Deloitte 2024 Q4 CFO Express

As emerging technologies become widely used and deeply integrated, the creation of enterprise value is continuously transcending traditional boundaries and stepping into a profound path of transformation. In the face of economic uncertainty, performance pressure, and intense technology and innovation competition, cost control alone can only bring short-term profit improvements. Enterprises should instead embrace a growth-driven cost optimization strategy, investing resources comprehensively and strategically to support long-term market competitiveness. For instance, artificial intelligence (AI) has initiated a paradigm shift in multiple industries. Enterprises need to integrate and empower themselves around key technologies, restructuring their core competency systems. In this transformation, CFOs play a crucial role. They need to actively adapt to market changes, leading corporate transformation through their own "exponential" shifts. Taking the sustainability reporting as an example, CFOs must consider the construction of a multi-dimensional capability system, including but not limited to talent and skill development, governance and control frameworks, and data management.

• In the wave of Chinese enterprises "going global", high-tech companies, particularly those in the internet sector, are facing unprecedented challenges. How can they build effective management and governance systems in different cultural, legal, and business environment?
• With the widespread adoption of technologies such as big data and artificial intelligence (AI), how should CFOs undergo a paradigm shift, redefine their responsibilities, and drive value creation and operational excellence?
• By 2027, the entire Asia-Pacific region will implement mandatory sustainability reporting, of which CFOs play a vital role. Besides ensuring the compliance of reports, how can CFOs leverage the relevant reporting model to make it a core driver of corporate value?
• The paradigm shift of applying artificial intelligence (AI) in various industries is in full swing and is expected to become a decisive factor for companies to withstand fierce competition. How will AI reshape the banking industry landscape, and how can companies position themselves to gain a competitive advantage?
• In the current market environment, balancing growth opportunities and profitability becomes increasingly complex. How can companies strategically release funds for long-term growth opportunities without sacrificing short-term profitability?

This issue of CFO Express focuses on the above issues, and we hope that these excerpts and summaries will provide new insights and references for corporate decision-makers.

China to Embrace US Election

With the conclusion of the U.S. election, policymakers around the world are actively preparing for Trump 2.0. Xu Sitao, Deloitte China's Chief Economist, shared his outlook for China's policies following the U.S. election:

1. Regarding the issue of further US tariffs on China during the Trump 2.0 era, the lesson from the phase one trade deal with the 1st Trump trade deal was such a trade deal based on quantity (even without the adverse impact of the Covid) would have been unlikely to work in the medium term because trade diversion and substitution would distort global trade. If higher tariffs were levied against trade surplus countries, such policy would have invited retaliation. The result is inflationary.
2. On inflation, there are scant signs for the US economy to exhibit signs of a slowdown. As of now, the Fed is poised to cut rate one more time rest of 2024 and could ease twice in 2025. For China, given that risk of inflation is likely to remain low, a calibrated monetary easing by the PBOC should remain the dominant theme. The complication is whether China would introduce more exchange rate flexibility in order to enhance the effectiveness of its monetary policy especially with a potential external shock on the tariff looming large.
   
3. Chinese policymakers have adopted a gradual approach in introducing fiscal stimulus measures over the past few months, such as the central bank announcing interest rate cuts and the Ministry of Finance increasing resources for local government debt management. Going forward, the test is whether debt rollout with local governments would be seen as credible by the market. Given that long term interest rates are low, Beijing does have ample capacities to bail out those local governments who are facing revenue shortfalls. In addition, it is expected that the government will also introduce trade-in subsidies (ranging from automobiles to home appliances) to boost consumer demand.
   

To Become an "exponential" CFO 

With the explosive development of technology, especially the widespread application of big data, artificial intelligence, and other technologies, the value creation, operational management, talent development, and corporate culture of enterprises in the future will transcend traditional boundaries and undergo profound transformations. 2030 will likely look different by industry and business, the evolving business environment necessitates an expansion and transformation of the CFO's responsibilities:

• Value creation. The ways companies create shareholder and stakeholder value in the future will be complex with avenues for new business models, products, services, and value levers that transcend traditional business boundaries, new sources of capital also provide new avenues to meet the evolving needs of customers.
  
• Operations. With the continuous development of artificial intelligence and the increasing embedding of technological sensing capabilities, enterprises have emerged with entirely new operational models, functional silos no longer exist—operations, finance, supply chain, and other functions operate with no boundaries. Businesses will have to operate with new laws, regulatory considerations, and risks.
• Talent and Culture. How companies integrate the human agenda into their corporate agenda may be profoundly different with human-technology collaboration, new work and worker expectations, and a growing prevalence of multigenerational work teams. Worker expectations across intergenerational talent need thoughtful inclusivity, workplace flexibility, and new measurements of “productivity”

The Deloitte whitepaper titled "Crunch time Series: The Exponential CFO" analyzes the macro dynamics and predicts future business environments. It points out that enterprise CFOs need to undergo an “exponential” transformation and summarizes the cultivation paradigm and precautions for becoming an “exponential CFO.” Exponential CFOs achieve a balance between efficiency and resilience by accelerating value creation, promoting operational excellence within the enterprise, and shaping the development of corporate talent and culture.

1. Accelerate value creation. By expanding the group of external stakeholders, broader expectations for value creation can be achieved, including revenue growth, operating margin improvements, and asset efficiency.
2. Drive enterprise-wide operational excellence. Maintain a demand-driven pace, monitor external dynamics and macro events, enhance their capabilities for financial and operational scenario modeling, and achieve risk prediction and proactive prevention.
3. Shape talent and culture. Talent and culture are key to organizational transformation. CFOs shall lead corporate change and should be dedicated to shaping the talent experience and cultural system, fostering or reorganizing teams with innovative spirits and adaptability to enhance employee motivation and diversity, thereby injecting vitality into the enterprise. They must diligently cultivate a transformational culture that embraces continuous innovation and have a clear understanding of the evolution of technology-driven financial skills.

Unlocking the promise of cost optimization

With growth at the top of many leaders' strategic agendas---and with growth as an increasingly complex goal to achieve given margin pressure, economic uncertainty, and the increasing competitiveness of innovation. Organizations need to avoid “death by a thousand cuts” and embrace growth-oriented cost optimization. This means not only reducing costs to boost short-term profitability but also strategically freeing up capital to invest in long-term growth opportunities such as innovation, enhanced capabilities, and expansion into new markets.

We spoke with strategy, operations, and transformation officers from Fortune 500 companies, as well as professionals from various Deloitte Global member firms around the world, to determine where companies are finding new efficiencies and redeploying savings into areas promising long-term growth. Here are four approaches that appear to be gathering momentum.

1. Prioritize long-term investments. Industries are strategically investing in advanced technologies to improve efficiency, thereby freeing up resources to invest in the future. For example, the power sector is increasing its investments in distributed energy technologies, such as electric vehicles, rooftop solar, and digital technologies that allow bidirectional flow of power. This evolution not only empowers consumers but also transforms them into potential power producers within the residential and commercial sectors. In addition, the industry is investing in building out their AI toolkit to make their operations more resilient and mitigate potentially costly risks.
   
2. Shifting from cost management in silos to cost optimization synergies across the organization. Traditionally, many companies have focused on cutting expense in specific departments to reduce costs without regard to the broader organization impact. In contrast, cost optimization involves analysis of spending and processes across the entire organization to identify not just savings, but also opportunities to enhance value. This more comprehensive strategy involves a cultural shift from merely seeking to minimize costs to optimizing them in a way that supports sustainable growth and competitive advantage.
   
3. Rely on strategic partners, and not just for non-core functions. The focus has shifted from cost-cutting centered on transactional, non-mission-critical functions to drive better, shared outcomes in areas closer to the heart of the business. Specifically, many retailers have been turning to external partners as they invest in curbside pickup; some consumer companies are progressively adopting external risk management platforms for risk management. Different from traditional outsourcing models, the external partners don't just take on the organizations' so-called “mess for less”; instead, they can drive better strategic outcomes for the business overall. This is a significant shift from more traditional outsourcing models, which focused solely on transactional processing without focusing on business outcomes.
   
4. Integrate tech to help with everything from forecasting to talent to risk management. Technology like artificial intelligence tools can be instrumental in transforming traditional cost management approaches. For example, AI-powered analytics helped challenge conventional wisdom, prompting organizations across industries to make more informed decisions, which can enhance overall sales, reduce costs, and mitigate uncertainties arising from geopolitical issues and natural disasters. Technological tools are now a key enabler for cost optimization strategies, and the next step is to consider how to scale these technologies in a way that makes a tangible difference across the organization.

CFOs Play Leading Roles in Sustainability Reporting 

The sustainable development reporting system is constantly evolving and the majority of locations will have financial and non-financial disclosures in place by 2027. Most are starting with climate disclosures, but the scope is extending into many other social and environmental domains. Currently, enterprises implementing sustainable development reports mainly face three major issues: complying with different countries' reporting standards and systems, clarifying ownership of the sustainability reporting agenda, and accountability for delivery and meeting the different needs of key stakeholders and company executives.

Preparing these disclosures requires the same level of rigor that is applied to the preparation of annual financial statements. Therefore, Chief Financial Officers (CFOs) play a pivotal role in fulfilling the obligations related to sustainable development reporting. Establishing an effective reporting model requires multidimensional considerations including leadership and objectives, operating models, governance, controls, and data:

Establish an operating model that meets talent and skill requirements. Companies need to ensure a steady supply of talent, which includes updating job descriptions with clear responsibilities and KPIs to maintain clarity in expectations and line management. Secondly, companies need to carry out capacity building. With knowledge and skills gaps across sustainability, data and financial reporting processes, organizations need to develop capability development plans that cover both broad sustainability awareness and role-specific expertise.

Develop an appropriate governance and control framework. To build processes and a control framework, it is essential to leverage know-how and workflows in the critical areas of strategy, risk and finance. This integration can bring existing best practices to be applied effectively to the evolving reporting model. In instances where internal technical proficiency may be lacking, it would be prudent to seek the support of external subject matter experts to develop and refine these processes. Concerning governance, many organizations can initiate by building upon their established climate-related governance frameworks, expanding these to encompass a wider spectrum of sustainability issues.

Understand data requirements and manage accordingly. In terms of data availability, accessibility, and assurance, companies must determine where and how material data is stored and define common standards, then address data ownership, controls and governance. For technical readiness, key capabilities will include data acquisition, consolidation, and automation to effectively manage sustainability reporting.

By optimizing sustainability data and insights, CFOs not only help enterprises achieve regulatory compliance in the short term, but also institute automated and sustainable reporting processes. This enhances the enterprise’s ability to utilize data with a high degree of self-service. Having ensured compliance and unlocked value, CFOs are then positioned to advance sustainability as a central component of long-term enterprise value, ultimately generating greater benefits for shareholders, employees, customers, and the environment.

How could High-tech Enterprises effectively manage global governance challenges? 

Currently, in the realm of global governance, Chinese high-tech enterprises, particularly those internet companies, are facing unprecedented challenges: crafting efficient governance frameworks that support vigorous expansion within diverse cultural, legal, and market settings. Deloitte China recently released a whitepaper "Global Governance Practices of Chinese High-Tech Enterprises", offering valuable insights and strategic guidance. Through comprehensive research into the global governance strategies of internet companies, this white paper serves as a resource for decision-making in the global governance of Chinese high-tech businesses.

Deloitte’s research suggests that in constructing a global legal entity framework, these enterprises tend to target overseas markets that mirror their home market as initial entry points. This strategy reduces entry barriers and facilitates the creation of a worldwide service network by establishing regional entities. Moreover, companies must consider multiple factors, including tax optimization, the distribution of computing resources, and the recruitment of technical expertise.

When appointing overseas business directors, companies in the initial phases of international expansion tend to focus on internal selection to ensure continuity of corporate culture and strategy. As overseas operations mature, companies begin to consider external recruitment more frequently to bring in new talents with local market experiences. In the selection of business directors, it is crucial for companies to value a candidate’s diverse skill set, including industry experience and expertise, relevance to the business context, proficiency in cross-cultural communication, as well as possession of strategic foresight and innovative thinking.
ancial reporting. A wide range of stakeholders including investors and regulators are also increasingly focused on the connections, consistency, and comparability of sustainable information and financial reports. Therefore, CFOs must pay close attention and take necessary steps to understand these requirements, build a strong knowledge and capabilities to tackle this new challenge, and strive to transform this trend into a growth opportunity.

In formulating corporate governance for overseas companies, Deloitte has identified five key distinctions in governance structures between domestic and international settings:

1. Localization of operations and strategies: Chinese internet companies prioritize the localization of their operations, pursuing tailored strategies to integrate more effectively into local markets.
2. Independent legal entities and risk isolation: To navigate the regulatory landscapes and mitigate country-specific risks, these companies commonly establish separate legal entities in each overseas market, ensuring a resilient global operational structure.
3. Empowerment and support models: Chinese internet companies often export successful business models, supply chain management practices, and technical know-how to their international operations.
4. Personnel selection and overseas assignments: For leadership roles in overseas entities, these companies typically select individuals with relevant industry experience, strong internal network connections, and alignment with business scenarios from within their organization and experienced local hires outside the organization.
5. Flexibility and adaptability: During international expansion, Chinese internet companies modify their governance structures to align with local market dynamics and business requirements, demonstrating a commitment to flexibility and adaptability.

As companies advance in their globalization journey, it is imperative for them to forge strong connections within their governance structures across various global regions. They should proactively pursue collaborative ventures with worldwide suppliers and technical partners to cultivate a global network. With the expansion of overseas operations, securing the right local talent becomes pivotal to ensuring effective management.

Generative AI Powers the Smart Evolution of China's retail industry 

In recent years, with the rise of generative artificial intelligence (GenAI), the digital transformation of the retail industry has progressed from foundational stages to deep applications. Deloitte China, in collaboration with the China Chain Store & Franchise Association (CCFA) have jointly published a white paper titled "Navigating the Generative AI Landscape in the Retail Industry ". The paper delves into the status of development, diverse application scenarios, and implementation strategies of GenAI within the consumer goods and retail sectors. The report highlights application solutions that have garnered attention and relatively mature within the industry. Furthermore, it also addresses the challenges associated with risk control and compliance systems during the GenAI application process. It aims to provide a valuable guide for businesses looking to adopt and integrate enterprise-level GenAI architectures.

The research reveals that many companies anticipate GenAI to be instrumental in boosting efficiency, cutting costs, and enhancing product and service quality. Moreover, fostering innovation, driving business growth, and nurturing customer relationships have also become focal points. Data shows that over 90% of respondents believe GenAI has significant potential in enhancing efficiency and productivity; 76% of companies expect to optimize the quality of products and services through GenAI. In addition, 60% of companies hope that GenAI will drive innovation and growth, while 56% are optimistic about its role in strengthening customer relationships and improving employee job satisfaction.

Many enterprises are increasingly adopting GenAI technology and integrating it into core business operations. The white paper points out that, based on the characteristics of business scenarios and their target customers, the application scenarios of GenAI in the chain operation field can be primarily divided into two categories: front-end and back-end. Front-end applications are consumer-facing business activities, whereas back-end applications focus on internal operational support. Besides the growing use of AI-powered customer service in the realm of customer support, technologies such as intelligent store auditing and smart sales assistance are enhancing the intelligent and nuanced management of retail outlets. Additionally, innovative approaches like intelligent pricing, smart marketing, and live streaming have gained widespread traction.

As enterprise-level GenAI business models continue to mature, the barriers to adopting GenAI technology are progressively diminishing for companies. More than half of the surveyed enterprises (56%) have begun utilizing public model application services, and 36% have opted to build their own GenAI platforms, while fewer than a third of enterprises are employing other business systems, intelligent hardware, or office software for this purpose.
China’s GenAI market is witnessing exponential growth, posing more complex transformation demands on enterprises in terms of talent acquisition, governance mechanisms, and risk management. Companies need to act swiftly to establish robust risk control and compliance systems, particularly at the inception of generative AI initiatives. They should also consider developing an AI governance framework to ensure responsible and effective integration of GenAI into their operations.

Roadmap for the Large-scale Application of Artificial Intelligence in the Banking Sector

An AI paradigm shift is in the making. Artificial intelligence is poised to be a decisive factor in determining the victors and vanquished within the banking and capital markets sector in the next five years. Recently, Deloitte Global released a report titled “Changing the game: The impact of artificial intelligence on the banking and capital markets sector,” which introduces the impact and role of artificial intelligence in the banking industry, examining its benefits and constraints. It also investigates how AI will reconfigure the industry’s landscape and offers insights into how banks can capitalize on these developments to thrive.

In addition to investing in critical technologies linked to artificial intelligence, banks must also revamp their capability frameworks. For top-tier institutions, artificial intelligence is no longer just an “instrument of strategy”; it has evolved into a “determinant of strategy”. To unlock success, banks must concentrate on mastering four fundamental key technologies: cloud computing, automation, data analytics, and digital banking. Furthermore, they need to develop a suite of efficient delivery mechanisms within their organizations, considering a multitude of aspects including robust governance, championing new technologies, value realization, talent development, and strategic alliances. By addressing these areas comprehensively, banks can position themselves at the forefront of the transformative wave driven by artificial intelligence.

To harness value creation, banks must unleash the untapped potential of their value chains through the power of artificial intelligence. By strategically deploying various human-machine collaboration tools across different segments of the value chain, banks can align these tools with their unique strategic objectives. During the strategic positioning phase, AI can aggregate and analyze market trends, customer behavior, channel dynamics, and product performance to inform strategy development and proposition crafting. In the marketing promotion phase, AI empowers hyper-personalized communications, deploys personalized virtual agents, and handles tasks such as generating creative content. Moreover, banks should explore the full spectrum of AI applications in line with their specific strategic goals and priorities. For example, if the focus is on cost efficiency, banks should target the largest functional areas for optimization. When risk reduction takes precedence, the greatest opportunities for AI application lie within risk management, compliance, data governance, service operations, and legal functions. Conversely, organizations that prioritize customer or client experience and growth may naturally direct their attention towards the front-office functions of sales, marketing, and customer service, as well as customizing product and service features and pricing to meet individual needs. By thoughtfully integrating AI into their strategic planning and operational execution, banks can create sustainable value for their customers and stakeholders.

The deployment of artificial intelligence in banking necessitates the optimization of data inputs and the adoption of a human-centered design approach. The effectiveness of AI outcomes is directly dependent on the quality of the data and content provided as input. Therefore, robust governance is essential to ensure traceability, minimize errors, and manage potential biases. Furthermore, given that human employees remain accountable for and oversee the tasks carried out by AI systems, it is imperative that AI functionalities facilitate human interactions that are transparent, understandable, and user-friendly.

While technological enhancement and process refinement are certainly crucial, the transformation of organizational structure and corporate culture is even more pivotal. Driving organizational change is as critical as implementing artificial intelligence technology. To successfully drive the AI transformation agenda, banks must prioritize the early development of foundational capabilities, encompassing vision setting, governance structures, talent management, streamlined processes, and advanced technology.