Why CFOs Make the Best CPOs - by Kaushik Ghatak

Wednesday, March 03, 2010

Today’s uncertain economic environment, and an increasing number of incidences of poor financial management of companies across the world, has compelled organizations to focus on how to better manage their financials and business performance. Regulatory compliance, governance and risk management are popular by-words among the regulators and the CFOs of large corporate houses.

Simultaneously, the onus on finance as the owner of financial transactional data and management and financial and regulatory reporting has increased too. Against this background CEOs and CFOs are often asking the question, “What should the right operating model for finance be?” To what extent should finance limit itself to financial transactions, regulatory reporting and compliance? To what extent should it try to work as a true business partner and provide rest of the business with valuable analysis and insights into current performance and future opportunities? Should finance drive enterprise level controls and performance management? Should the CFO also be the CPO (Chief Performance Officer)?

Taking Ownership

The term CPO was coined by Tony Politano in his book, Chief Performance Officer, in 2003. The CPO is the business executive who helps the CEO run the business on course. As Politano puts it, “the CPO acts as the heads-up display for the CEO.” CPOs facilitate the process of integrating key information and insights from within the business, scanning the external environment and providing all the required analysis necessary to make good decisions. The CPO helps in:

• Collecting key performance measures from various parts of the business.
• Consolidating the disjointed performance data into a single enterprise-wide performance framework.
• Condensing the performance data to the right level of detail for senior management, and
• Communicating the business implications of the information for the management to take corrective actions.

So, who in the organization qualifies most to be the CPO? In all likelihood it is the CFO. Here are the reasons why.

Firstly, the CFO is the business owner for the most important asset in the business - capital. He or she is responsible for ensuring the best use of it, for maximum returns and hence maximum performance. ROCE (Return on Capital Employed) is probably the most important measure that determines CFO and CEO performance today. Secondly, the CFO owns the process that plans for the deployment of capital across different areas of the business, in the long, medium and short run—namely, strategic planning, annual budgeting and quarterly forecasting. Thirdly, the CFO also owns the control functions that ensure the rest of the business is using the capital efficiently, and running as planned. In today’s environment this control function has the additional dimensions of regulatory compliance and risk management. In addition to internal audits and controls, CFOs have to ensure that the financial books are in compliance with the corporate regulatory frameworks laid out by the regulators, such as the SEC (Securities and Exchange Commission) and IFRS (International Financial Reporting Standards) guidelines. CFOs also need to have a realistic assessment of the risk of doing business, including credit, market and operational risks, and create capital buffers to protect the business adequately. Risk Adjusted Return on Capital (RAROC) is a popular measure of business performance today.

If CFOs are to be effective CPOs, they need insights into how the company is performing, so that they can flag early warnings for management to take corrective action. Given the complexity of today’s businesses, this is no small task. CFOs needs strong support from the rest of the organization, a shared vision and commitment from peers at the C-level, and most importantly their peers' acceptance of their role as CPO.

Building An IT Toolkit

From a process perspective, management needs to institute an integrated planning, execution and performance management framework that links together all elements of an organization’s value chain. A balanced score card approach that ties the strategic goals of capital deployment to operational level KPIs (Key Performance Indicators) across the different business functions is needed, so that the different parts of the business are working towards one common goal. From a pure information management perspective, the CFO/CPO needs to have to capability to harness the volumes of data from all the activities performed in the value chain. For most companies, this data exists in diverse technology platforms, across multiple geographies and in raw form. To find the proverbial needle in the haystack in the face of such complexity requires strong technology capabilities around transactional and master data accuracy, in-time data availability, and analytical capabilities that transform raw data into insightful information.

The good news is that from a technology perspective, tools are available today that can address each and every aspect of the challenges described above. Financial planning tools allow scenario modeling and sensitivity analysis to support long-range capital deployment decisions. Budgeting and forecasting tools take the long-range plans as inputs and develop capital and operating budgets for each part of the business. Sales and operations planning tools translate the financial numbers into operational targets for sales, logistics, manufacturing/service fulfillment and procurement. Execution tools support business execution and enable efficient operations and tools for recording the financial transactions and enabling financial reporting. Tools are also available to complete the feedback loop for monitoring performance and to signal the need for corrective actions. These are the operational analytics tools that report on KPIs set across the different business functions and tie back to the balance scorecard.

So what stops the CFO from being the CPO today? The real challenge is not the capability or the availability of technology tools, but the vision of the senior management team in instituting a clear performance management framework across the enterprise, and empowering the CFO to be the owner of the entire performance monitoring process.

For More Information The New CPO