Greater adoption of rolling forecasts and subscription pricing models are among the trends you'll see this year.
Much of the conversation about the finance profession — whether at conferences or in journals — has been around the digital transformation of the enterprise and the rise of the strategic CFO.
Advances in cloud computing are central to those trends, because transformation of the enterprise can’t happen without the data the cloud generates and the CFO can’t be a strategic partner to the CEO without assuming control of that data.
This dynamic is underwriting a number of trends you can expect to see as we move through 2020. Here’s a look at the top five of these trends.
When the American Accounting Association (AAA) came out with a report last year on the merging of CFO and COO roles, it validated a movement that’s been accelerating in recent years. As a way of increasing efficiency, organizations have been replacing their COO with an operationally focused CFO — a trend likely to pick up speed in 2020.
Although efficiency is behind the merger of the two roles, the movement actually began partly as a reaction to Sarbanes-Oxley, the sweeping 2002 law that imposed reporting and audit controls on public companies as a way to avoid the kind of accounting scandals that rocked Enron and WorldCom just a year earlier.
The new rules put CFOs in a position of having to oversee business systems in a way they hadn't before, precipitating a natural convergence of the two roles. A Harvard Business Review study of the impact of Sarbanes-Oxley two years after it was enacted found companies streamlining their executive structure as the best way to comply.
"Executives, particularly those who recognized [Sarbanes-Oxley’s] advantages from the beginning, have figured out how to leverage the new law so that … plans for improvement can be realized," the report said.
Red Points Solutions exemplifies the new thinking. The company, an intellectual property infringement detection start-up, created a hybrid CFO-COO position when it hired Lena Shishkina last year. She oversaw the finance operation for SAP’s U.K. operations and, after that, for Workday. "I had a fair amount of accountability for operational performance," she said. And that’s what Sarbanes-Oxkey was looking for: a merging of finance with operational accountability.
In its report, AAA said its findings should put to rest concerns CFOs can manage their expanded role effectively. Among other things, it found financial reporting actually improved in some ways under a combined CFO-COO executive. "Managers from a financial background can fulfill operational roles admirably," it said.
The rise of the strategic CFO hasn’t made it any less important for the finance chief to ensure the company’s reporting meets regulatory standards. The accounting function, and the reporting the goes with it, remains a core function of the CFO role. But with organizations looking to CFOs to be more than compliance experts, CFOs with a background beyond traditional accounting are in increasing demand — a trend you can expect to accelerate.
“The accounting CFO is going the way of the dinosaur,” said Will Johnson, CFO of Iterable, a company that helps online brands support customer engagement.
Andreas Schulmeyer, CFO of Better Choice, a pet wellness company, and a former CFO of PepsiCo’s China operation, said PepsiCo — one of the largest corporations in the world — shifted its focus away from the CPA-type CFO to a more strategic, MBA-type CFO years ago in response to the growing complexity of business.
“Almost all of [PepsiCo’s] CFOs — divisional, country, and so forth — come from the planning or strategy and business development side rather than the accounting teams,” says Schulmeyer.
At the root of the strategic CFO is automation. Each year, more aspects of the traditional accounting function is taken over by software programs. That puts a premium on the interpretation of the data, not on the recording and reconciliation of the data itself.
"We’re really storytellers," says Valentino Hafalia, vice president of financial planning at Western Alliance Bank. "The tool sets available now are good enough to do a lot of the heavy lifting for us. So, the skill sets we’re looking for now are leaning more toward emotional IQs, softer skills, people who can communicate things."
Last year, database software company Couchbase released survey findings showing 80% of digital transformation projects fail. But there was good news. Most of the CFOs and other executives surveyed said the effort nevertheless led to positive change, particularly for end users of the company’s products or services.
And that’s a good way to look at how digital transformation will continue this year — in a way that puts the focus on small wins rather than big, overarching transformation.
Dennis Gannon, vice president of finance issues at Gartner, said the move to digitally transform your operations has tended to be clouded by misconceptions. The biggest of these, he says, is the idea that you have to transform an entire operation all at once. Adding robotic process automation (RPA) to your accounting function is a case in point. Instead of trying to automate that function from start to finish, you’re better off identifying a discrete piece of it, like certain types of routine expense reporting, and automating just that part. Then, when you have that to the point where you’re seeing material efficiencies, move on to another part of your accounting function.
"It’s better to start with sub-processes and build out from there," Gannon said. "You can use an RPA script to, say, flag a type of overage in your expense reporting that you’re encountering a lot of, or to manage the validation process for your expense reports. Put the scripts in place, see how they’re working, iterate, and then find the next thing that you might automate."
That goes for transforming your financial planning and analysis (FP&A) function. FP&A consultant Brian Kalish recommends clients who want to add automation to their forecasting process do so only for a discrete line item, and then expand from there. "I always argue, make little bets and wins and then let them build,” he said.
One of the best moments of William Edmondson’s career was when he led his company’s transition from a traditional transactional revenue model to a subscription based model. Now the CFO of 1E, an IT support platform, is seeing increased revenue, better visibility and predictability into the company’s accounting operation, and more interest in the company among investors.
"It was one of the most important moments of my career," Edmondson said, "both in terms of the potential risk, but also potential reward."
Edmondson isn't alone in making that move. Companies of all stripes — whether business-to-business or consumer-facing, whether offering software-as-a-service (SaaS) or premised-based software — are moving to subscription pricing.
Ordergroove, a subscription platform provider, claims customers spend 60% more when they buy products or services on a subscription basis.
"By making it easy for customers to shop when and how they want," companies form deeper relationships that establish a level of commitment that keeps customers coming back, says Greg Alvo, CEO of Ordergroove.
Making the switch from a traditional transaction model to subscriptions can be disruptive, though. Since you’re not charging full price up front, you can expect revenue to drop in the short-term, making it necessary to set the stage for the switch in the right way.
"If you want to make this happen and keep your job, you have to be able to show long-term value, even if, temporarily, it's not going to look like that," said Daniel McCarthy, assistant professor of marketing at Emory University.
Expect more CFOs to take that risk given mounting evidence of the rewards that follow.
All forecasting is dynamic: you create your budget for the coming year and update it monthly or quarterly as data comes in, showing how close or how far away you came to meeting your projections. Not all forecasting is dynamic in the rolling sense, though. But expect that to change; planning experts say they’re seeing more organizations adopt the rolling approach because it can lead to better decisions.
“It's going to give you more accurate and informed decisions than if you were just simply to look at a static, months-old annual budget," says Brian Martell, senior manager at Host Analytics.
Rolling forecasts differ from traditional forecasts based on the time frame they cover. In a traditional forecast, the budget might cover the calendar year or a fiscal year. As the months pass, the time increments covered by the projections decrease. If you’re operating on a calendar-year basis, your forecast time horizon shrinks as you get closer to December 31, at which point you start over. Planning professionals call this “forecasting to the wall.”
On a rolling basis, there is no endpoint. Instead, the forecast continuously rolls out, like a goal line that always remains just out of reach, while the trailing end drops off.
Kalish, the FP&A consultant, says the rolling time horizon enables executives to make decisions based on market dynamics rather than an artificial target.
"If your sales compensation is based on hitting your numbers for December 31, your behavior will be very different than if you're ignoring that deadline," he says. "The business is going to exist on January 1, so what happens is, you start making economically suboptimal decisions to hit artificial targets."
Moving to a rolling forecast isn’t easy. The first time you do it, you’re effectively asking your finance staff to redo the work it did just a few months prior when it created its budget for the new year. But as you keep updating your forecast, it should get easier, consultants say, and, more importantly, it becomes more accurate. That’s why you can expect more CFOs to make the transition this year.
Brian is Founder and Principal at Kalish Consulting. He is Former Executive Director – Global FP&A Practice at AFP. He has over 20 years of experience in Finance, FP&A, Treasury and Investor Relations. He previously held a number of treasury and finance positions with the FHLB, Washington Mutual/JP Morgan, NRUCFC, Fifth Third and Fannie Mae. He has spoken all over the world to audiences both large and small hosting FP&A Roundtable meetings in North America, Europe, Asia and soon South America. Brian attended Georgia Tech, in Atlanta, GA for his undergraduate studies in Business and the Pamplin College of Business at Virginia Tech for his graduate work. In 2014, Brian was awarded the Global Certified Corporate FP&A Professional designation.