Part 1 of a 2-part series. Read Part 2.
Economic risk. Political uncertainty. Industry disruption.
Keeping up in the face of these challenges is all in a day’s work for a CFO. But is your focus fixed on operations or business strategy?
The unequivocal answer is both. Striking a balance between managing day-to-day operations and defining and driving long-term strategy is your burden to bear. But with new disruptions, uncertainties, and risks emerging on the horizon, a nuanced shift in how and where you focus your efforts in these two areas is a strategic imperative, according to Cornell University professor of finance Dr. Steve Carvell.
“The only value that will be created by the CFO will be on differentiating issues, be they strategic or operational,” Dr. Carvell recently told us. “The real challenge here is to figure out, on both the strategic and operational levels, which issues will allow for differentiating value to be created.”
So when and where does that shift need to happen? How should you be spending your time? What role does your senior management team play?
In a recent interview, Dr. Carvell shared his insights and answers to these questions and detailed how CFOs can rise to the challenge and emerge as more strategic leaders. This is Part 1 of that interview.
Q: How much time should CFOs spend on strategic versus operational activities?
On the first day of class in my financial strategy course, I write on the board the equation “1 + 1” and I ask my students to tell me the answer. After much trepidation, someone finally says the answer is two. Then I ask: How much would you pay someone in your organization that can answer that question? They will often say nothing, or zero.
After I explain that paying them nothing is unlawful, we explore the fact that we would pay these people minimum wage. The lesson here is that any question—no matter how complex—that has a definable answer has little value to differentiate either individuals within a firm or the firm itself within its competitive landscape.
C-level officers of a company cannot differentiate their firm and create value by spending their time significantly on questions that have direct and definable answers. Such questions are necessary evils that require the attention of all management. C-level officers should focus on investigating problems that have no definable answer. It’s these questions, the ones that have no answers, that are the only questions worth asking.
Rather than answering this question purely within a time framework, we should think about this in the context of value. The real question here is how much value comes from the time CFOs spend. As a matter of competitive dynamics, this differentiating value is more commonly created within the strategic environment rather than an operational environment.
Reclaiming your strategic focus
Q: How can CFOs reclaim time normally spent on operational activities to focus on strategy?
The simple answer here is that CFOs need to delegate more of the operational activities to their senior management. If senior management can manage operational activities in an efficient manner, CFOs will have more time and opportunity to focus their attention on the differentiating components embedded in the firm’s business strategy.
Whether CFOs can delegate and provide feedback opportunities for their senior management on a daily weekly or monthly basis depends on the type and activity rate of the operational activities being managed. Regardless of the frequency of the feedback opportunities, the CFO will need to find an efficient reporting and oversight process that allows them the freedom and time necessary to focus their attention on these other strategic differentiating activities.
Q: What are the key strategic decisions CFOs should be involved in?
Every strategic decision will require financial capabilities to be actualized. Regardless of the value driver involved; growth, profit margin, tax advantages, cost of capital, etc., the CFO has a critical role to play.
- By ensuring proper measurement of the advantages being sought and realized.
- By positioning the firm from the standpoint of funds availability to ensure that the firm is financially capable of providing financing for the competitive advantages.
- By ensuring strategy is linked to the capital allocation, risk, and uncertainties within every aspect of the firm’s strategic decisions and to ensure that options embedded within each activity are properly valued and understood.
- Finally, to ensure that the corporate strategy and the company’s capital structure are well aligned.
What’s coming next?
Now is the time to make moves to strengthen and empower your team so you can focus on developing strategies that can help your organization navigate the changing landscape. This should include a strategy for your organization to evolve toward becoming an intelligent enterprise for finance,
What disruptions, uncertainties, and risk do you need to prepare for?
For more insight into the changing role of CFOs and how to stay ahead of the shift, visit The CFO’s Guide to the New Era of Intelligent Finance.
For more on this topic, read Financial Risk Management: The Cornerstone of Business Strategy.