CFOs, by the nature of their experience, have deeply honed finance skills. But only a select few have deep strategy capabilities. And this presents a real dilemma. It’s commonly understood that CFOs need to play a leading role in strategy; in order to deliver value, you need to have a firm grasp on your strategy role and execute it flawlessly. That’s how you will earn the right to play.
Seasoned CFOs often share three ideas to consider as a starting point to understand their role:
- There’s no defined road map to be strategic. And approaches vary by organization. It’s about the strategy mindset you bring.
- Being a strategic CFO is not just about you being strategic; it’s also about your team.
- The expectations of CFOs are about promoting value creation and retention.
Shaping the Strategic Mindset
Readers of my prior article know I’m a fan of A.G. Lafley and Roger L. Martin, authors of Playing to Win, How Strategy Really Works. Their work is practical and succinct, and provides an appreciation of the rigor strategy requires. Their strategy framework is comprised of five overarching questions (see sidebar). Although seemingly straightforward, their framework provides a sense of the mindset one must have. It’s about the hard choices leaders at all organizational levels must make to create a winning strategy. Considering this framework, CFOs must orient themselves to the strategic mindset needed. That’s how they can help their peer leaders make the hard decisions required to form an effective strategy.
Applying the Strategic Mindset
Developing a strategic mindset is an essential first step. But you need more than that. CFOs like you need to understand the various roles you will be immersed in. These roles require a range of capabilities extending beyond those you might already have. To play the role well, you have to commit to personal development that may go beyond your comfort zone. Key tactics in this development can include:
- Aligning early with the CEO and Board
- Bringing an informed, forward-looking view
- Applying a balanced growth perspective
- Promoting a culture of value creation and fact-based decision making
- Constructively challenging options and assumptions
- Proactively readying the finance function
- Advancing a “growth at acceptable risk” mindset
Align Early with the CEO and Board
CEOs and boards expect CFOs to help drive the CEO’s strategy and agenda. Experienced CFOs know that supporting the CEO to drive their strategy begins well before strategy execution. It begins at the start of the strategy development process. They spent time with the CEO to understand expectations, discuss dynamics and personality styles of the leadership team, and how to reach consensus on key decisions and agree on their respective roles. Similarly, these CFOs, with the CEO’s knowledge, spend time with the board to understand their expectations of them and then share these expectations with the CEO.
Drive a Value-Creation Language and Mindset
Leading CFOs see themselves and their team as the catalyst that drives two cultural shifts that enable value based decision-making. The first shift comes from driving financial literacy throughout the organization. Through partnering with business leaders, they create informed awareness of how profits are made, and advance an understanding of the drivers of value creation across the complete business ecosystem.
The second shift comes from the application of an analytical mindset where financial information is the means for fact-based decision-making. Realizing this mindset minimizes behavioral and political biases during strategic decision-making. In doing this, CFOs become the architect of the strategy’s financial goals and metrics. These then drive the sustained behavior needed to realize the strategy’s desired outcomes.
Ready Finance to Support the Strategy Process
Strategy, by its nature, is information-intensive. It demands that finance be ready to deliver the information needed and in the manner required to make vital decisions. Experienced CFOs proactively assess the capabilities of their finance function. They make needed adjustments thoughtfully, and build the capabilities required.
From a people standpoint, required skills include business knowledge and partnering; analytics; scenario development and financial modeling; and presentation and communication. Systems capabilities include timely availability of required information, and data analysis, modeling, and reporting tools. Finance increases its credibility when it meets the needs of leadership. This influences and promotes confidence in decision-making. It also frees up the CFO to participate more fully in the strategy process.
Influence the Leaders
Strategy is about making and executing the hard choices that result in realizing value. But making hard choices can be uncomfortable, and appear limiting by some managers. Why? Because some managers want to keep all their bets open. CFOs know well that financial resources are limited, and have a cost. At times, CFOs need to challenge their peers when proposed directions may not be financially viable, or hard choices are not being reached. Doing so must be done thoughtfully and through influence. It is more of an art than a science, one that’s applied with the right balance and style. This role is critical, since CEOs and boards see the CFO as the balancing force of the leadership team.
Promote Informed Optionality and Decision Making
Many CFOs believe the CFO should not own the organization’s strategy. But they must influence the decisions made that form the strategy.
CFOs can influence strategic decision-making by:
- Guiding leaders to analytically understand and compare required investment levels with the expected returns of strategic options
- Quantifying execution risks of each option and if an option meets required return thresholds
- Facilitating development of trade-offs between options
This is how CFOs can guide leaders to make the right decisions.
Instill a Risk-Based Perspective
Strategy is about deciding where and how a company can create a competitive advantage, grow, and then win in the marketplace. This necessitates the betting of precious resources. Strategy, by its nature, requires organizations to take on risk. Effective CFOs do not prevent risk taking; they know it’s required. Instead, they challenge leaders to think about growth and risk together. For boards, this one of a CFO’s most critical roles.
Examples of fulfilling this role include:
- Facilitating methodical approaches for weighing expected returns against the defined risks of the choices being made
- Establishing hard pivot points driven by defined financial sensitivity measures
- Considering possible consequences, how contained a risk might be (if realized), and the company’s capacity to absorb the risk
- Promoting an objective view of the organization’s existing financial capacity, what can be obtained, and the implications of financial structures chosen
Create a Finance Strategy that Delivers Competitive Advantage
Playing to Win is about creating competitive advantage through differentiation. It’s not limited to the differentiation of customer products and services. It’s about how a company shapes its operating model, processes, and systems to create it.
CFOs play to win by developing finance strategies that provide an advantage over their competitors’ finance strategies. Example for consideration include:
- Financial structures that promote liquidity to weather market variability, lower the cost of capital, or enable future optionality
- Joint venture arrangements providing risk sharing and pay for performance terms
- Operating models, outsourcing or offshoring that lower the cost structure
- Financing arrangements for vendors and customers to protect relationships
- Treasury capabilities that speed cash flow, promote cash transparency or reduce exchange rate risk as compared to competitors
- Forming tax entities or operating in tax jurisdictions to lower tax burdens
Experienced CFOs say that having a strategic mindset and earning the right to play doesn’t happen overnight. It requires sustained, deliberate effort. Their advice? Don’t allow day-to-day operational challenges consume your time. Instead, set aside regular blocks of time to:
- Gain a deep understanding of the business’ competitive position and what drives its position. How might a Wall Street analyst or lender value your organization?
- Think strategically about the business and how finance can create competitive advantage. How can you begin to shape these opportunities?
- Practice the language and concepts of value creation. Begin the dialogue during regular interactions with leaders and your team.
- Deliver value-driver concepts and fact-based decision making within regular financial performance reviews. Are sacred-cow assumptions supported by facts?
As always, you are welcome to provide your thoughts, and any insights you would like to share. You can contact me at email@example.com.
- Are You Really A Strategist?
- 7 Principles That Define Finance Leaders
- The 10 Habits of Highly Effective CFOs