Dynamic data and the future of the CFO from a CFO

Much has been said about the CFO of the future. Where some contributors to this discussion see the CFO developing forward purely on their strategic influence on the firm, some others see the CFO to be more of a chief data officer. As McKinsey writes in their 2018 survey 'digitization and strategy making are increasingly important responsibilities for the CFO (…) most finance chiefs are involved in informing and guiding the development of corporate strategy' (McKinsey & Co.: The new CFO Mandate: Prioritize – transform – repeat).

But what do CFOs need to do to deliver on these ambitions?

CFO's will obtain strong reputation, both within the firm and the investor community, if they are capable of delivering relevant and meaningful financial information in a timely manner. As simple as this may sound, it is often difficult to achieve. Much of the financial information the CFO is working with lacks meaningfulness, both vis-à-vis internal demand as well as the investor community. Often, information is delivered just too late to play a role in management decisions - much is outdated by the time it's delivered. Resulting in a backward-looking focus which is further exacerbated by having to sequentially produce the various valuations required by Finance's many stakeholders.

There is also the general trend of the increasing accessibility and relevance of dynamic data. With the emerging use of the Internet of Things (IOT) and with B2C companies enhancing their own data efforts, we now have access to unprecedented and almost real time data. From health data collected via your smartphone or driving and accident information from smart cars, we increasingly have access to huge amounts of information generated outside of the financial systems of the firm that can help explain business performance and improve forecasts, devaluing internal historic financial data in day-to-day management decisions.

The following model illustrates the challenges and how Finance functions are maturing:

The slowness of sequential production

Much of the CFO's challenge today is that there are numerous financial views on the same matter: financial accounting views, management accounting views e.g. economic views, statutory accounting views, etc. Often many of these views or valuations are generated in a sequential manner, resulting in long reporting cycles. Finance departments are currently investing in their capabilities to introduce parallel financial reporting, shortening reporting cycles and making financial information more meaningful and timely in a multi valuation context. This is a great improvement making finance departments more responsive, however it does not fully solve the second problem of today, as most financial information delivered in a timely fashion is still backward looking. Those who don't invest in this capability risk being a 'Finance Laggard', stuck with slow processes and a backward focus.

Enhancing historic information with dynamic data

The second problem is depicted on the horizontal axis, showing the move from the focus on historic to dynamic information. This characteristic of today's finance challenges is that much accounting information, even if delivered in a timely manner, lacks the meaningfulness that dynamic information provides. Dynamic data, often driver related, exists on the internet and business ecosystem and it can be much more relevant in explaining the financial performance of the firm than historic accounting information and helping improve forecasts and estimates.

To give an example: behavioral data about primary insurance clients is not reflected in the historic financial accounts of an insurance company, but can be extracted from social media and their IoT data. This can have an important influence on the true economic value of insurance liabilities, as well as the costing of insurance products. This wealth of rich and dynamic data, if used properly can even better explain financial results than by just looking at the historic financial or actuarial data. As such, pure financial data without this enhanced view leads to a devaluation of historic accounting data in the context of management decision making as we move into this dynamic new world. It would be a true miss not to make such data available for financial decision making.

Bringing Finance into the future through two key capabilities

Finance divisions are responding to this challenge and opportunity by making such information available and linking financial explanations and modelling systematically to dynamic data. As such the CFO of the future is indeed a data manager, and they are also potentially the best suited person in the management team to shape the company's strategy given their end to end perspective and proximity to the business results. To do this effectively, the CFO must invest into two capabilities. On the one hand, information provided by the finance department used for strategic decisions and performance assessments must be timely to be meaningful, which means that the CFO must invest in the company's capability to generate (all) relevant financial views of a problem in parallel, and in a timely manner. On the other hand, the CFO must generate access to non-financial, dynamic data which can be used to enrich decisions in today's data driven world, which requires enhancing the skills and capabilities of Finance employees and investing in the tools and platforms capable of processing and interrogating this type of data.

Only if the CFO is capable of combining historic and dynamic data in a timely manner can they stay ahead of the requirements of the future and become a true strategic advisor to the firm.