Article - The Focus of CFO in Today’s Digital Age
Neelesh Talathi, Chief Financial Officer, pepperfry.com
What makes Digital Disruption a force to reckon with is the pace of change and its all-pervasive nature.
Management thinker and Professor, Clayton Christensen describes ‘Disruptive Innovation’ as a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. Disruptive innovations have been underway for a long time, for example, Mini Mills disrupting Integrated Steel Mills, or Personal Computers dethroning Mainframes.
James McQuivey, in his book Digital Disruption characterises the current state of disruptions as a preference to innovate through rapid, focused pursuit of adjacent consumer benefits and a habit of partnering promiscuously to deliver these benefits quickly and at low cost.
In my view, what makes Digital Disruption a force to reckon with is the pace of change and its all-pervasive nature. It is indeed right to think that different businesses are varyingly impacted. For instance, a mining business would be lesser impacted than say a consumer facing business. Having said that, every organisation today needs a digital strategy. And every CFO has a role in shaping and delivering their organisation’s digital strategy. I don’t intend to dwell on the specifics of individual strategies, but rather on 4 key areas that I, as a CFO, am focused around:
To quote Randy Komisar, Partner, Kleiner Perkins Caufield & Byers – ‘If Corporates don’t approach rebalancing as fiduciaries for long term corporate value, their life span will decline as creative destruction gets the better of them.’
Never has resource allocation been as important as in the digital age. Yet, studies have shown that roughly a third of businesses fail to differentially allocate capital. As a CFO, one needs to be cognisant of the inertia in capital allocation decisions and counter it by deploying suitable tools and processes. It is critical here for the CFO to get over their personal bias towards anchoring or loss aversion. Incremental allocation is not the answer. Driving objective decision making in an otherwise subjective VUCA world is the challenge. CFO needs to provide the objectivity, ensuring that organisation politics does not rule over business economics.
‘Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network’ – Peter Thiel.
Competition is no longer that person selling products / services like those sold by you. Who would have thought that a wannabe new comer like Pepperfry.com would in under 5-years rise up to be the largest furniture retailer in India. Or, how strange it is that the traditional global No. 2 FMCG player, Unilever, with a turnover more than €50Bn, would pay 5X to
acquire a subscription based start-up, Dollar Shave Club having a turnover of less than $200mn. Or, for that matter Detroit is rushing to relocate to Silicon Valley with General Motors investing $500mn for an undisclosed share in Lyft, a start-up in the self-driving cars space. Clearly business models are being redefined every day. The CFO needs to play a crucial role in provoking challenging questions – on the business models, on value drivers, on ROIs of different type of marketing investments etc.
Yet another aspect where businesses are being profoundly impacted by technological advancement is the cost structures. We know that all CFOs simply hate cost. Digital age is now providing us unconventional solutions to address the entire cost challenge. For instance, let’s look at customer service centres (also called call centres). The cost per phone call tends to hover in the range of INR 6–7 per call. Training of staff, education of customers, supply chain efficiencies can bring this cost down by let’s say 20%. Not bad. However, if we can deploy ‘chatbots’ – well then, we could eliminate this cost! That’s the sort of competitive cost advantage that technology can create for you. What the digital age is offering is a completely different paradigm when it comes to operating efficiencies.
Our mobile phones today have more computing power than the computers used while sending man to the moon. To quote Bill Gates – “Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk meaningfully about one without talking about another”. This is truly advantage CFO!
Digital age has ushered in the unprecedented ability to collate, store, process and compute vast amounts of data at high speed and low cost. There isn’t any aspect of business where the power of information can’t be unleashed. Let me again call out an example from my business where we harnessed the power of information to create competitive advantage. In the global FMCG industry, 10bps of market share can swing fortunes. Pricing decisions have significant impact on margin and growth. There are very many considerations that go into making these decisions and finally it does come down to the exercise of judgement (a better way of saying a gut call). In our business, we successfully pioneered predictive pricing models which brought together diverse information such as brand voltage scores, consumer behaviour metrics, economic indicators etc. With the advent of artificial intelligence and significant improvements in capabilities to mix and crunch diverse sets of data, programmers can associate or disaggregate trends or exceptions and help visualise information, enhancing human abilities to discern and make better informed decisions. It’s a true CFO dream come true - to see the organisation embracing information based decision making.
People People People:
As I spoke earlier, the digital age is not just about the change but more so about the pace of change. As Mahatma Gandhiji has said – ‘You must be the change you want to see in the world’. Our approach to succeeding in Digital Age is not about doing things differently but to do different things. Here a CFO needs to follow a two-fold approach. One aspect is around development of the Finance Team, and the other where the CFO is effectively the spokesperson on behalf of the CXOs or the leadership team.
In our business, we have substantially invested in training and development of our teams. It is as much an unlearning process as it is a learning one. The approach encompasses heightening awareness around the digital world, (for instance, bringing in Facebook team to speak to our leaders), redesigned information capabilities (e.g. data warehouse), and adopting newer processes and tools (for instance, Tableau). As a CFO one ought to be evangelical about the company’s digital strategy and its roll-out. This process starts with changing yourself and converting those around you. It calls for a level of belief that the future, as uncertain as it maybe, will only be brighter and that we (organisation, individuals) will succeed in that future.
My concluding thoughts – if you are not a disrupter then it’s very likely that in the digital age you are getting disrupted. Finance function and the CFO are the vanguards of organisational value creation. Let’s seize the opportunity to creating competitive advantage for our organisations.
Opinions expressed in the article are the author’s own.