How to build finance resiliency and return the business to scale

No crisis has been as challenging in recent memory as the COVID-19 pandemic, severely testing the strength of corporations and the business guidelines under which they operate. Even before the coronavirus, finance teams had already started to design more agile, resilient organizations with higher levels of digitization. The pandemic has accelerated these efforts, as finance leaders realize the limitations of outdated platforms and processes. 

To support this effort, the Association of International Certified Professional Accountants (AICPA & CIMA) is producing Agile Finance Reimagined, a five-part webcast and white paper series offering CFOs and their finance teams practical advice on how to increase resiliency and growth—not just in finance, but also in the lines of business that rely on finance to guide the way forward. 

The first webcast in the series was held the week of March 25, 2020. We examined how CFOs can boost the resiliency of their finance organizations and return the business to scale by applying McKinsey’s Five Horizon framework. Joining the Association’s Ash Noah as guest speakers were Kyle Hawke, a partner in the McKinsey’s Corporate Business Function practice; and Matt Bradley, senior vice president, Enterprise Performance Management Applications Development, Oracle. 

McKinsey’s Five Horizon Framework

To kick off the webcast, McKinsey’s Kyle Hawke walked attendees through recent McKinsey research on the role that CFOs have in helping their companies navigate through the coronavirus:

• Resolve: Addressing the immediate challenges to the company’s workforce, customers, technology, and business partners. For finance leaders, this has meant address immediate problems of liquidity and financial stress.
• Resilience: Handling near-term cash management challenges and broader resiliency issues. For CFOs, this has meant launching a cash war room to track and boost liquidity; developing a range of integrated scenarios to address multiple eventualities; and instituting a communications plan to proactively engage with employees, boards of directors, and investors.
• Return: Drawing up a plan to return the business to scale after shutdown orders are lifted. Here the CFO needs to make operational improvements to bolster productivity, reevaluate the investment portfolio, and turbocharge the role of FP&A. 
• Reimagination: Envisioning what the “next normal” looks like. This might include adopting a transformational mindset when reallocating resources, considering M&A and divestures to improve the portfolio, and setting outsize growth or performance improvement targets. 
• Reform: Developing a long-term plan to adapt to changes in the business environment and regulations. Here the CFO must take a leadership role in boosting productivity through digitization—not just within finance, but across the enterprise—to reduce exposure to exogenous shocks and increase resiliency to capitalize on opportunities in the new normal.

During the webcast, the Association polled participants on where they were on this framework. 41.3 percent identified themselves in the “Resilience” phase, 28 percent in the “Return” phase, and only 16 percent in the “Reimagine” phase.

To withstand exogenous shocks such as COVID-19, building operational resiliency must now be a core competency for every finance organization. “CFOs already in the cloud feel relief that they’ve been able to close the books virtually and collaborate across time zones to rapidly model and adjust scenarios in real time,” noted Oracle’s Matt Bradley. “Those who haven’t moved to the cloud may be feeling some regret at not moving forward with plans to modernize, especially in areas critical to crisis management, such as strategic planning and scenario modeling.” Bradley cited the fact that being completely on the cloud enabled Oracle’s own finance organization to not only close the books remotely during the pandemic, but even shave one day off the close process. 

Key strategies for building finance resiliency 

Following the global financial crisis of 2007-2008, McKinsey conducted research to understand what companies did to achieve and sustain a competitive advantage after a downturn. The research revealed four core strategies that today’s businesses can also leverage to achieve financial resiliency and scale their operations in the wake of COVID-19.

Strategy 1: Bolstering productivity

Bolstering productivity is one of the top strategies CFOs can employ today to improve financial resilience and return the business to scale. “We conducted a survey in early May 2020 of CxOs and functional leaders on their SG&A outlook in the months ahead, and over half have productivity improvement plans in place to contain costs,” Hawke observed during the webcast.

Oracle’s Matt Bradley counsels companies to apply automation to ensure that the data they’re using is clean and correct, and to eliminate human intervention across the entire process, so that resources are freed up to focus on predictive analysis and strategic decision making. “Adopting a touchless approach to transactions—moving a transaction all the way from the front end of the house, the order, all the way through to the generation of the invoice and payment—can deliver immediate value add while reducing risk.”

Second, he advises companies to ensure that their information is complete. “By complete, we’re really encouraging finance to have a look at not just financial information, but at operational information as well, because that information may contain what we would consider leading indicators, such as customer usage. You are really trying to get to that early warning sign that something is either improving for you or not, so you can take corrective action.” For Bradley, companies must start to move toward machine learning to analyze data at scale, because machines can spot patterns much more readily, cluster that information, and then leverage that to do predictions, generate forecasts, and enable professionals to take swift, corrective action.

The Association polled webcast participants to understand the timeframes being used currently to model different scenarios and found that the ranges have shortened considerably from previous three to five-year forecasts. Almost half (48 percent) now forecast for the next three months, followed by 53.2 percent forecasting for the next six months, and (63 percent for the next twelve months. Only 10.9 percent continued to forecast using five-year horizons. 

Participants were also polled about the pace at which they are trying to predict outcomes and flag early warning sign, and that too has sped up significantly. A little over 17 percent are running continuous or daily scenarios, with 25.8 percent running weekly, 31.4 percent running monthly, and the remaining 25.8 percent running ad hoc scenarios.

Strategy 2: Reallocating resources and strengthening the balance sheet

McKinsey’s research also suggests that successful companies were able to bounce back from the previous recession in large part by aggressively reallocating resources, diverting capital away from exposed categories and reinvesting them in high-performing areas. The Association polled webcast participants to understand the top three areas they were focused on when reviewing resource allocation initiatives and found that operating costs were the main driver of reallocation efforts, at 76.5 percent, followed by head count (51.6 percent), cash and receivables (50.8 percent), and capital projects (40.1 percent).

Top Focus Areas for Resource Allocation

Dynamic resource allocation is another strategy that helps identify units that no longer make sense to maintain. “You can divest those and free up some capital that way,” commented McKinsey’s Hawke during the webcast. Hawke also noted that companies which performed best coming out of the previous financial crisis cleaned up their balance sheets early and aggressively.

Oracle’s Bradley pointed to the need for CFOs to look to their own industries for the right use cases where it makes sense to reallocate resources, using the scenario modeling capabilities in a product such as Oracle Cloud EPM to replan and reforecast accordingly. “The ability to have a full allocation methodology, to look at just the key elements that are important for the business, will help companies get back to the new normal, whatever that might be.”

Strategy 3: Turbocharging the role of FP&A

Finance must also be equipped to lead in terms of their individual skills as well as their institutional capabilities. When asked how companies can measure progress on capabilities, McKinsey’s Hawke observed that one metric is to look at the impact that finance leaders are having on the organization and ask whether functional and business line leaders are coming to finance for guidance. He noted, “the evolution of finance from transactional expert to value manager requires a combination of technical skills, soft skills, digital enablement and a mindset shift of both the finance function as well as the organization.” 

The Association polled webcast participants to better understand where they were investing in the digital enablement technologies needed to turbocharge FP&A and boost finance resiliency for the road ahead, and found that almost 60 percent (59.7 percent) were considering investing in decision support and analytics, followed by 39 percent in automating the month-end close process, to free finance up to focus on more strategic activities. 

The increased usage of artificial intelligence and machine learning embedded directly into enterprise software can provide a big boost in helping finance professionals become more strategic to the business, noted Oracle’s Bradley. “Technology will unleash the full potential of finance professionals to be involved in those conversations, to present the information in a meaningful way that delivers better business outcomes.”

To guide skills development of finance teams, the Association’s Ash Noah recommends finance leaders look to the CGMA Competency Framework. This resource was developed based on feedback of thousands of finance leaders worldwide and provides a roadmap to help finance leaders develop the technical, business, people, leadership and digital skills required now and in the future.

Strategy 4: Improving communications with employees and stakeholders

At the end of the day, COVID-19 is a humanitarian crisis, and as such business leaders should address the health and safety of their workers, along with how these considerations will impact operations going forward. 

Technology can also play a critical role in helping companies effectively communicate the right narrative to both internal and external stakeholders. The Narrative Reporting capabilities in Oracle Cloud EPM automates both flux reports and statutory reports, replacing Excel spreadsheets with an automated tool that leverages the same data set, so that everyone has access to the right numbers each time information is updated. 

“We are using Narrative Reporting internally at Oracle and seeing productivity gains of 80 percent from the time it used to take to produce these reports,” Bradley commented.

Next steps for businesses

As CFOs seek to boost the resiliency of their finance organizations and return the business to scale, they should consider these steps: 

• Increase scenario planning: In a rapidly changing environment, scenario planning becomes essential to finance teams as they assess a wide array of possible outcomes, forecast cash and liquidity, and make iterative forecasts. Frequent modeling of range-based scenarios helps organizations stay agile and develop alternative strategies to deal with how a post-crisis world might evolve. 
• Align plans across finance and all your lines of business: Synchronizing finance plans with those of your lines of business provides greater transparency, helping you anticipate and capitalize on future growth opportunities. 
• Gain deeper understanding of costs and profitability: Undertake a systematic assessment of costs and profitability to guide investments and spend. By understanding your most profitable products or lines of business and, inversely, your biggest costs, you can make more informed decisions about where to take the business.
• Invest in enterprise master data governance: Master data governance across customers, prospects, employees, suppliers, hierarchies, charts of accounts and other data helps organizations to more easily model divestitures, acquisitions, or new company structures as part of their digital transformations. 
• Empower employees to collaborate securely and remotely: Collaboration is critical in remote working environments. Cloud applications help finance teams collaborate, securely share and create financial, management and statutory reports, increase transparency, and improve visibility.