Digital Transformation for CFOs: Strategies to Lead Financial Innovation

From being a guardian of purses to an enabler of strategic financial decisions, the responsibilities of a Chief Financial Officer (CFO) have witnessed a profound change in today's corporate landscape. The attribute goes to the advent of digital technologies, like cloud services, IoT, blockchain, and machine learning & AI. Entrepreneurs and managers handling financial positions can no longer ignore in-depth knowledge about these technologies. This article discusses the role of CFOs in digital transformation and the challenges they may face. 

What is Digital Transformation for CFOs?

Digital transformation for senior managers handling corporate finances involves developing an in-depth understanding of evolving digital technologies and adapting to these technologies for foundational changes in financial operations to create business values. Let us understand this through an illustration. 

Example: 

Assume a mid-size machine tools design and manufacturing company, Precise Engineering Ltd. They source, manufacture, and provide maintenance services to various manufacturing industries. The critical responsibilities of the senior finance manager of Precise Engineering involved-

• Financing working capital at a low cost 
• Maintaining adequate liquidity for operations and debt financing 
• Identifying trends in material costs and production schedule  
• Forecasting yearly revenue 
• Budgeting expenditure  
• Financial evaluation of investment opportunities and RoI analysis 
• Ensuring tax compliance 

The CFO primarily relied on manually collected data, databases distributed across departments, legacy accounting, and financial management tools and practices, and historical data specific to the past performance of the Company and the industry. This created a lag in financial reporting and decision-making. Sales forecasts based on historical data had limited usability, and risk mitigation practices were mostly reactive and based on hindsight.   

If the CFO of Precision Engineering wants to digitally transform the financial operations of Precise Engineering, he or she will need to,

• Implement cloud-based ERP 
• Enable IoT-based inventory tracking 
• Automate and centralise data collection, storage, and retrieval 
• Leverage predict data analysis and forecasting models  
• Automate financial reporting through real-time dashboards 
• Establish safeguards to protect sensitive enterprise financial data 

Digitally integrated tools and technologies will help the CFO to better serve the company with real-time oversight, strategic foresight and predictive risk awareness. 

Key areas of Digital Transformation for CFOs

Digitisation and digital transformation are two different things. The former may involve leveraging digital technologies to augment specific processes, like inventory management. However, the latter involves taking a holistic approach to the seamless digitisation of operations and decision-making culture across a supply chain. 

The key areas of digital transformation for CFOs include: 

• Automation of financial activities - This involves automation of activities, like general ledger reconciliation, accounts payable management, financial reporting, etc. 
• Centralised storage of financial data - In companies managing finance in a traditional setup, departments store data separately and share the same with finance when requested. It creates data silos. Digital transformation requires centralised storage of every data relevant to financial operations.  
• Leveraging AI-ML models in data analytics—A major aspect of digital transformation is the capability to harness a vast amount of data in real time and make predictive analyses. This requires leveraging AI models.  
• Adopting data-driven decision-making—Finally, digital transformation cannot be complete if the company's leadership culture is not conducive to data-driven decision-making. So, it is important to establish organisation-wide transformation in managerial practices. 

CFO's Role in Leading Digital Transformation

Financial digital transformation is the sole responsibility of a CFO. However, finance is integral to any business operations, and CFOs are always part of any executive committee. So, to lead any type of digital transformation in a business, senior managers in finance are always at a vantage point. 

The role they can play in transforming any traditional business into digital-first operations can be broadly categorised into: 

1. Aligning digital change with digital finance 

Unlike digitisation, digital transformation is a long-haul game. It is essential to set up immediate targets and long-term goals to keep employees motivated. It is part of strategising digital change. Besides, for CFOs, it is also important to align the overall direction of digital change with the realities and possibilities of digital finance.  

2. Finding resources to invest in technologies

Implementing digital technologies as part of digital transformation requires significant investments and a commitment to recurring cash outflows for servicing those technologies. Cloud-based tools are highly scalable and sustainable. Companies might need to allocate funds for current and future investments. A CFO will be required to justify these investments with sufficient RoIs and devise a sustainable plan to finance them.  

3. Building a digital-first operational model 

Implementing technologies and tools across business processes is not sufficient to digitally transform a business if operations are not aligned with new capabilities. For example, in a digitally transformed accounts department, employees need to think and act like technologists instead of playing the role of conventional accountants. This will be possible only when CFOs and leaders from other verticals sit together to devise digital-first business operations. 

4. Establishing a data analytics framework 

Digitisation of any process generates a tremendous volume of data and offers the capability to measure performance based on collected data. The success of any digital transformation initiative depends on how much intelligence and economic value a company is generating through data analytics. A CFO is responsible for establishing a data analytics framework in consultation with other senior leaders and aligning the framework with the Company's finances. 

4. Scouting talents to lead digital-first operations 

Training the existing workforce is critical for the success of digital transformation. It is also necessary to find talents who can lead digital-first operations in each business vertical. A CFO can play a critical role in scouting such talents in finance. This is essential for future sustainability and implementation of digital finance strategy.  

Challenges in CFO-led Digital Transformation

Digital transformation is a continuous process for the gradual adoption of digital-first operations and managerial practices and ensuring changes that last. Obstacles and challenges are part of such a process. Common challenges a CFO-led digital transformation might face are:

• Technology modernisation 

Large or mid-sized companies that have been in the business for several years already use legacy technologies. Shift toward digital-first operations and finance means real-time agility, which legacy environments do not support. So, it becomes necessary to modernise the technology environment. CFOs leading digital transformation may face challenges in convincing stakeholders to upgrade legacy systems to digital environments. 

• Organisational resistance 

Change is the only constant in the business world, but managing change cannot be easy. People, accustomed to traditional ways of doing things for years, may not feel comfortable readily adopting and adapting to new rules of games. It takes time and effort to convince people.  

• Cybersecurity threats 

Digitisation of business processes is an inevitable reality, but it also opens up organisations to threats of cybercrimes, data theft, and data privacy concerns. Any data breach can be significantly expensive because of legal implications, monetary penalties, and reputational it may cause. These are serious challenges for any leader spearheading digital transformation. 

• Integration with legacy system 

Overnight modernisation of legacy technologies with digital tools and systems may not be feasible for even large companies. This is not advisable also as it may disrupt operations. Employees need time to adopt and adapt to new practices. So, it might be necessary at the beginning of the transformation process to integrate digital technologies with legacy systems. This can be a tremendous challenge. 

• Developing human resources 

Even the most modern digital technologies, like AI and robotics, cannot replace human employees in any foreseeable future. So, companies will require developing human resources capable of leveraging future technologies and driving innovations.  

Future Trends in CFO Digital Transformation

Digital technologies are evolving every day, and so are their applications in finance and other business processes. Some of the future trends that every CFO must keep track of for future applications are: 

• IoT and edge computing 
• Quantum computing applications 
• Hyper-automation 
• AI-led app development 
• Physical and Digital Convergence
• Quantum computing-led cyber threats