CFO as Chief Frontier Officer Business Trends 2014

Overview

As organizations move into a new era of globalization, they face ever more complex dynamics and decisions. One result is that the role of the chief financial officer is shifting in many companies to focus on making global initiatives succeed. Soon, in fact—given how central global growth is to an organization’s strategies—CFO could equally stand for chief frontier officer.

Look, for example, at Starbucks CFO Troy Alstead. When he joined the coffee seller in 1992, it consisted of fewer than 170 shops; it would still be four years before the first Starbucks appeared outside North America. When it came time to expand overseas, however, what was needed most was deep knowledge of global financial management, decision support, planning, and business development—all strengths that Alstead and his colleagues in finance and accounting could offer. By 2013, Starbucks was operating some 19,000 stores in over 60 countries, and the company formalized the duality of Alstead’s leadership: Already CFO, he was also named group president of global business services. In a statement announcing the change, the company said: “Alstead’s promotion is a recognition of the increasing responsibility and complexity of his role overseeing Starbucks global financial, technology, and supply chain operations, and ensuring that the company’s overall business infrastructure is optimized to support the company’s global growth.”¹ Starbucks CEO Howard Schultz stressed that Alstead’s rise was as much about future needs as about past accomplishments.²In fact, in February 2014, Alstead saw his role expand further as he was promoted to chief operating officer (COO).³

We’re seeing many CFOs stepping up to understand and manage a broader set of business issues than they’ve faced at home or in core markets. But as leading the charge on globalization initiatives becomes an expected part of the CFO’s scope, not all are equipped to take on the new responsibilities. Many financial executives will need to hone their approaches to financing, investment, operations, and valuation. More broadly, many will need to adopt a new mindset on their work.

What’s behind this trend?

Part of the reality of modern business is the imperative to operate beyond domestic markets. This is hardly news; globalization has been an advancing trend since at least the 19th century. Yet today’s version of globalization is far more complex than the forays companies made in the past—even up to just a handful of years ago. Traditionally, managers looked to foreign lands to supply inputs to production that were either unavailable or more expensive to procure at home—or they saw them as new markets for their offerings, managing to sustain revenue growth as domestic demand ebbed. Now, a new era of globalization is dawning. As the world, in general, throws up fewer restrictions on trade, multinationals are transforming into truly “anywhere” enterprises. Many are abandoning their old ways of managing huge flows of goods to and from a home country. Now they overlay the globe with a multitude of point-to-point connections, meeting customer needs in one region by tapping capabilities in another region—or within the same one.

This new era demands new capabilities in a senior management team. Innumerable opportunities present themselves, each involving distinct consumer tastes, supply considerations, regulations, and ground rules for investment. Complexities abound in managing the legal frameworks for corporate expansion, complying with local regulations and contractual obligations, adhering to local content provisions, and adjusting pricing and product strategies based on customer tastes and competition. Achieving growth goals is a much more analytical exercise than has traditionally been engaged in by business unit heads pushing for geographic expansion.

The question then becomes: Where does this new management capacity develop? Certainly, CEOs are ultimately accountable for the success of global forays—but the complexity growing on every other front of management simultaneously makes it unlikely that the CEO can devote the necessary attention to this one.

It is the CFO who, in many organizations, is becoming the go-to person to translate global ambitions into practical reality.

This marks an intersection of a rising need with an organizational role that was itself already on the rise. Elsewhere, Deloitte has described the trajectory of the CFO’s role.⁴ CFOs were not always considered so critical to strategy setting and execution. Indeed, the title of the senior-most financial executive didn’t always include that exalted word “chief.” Today, however, the CFO in a typical large-scale organization is among the most important players in devising and executing strategy. The unprecedented size of financial functions today also means that many CFOs, by the time they reach that office, have acquired strong leadership skills.

The CFO’s training and toolkit are highly relevant to the new era of globalization. In particular, the CFO’s strong background in deal-structuring and a deep understanding of regulatory, environmental, and operational impacts on financial performance can put finance in an ideal spot to drive market-entry strategies, target specific customer segments, and pick the optimal product mix for success in the local market. Today’s forays into new markets call for finance to be actively involved from the outset, not only to fulfill traditional financing and valuation responsibilities, but to also guide investment and operations decisions.

Finance’s increasingly global lens enables the function to apply its ability to structure and execute good deals across borders and mitigate enterprise-wide risks. Consider, for example, the leadership exercised by CFOs of US-based multinational life science and consumer product companies dealing with the problem of increasingly volatile foreign exchange markets. Their solutions to these problems yielded many important outcomes, including a natural hedge on multiple currencies and protection from currency swings between order and delivery. These solutions provided significant economic benefits while reducing risk.⁵

The importance of well-managed compliance also brings the CFO’s organization and its capabilities to the fore. We know of a large US-based Internet retailer that, having decided to enter the Brazilian market, discovered that regulations there demanded localized information systems; a country-specific operating model; adherence to certain invoicing, payment, and collection rules; stringent foreign exchange controls; and extensive documentation.⁶ Someone had to own the complex responsibility of translating all these requirements into viable operations—someone who could also keep the overall goal in mind: to maximize the economic benefit and minimize the risk of entering Brazil. The company’s CFO was tasked with that.

CFOs offer many attributes that fit the emerging need for a chief frontier officer. Finance tends to be the only operating function within a company that looks at all data both singly and on a consolidated basis. As part of their responsibilities, finance leaders objectively weigh the pros and cons of investment decisions across business units and provide an unmatched level of rigor in the analytical process. These capabilities, as well as the trust CEOs typically have in them, may position CFOs as the organization’s go-to leaders for comparing performance across markets and ensuring that global initiatives are ultimately successful.

Implications

As part of this shift in finance leaders’ purview, expect to see the reach of the finance function extended in four key domains: financing, investment, operations, and valuation (figure 1).

Financing

Companies perceive the benefits of raising capital outside their home economy, and of being listed on alternative stock exchanges. But issues such as cash repatriation add a new layer of complexity, demanding advanced tax policies measured in the risk-adjusted cost of capital for each potential capital source. Managers find it more difficult to determine what type of financing will support future growth as they move beyond markets where they have established track records and ready access to market information. Companies must now take into account new risks that could threaten liquidity in these countries. They need to ensure there will be enough access to cash to weather such disruptions, and devise contingency plans in the event operating cash flow is compromised.

Investment

When an organization expands to new markets, whether emerging or mature, it finds that no single metric is sufficient for governing investment decisions. So in addition to fulfilling its traditional role of identifying tax-efficient strategies for reallocating assets between geographies, finance is increasingly asked to do two things: determine whether the organization is adequately funding expansion into new geographies and measure the progress of such investments. This is only a natural extension of the strategic oversight the function provides to investments in the home market; on top of analyzing whether the organization’s business units are generating appropriate returns, finance is now charged with applying the same analysis to overseas markets. But taking on this new level of oversight puts CFOs in a more strategic position. They are helping their companies identify cross-border opportunities for fueling growth, and determining that country-specific investments are aligned with the company’s planning priorities in each market.

Operations

Individual markets have idiosyncrasies that can affect an organization’s ability to deliver consistently good business performance. As organizations expand into new markets, finance is being asked to drive better operating results by working with regional and business unit leaders to identify and respond to those particular traits. The CFO’s organization is equipped to help determine the right pricing strategy, identify the most profitable customers, design the optimal mix of mature and new product offerings, and project how much growth the existing infrastructure can support. Throughout these efforts, finance is helping the business to analyze the unknowns in each market, such as how pricing changes would affect demand in each market, and to spot developing trends, such as how demographics are shifting.

Valuation

In the first wave of globalization, companies moved manufacturing facilities and other assets to emerging markets to take advantage of lower costs and taxes. Even as subsequent waves of globalization focus on revenue-generating opportunities, businesses still need to ensure they are being tax-efficient. Finance should be driving this effort. It knows how to enhance the company’s overall tax position through an appropriate legal entity structure while taking advantage of available tax opportunities in each individual market and ensuring compliance with local tax rules and regulations.

Companies are finding that every country or region is different in this regard. What works in one locale doesn’t translate to another. If the last wave of globalization was about building a business case for entering a new market, this wave is about bringing together the deployment issues that come after that case is made. Even in multinational corporations with extensive global experience, this new era demands a ringleader with the skills and background to manage investments and risk at a high level across business units and geographies.

Adopting a new mindset

Some finance leaders will be challenged by these new responsibilities, as they have rarely been asked to leverage their capabilities outside the domain of finance. If their expanded duties were limited to the domestic market, they could turn to their internal network of relationships for support. But in many of these markets, such support doesn’t exist. Finance professionals aren’t just involved in picking locations and staffing up—they are often literally turning the lights on.

The CFOs who capture this opportunity will be those who develop a new mindset as well as new capabilities. They will recognize they are shifting from a controls-oriented environment to one in which influence is equally, or even more, important to exert. Many will see new value in gaining greater exposure to other facets of the commercial enterprise. Finance leaders who have spent a year or two in the business, perhaps in an overseas market, may be more likely to earn the CEO’s confidence that they can lead the globalization agenda. This kind of “lattice” career development may not be a prerequisite to success, but it can provide an advantage. As CFOs’ duties broaden, having non-traditional operational or global experience in their backgrounds will inform their perspectives.

Looking ahead

If the larger trends behind CFOs’ expanded responsibilities continue, and we believe that they will, then companies will increasingly call on finance to manage the complexities that come with exploring new frontiers. In all likelihood, this evolution will dovetail naturally with business transformation initiatives that seek to reposition business processes, operating models, and methods for interacting and engaging with customers. These changes will force business leaders to move beyond traditional interactions by integrating their strategies and capabilities. In this, the CFO may have to manage new relationships within the C-suite and assume a wider strategic role within the organization. Even those finance leaders at companies just starting to think globally should get ahead of these organizational shifts, and begin building the capabilities and relationships that will help them succeed in an expanded role.

It stands to reason then that the CFO will enjoy a higher profile within many organizations, accelerating the trend we have seen in recent years. And as CFOs’ spheres of influence expand, they will have to consider regional and business line CEOs with vested interests in calling the shots and protecting their turf, particularly when it comes to decisions involving investments and operations. They may even have to serve as international emissaries for the company, visiting countries and winning over local officials and other stakeholders whose views are often not aligned with the company’s strategic goals.

Within some companies, these efforts will strengthen the CFO’s candidacy for the top spot. At the very least, the CFO’s expanded scope will bring more recognition of the value finance can bring to the overall organization.

My take

By David Carney, principal and national service line leader for Finance, Deloitte Consulting LLP

In recent years, CFOs have dealt with an ongoing series of “small explosions” that have created new opportunities and posed new challenges. The rise of spending power in emerging markets has transformed the growth prospects for many global companies. The opportunity to sell products and services has grown rapidly, and CFOs are expected to prepare their organizations to capitalize on these conditions. At the same time, major regulatory changes are testing the capabilities of the finance function like never before.

These dynamics of growth and regulation affect every sector, but each industry has its own set of unique challenges that the CFO must contend with. Look, for example, at the banking and securities industry. The CFO’s agenda focuses on raising capital and keeping compliant with new capital standards across different regions and jurisdictions. In the energy industry, CFOs must navigate a complex shift in the economics of the business as new sources of supply combine with technology advances. CFOs also need to be fully aware of the proliferation of new energy policies and mandates in different jurisdictions across the world. In the technology industries, CFOs deal mostly with enabling growth and taking opportunities. Compliance and regulations are—as yet—less of a focus here.

No matter what the industry, today’s business environment is far more dynamic than in the past. Given these complexities, what will make CFOs particularly well-suited to lead organizations into new frontiers?

Nearly every global CFO must have deep industry knowledge coupled with a core finance background. These skill sets are critically important and help create credibility when interfacing with investor and analyst communities.

Beyond this, I see tomorrow’s global CFO providing real value when they are able to directly affect the performance of their organizations. Increasingly, performance management systems will involve the use of large operational datasets to help predict revenue and cost streams. The CFO should embrace the use of “big data,” but should also use his or her experience to interpret it wisely and hence make informed decisions.

Lastly, global CFOs should be adept at working with individuals from many different backgrounds. This cross-cultural competence is critical for CFOs to master as they operate and lead diverse, multinational teams into the future.

The bottom line

At a large hospitality company, the CFO and finance team recently managed a transformative initiative. By engineering a new legal entity structure for the company, they allowed it to move a key business unit’s headquarters from the United States to Europe, simultaneously connecting it more closely with its growth markets, reestablishing the company’s brand, and substantially reducing its overall effective tax rate by domiciling profits in a low-tax jurisdiction.⁶ It was an effective example of the kind of multifaceted, high-profile assignment that is vaulting the CFO into a new position of influence: the chief frontier officer.

It should come as no surprise that CFOs are well positioned to lead such efforts, given their well-honed abilities to manage risk, provide objective counsel, and bring analytical rigor to strategic decision making. CFOs can accelerate this shift by more deliberately seeking opportunities to apply their competencies, by increasing their exposure to the organization’s global operations, and by developing the leadership skills to exert influence and inspire confidence. In doing so, they might keep in mind the five “Cs” of influential leadership:

Curiosity: They should constantly ask “why” questions, be eager to understand how things really work, and both generate and welcome fresh ideas.

Capacity for surprise: They must be willing to set aside preconceived notions, and challenge things that they “know” but might not still be valid.

Courage: They must learn to deliver hard news and be willing to take unpopular stands. And they must see risk as something not to be avoided, but to be managed for reward.

Character: High ethical standards and unwavering integrity have always been essential in a leader; in an era of heightened scrutiny and transparency, they are only more so.

Collaboration: They must be accessible and eager to listen to colleagues, and convinced that better solutions emerge when different perspectives are brought to bear on a problem.

These skills may or may not already be evident in a CFO’s direct line leadership of the finance function. But they will be needed as he or she plays a leadership role beyond that controls-focused domain, and in aspects of the business that have been traditionally managed by others.

CEOs with global aspirations understand how important it is to have a partner with them at the helm who is attuned to risk in its many forms and can navigate the new terrain with integrity. In fact, companies that don’t have a CFO overseeing their push into new markets may be taking unknown risks.