Digitalization: Building Blocks For The CFO

Matthias Heiden

I wrote about digitalization in a previous blog, and of course it’s the topic du jour. I am often asked by finance colleagues and customers alike about the impact of a digital economy on the finance economy. Therefore, I’m revisiting the topic from a different perspective – what I’ll call the digitalization building blocks for the CFO.

Building block 1: Understanding the financial implications of digital strategies

Let’s begin with good news. The starting point, in my opinion, is a classical CFO task. That is answering the question: If we reimagine our business models, what does it mean for our financial model? During my involvement with five cloud acquisitions at SAP, we repeatedly asked ourselves this question. I call it a classical task because it’s an exercise undertaken in mergers and acquisitions, as well as during post-merger integration. It involves classical skills such as financial modeling, steering, and finance, and understanding how we apply them. A CFO’s perspective, when applying this classical approach, offers invaluable perspectives to the business as it captures the financial implications of digital strategies.

Building block 2: Transforming processes

After exploring the financial model, the second question can be addressed. If there is indeed a digital economy, whose characteristics include interconnectivity, Big Data, and so forth, then it’s only fair to ask: How does it affect our own finance processes? This is not an easy question since it’s not something we consider often. Some companies still find themselves in a finance transformation, which looks at making systems and processes more efficient, but usually does not fully consider aspects of the digital economy and their impact.

For instance, if we replace our digital core with our latest technology and picture the CFO’s role in collaborative digital finance, we have to understand what the digital changes to core business processes mean to the firm as viewed through the financial lens. If core business value streams and creation go digital, what does this mean for our finance processes through which we capture business processes?

This is true with each aspect of a digital framework, with procurement in one corner and employees in another – since any transformation involves people as well as processes. You have to ask yourself: How do I manage these processes? Do the processes connect with other parts of the business and, if so, how do they affect finance? Where do they connect, what is the impact?

There’s a strong need to mirror the digital economy on the finance side, which means the implications must be explored. If we seek to revolutionize our procurement processes, we have a lot of new things to consider. For example, procurement processes will follow the increasingly digitized material flow, and over time will largely mirror the supply chain. In procurement, there are many ways to gain new insights and improve efficiency through collaboration across the supply chain. Therefore CFOs will play a special role inasmuch as their independent perspective allows them to connect people and data points to establish collaborative business and finance processes end-to-end.

Building block 3: Digitalizing finance

In a digital economy, we need to think about the digitalization of finance itself. It will transform classical finance processes like receivables management, utilizing statistical methods to drive forecasting and prediction, while processes like live analytics will help in steering the company. Consider the evolution of assembly lines. They began with a conveyor belt and people standing alongside. Today, they’re automated with robots fulfilling the repeatable tasks. We can expect a similar transformation for finance.

There’s talk about robotics and finance functions, and that’s a question about the future. For now it’s clear that digitalizing finance, and the opportunities this will create, will open many new doors. Though I don’t have answers at this point, it’s intriguing to consider, and I think we’ll see some elements begin to emerge – not full automation, because there are things that require thought and judgment. But why shouldn’t robotics take over the workflows they can do better? This could include things involving customer interaction at a shared service center, for instance.

There is one element of digital finance that I would like to share from my desk. Right now, we’re piloting something interesting: predictive forecasting. With this process, we use all of the data that our intelligence systems provide and run it through predictive engines. For the first time, I’ve been provided with information that is real predictive forecasting. It compares what I would predict with what the machine would predict.

The “wow” factor is that historically, I’ve spent a lot of time forecasting, analyzing pipelines, and discussing details with colleagues to come up with a forecasting number. We’re generally good at this. However, it’s time-consuming, and in contrast the machine needs only a moment or two. Over time, the machine is giving a forecast that rivals our traditional manual approach. I can see that this will have a strong impact on where I spend my time and focus, allowing me to deep dive on other topics that should use human elements, such as relationships.

Building block 4: Managing risk and compliance

As we transform our businesses into the digital realm, we will need to give even more attention to the framework for risk and compliance. Old models will need to be updated to reflect the modern landscape, with not only tighter but faster controls, given the speed and flexibility a digital landscape offers. This includes new risk areas that have emerged in the digital economy such as cybersecurity and cyberfraud.

Regularly occurring changes to the business will need to withstand the transparency for proper governance, which as CFOs we apply to protect the business. This aspect will remain important for sure, if not gaining ever more importance to the business.

With building blocks one and four, we build a nice framework and starting point that allow us to apply our traditional skill set in the new environment, while building blocks two and three require us to reimagine finance and its processes.

What do you think – am I missing anything? I’d welcome your thoughts.

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Matthias Heiden

About Matthias Heiden

Dr. Matthias Heiden, senior vice president, regional CFO, Middle and Eastern Europe (MEE), is responsible for the field finance organization of MEE. In this role, he supports the organization in managing P&L, continuously driving strategic finance transformation initiatives initiated by Corporate Finance together with the other regional CFOs. This team helps improve business-related processes and supports the Market Unit CFOs in their role as business facilitator and transformation agent.