive and gain market share in this new normal.
CHALLENGES AND TRENDS AHEAD
Key Challenges that CFOs are facing today
Prior to the pandemic, Finance teams faced barriers and COVID-19 has exacerbated these challenges. The most significant universal issues for banks and insurers are cost pressures from the need to protect margins in a sustained low interest rate environment and difficulties with adopting new technology.
We have found that many of these challenges are connected. For example, changing regulatory pressures and compliance fatigue are directly impacting Finance operations as well as contributing to issues with attracting and retaining talent.
CFOs identified cost pressure from low interest rates as the top challenge
THE MODERN DAY CFO
"I'm not a controller, but a strategist"
Approximately 70 percent of the CFOs we had discussions with in banking and insurance said they now have responsibilities outside of the traditional Finance mandate and are taking on more strategic and operational responsibilities.
For example, functions such as Strategy/M&A and Procurement may now fall under the CFO’s responsibilities. Many institutions are finding that having their Strategy/M&A function operate within Finance creates a beneficial synergy for their organization — allowing them to more effectively maintain alignment between financial forecasts and planned actions by the business to expand or contract; and helping them to holistically position the company post-crisis more effectively.
With this shifting dynamic towards strategy, Finance teams said they need better data and analytics to support the analysis of risks, customer segments/behavior, and customer needs. In the following section we present the success factors to get there.
1Create synergy within the organization
Many institutions are finding that having their Strategy/M&A function operate within Finance creates a beneficial synergy for their organization — allowing them to more effectively maintain alignment between financial forecasts and planned actions by the business to expand or contract; and helping them to holistically position the company post-crisis more effectively.
2Redefine the Finance function, with optimal efficiency and effectiveness
Build a stronger Finance capability is achieved through improving across multiple dimensions in tandem and requires the full support from senior leadership; developing an understanding and accountability across business functions; and successfully executing the plans laid out.
3Drive continuous cost-improvement initiatives
The key is not to get a one-time result, but to continue reducing costs over the long term. Given the economic uncertainty surrounding COVID-19, it will be crucial to take a structured and systematic approach to cost and efficiency management efforts under a variety of scenarios, as well as take immediate actions to reduce costs due to the near-term profit outlook. To accomplish this, it’s imperative for business leaders to be given reports that offer breakdown costs with clear, visible, actionable insights. Through the simplification of costs and better descriptions of the actual costs listed in reporting, businesses can bridge the gap and improve cost management and decision making.
4ADOPT NEW TECHNOLOGY
Success is contingent on investment beyond technology that includes an integrated and modern architecture, improved data management, and stronger talent training. Many CFOs said that investing in a single general ledger and sub ledger function (for example, accounts payable, expense management) provided operational advantages and opportunities for efficiency during COVID-19. This architecture provided a more effective way to balance workloads across multiple Finance operating groups (different lines of business and geographies). And we have found that organizations who pushed to digitize processes (for example, invoice management, payment processing) have operated with fewer challenges during the pandemic than those who still relied on paper-based processes.
5ATTRACT AND RETAIN TALENT
CFOs need to build the right mix of talent on their team. The transformation of the Finance role has made a strategic, business-oriented skill set more in demand than before. Additionally, the increased use of enabling technologies and advanced analytics has led to technical knowledge being more essential, in Finance and in other areas. The team must foster agility and strategic thinking, with the ability to consider the impact of decisions across the enterprise. They should also understand game changing analytics and be able to use an efficient forecasting process, and this type of team is often more expensive than a team monitoring the accounting rules.
6MANAGE CURRENT REGULATORY DEMANDS
Auditors will expect more automation and simplification in the future regulatory landscape. We have found that the mounting regulatory and compliance pressures, such as the LIBOR transition, are impactful to daily systems and operations. In some instances, regulator disconnect may drive regional variations and redundancy. As Finance talent keeps pace with changing regulations, they must have solid expertise in assessing risks and determining the outcomes on the organization. Regtech can also drive automation and help manage regulatory changes, allowing companies to move away from tedious, manual processes and share information more efficiently.
7UNCOVER CHANGING CONSUMER DEMANDS
In our discussions, we have found that many banking and insurance organizations are not as nimble as other industries when it comes to uncovering shifting customer preferences; however, financial institutions are starting to recognize that “this is where we need to go.” When tackling consumer-centric market dynamics, we believe that banking and insurance can learn a great deal from what other industry sectors have already accomplished. For example, the consumer package goods industry is ahead of the times when it comes to understanding customer preferences in different market segments. With digital innovations, customers are craving seamless online experiences and apps, more engagement, and personalization. When Finance is connected to consumer needs and interests, the team can begin to track those details and start to see pricing and profitability by customer type — ultimately allowing Finance to gain deeper insights and make more impactful decisions.
The road ahead is uncertain and now is the time to future-proof your business. With many competitive forces and challenges in the marketplace, having a Finance function that is positioned to strategically support the business can be instrumental in making the right types of decisions required to thrive in this environment. Well-planned actions taken today can help drive growth and win goodwill with customers, especially once the crisis fades.
The pandemic has reinforced the broader, strategic advisor role that chief financial officers and their teams are taking on within the business. At Oliver Wyman, we can help you to find your strategy and achieve it in a way that is market relevant. We know the types of pressures that exist across the board and can collaborate with your team to strengthen your Finance capability on a number of dimensions — whether it’s accessing your current capabilities; identifying business-wide transformation opportunities; becoming an efficient data-driven business; or building operating models both within Finance and across the organization.
The time to start is now.