Uncertainty changes the CFO's script, but strengthens their position.

Where we are at, according to European CFOs

Deloitte regularly conducts a survey of CFOs across Europe to gauge the business situation. The nature of this survey changed from 2020. Nothing could ever be the same as before. In 2021, the consulting firm began asking financial directors -a total of 1,296- in what phase they found themselves after the pandemic.

These are the three phases identified and in which the different financial directors find themselves:

1. Digitisation and prediction

The world of communication has gone from a hierarchical sender-receiver model to an omnichannel networked system with billions of voices. The same has happened with the traditional linearity of the supply chain. Today's supply networks are increasingly sophisticated and global. As the Forbes report says, we are facing a multi-layered ecosystem with independent nodes and logistics partners acting as a network.

A scenario that would only have been and is possible thanks to digitisation, which cuts across all processes and provides transparency and real-time in the exchange of information. This data is available to the entire organisation and allows decisions to be made in real time as well. The CFO, as a catalyst for the company's Big Data, is responsible for that information flowing and becoming an understandable language for all, generating the right reaction, from sales to operations. A minimal incidence 15,000 kilometres away, as we have seen in recent months, has critical implications for the rest of the globe.

In addition to sharing information and monitoring the supply chain, technology has gone a step further with Artificial Intelligence, which is able to offer us predictive models and observe trends that, at first glance, would go unnoticed. Technology, in short, helps us to be more resilient.

And also to save that problem that McKinsey calls the Holy Grail of the supply chain: multilevel transparency. Companies are usually well informed and trust their direct suppliers, with whom they have signed contracts over the years. Problems occur with second or third level suppliers. According to the consultancy, this is where technology plays a critical role.

2. New supply models: micro chains

An expression that takes us back to the 80s and 90s, when the stereos we had in our homes were compacted. As we mentioned, the risks associated with large supply chains lead us to a more complex scenario, which requires agility and closeness to guarantee business continuity.

A more flexible and decentralised model, as KPMG maintains in its report on this new phenomenon. Standard low-value products will continue to be produced in offshored markets, but non-standard parts will be closer to the end market. This will make it possible to adapt to the customisation demanded by new consumers and will take advantage of 3D printing, an industrial technology that imploded during the pandemic and is here to stay.

Some features of this model, according to the KPMG report“ micro supply chains”, and its impact on the financial area:

• Contracts will be made short term.
• Production will be modulated according to demand.
• We went from a fixed cost model to a variable cost model.
• Non-standard parts will be assembled locally.
• Less vulnerability toward customs, climatic, fiscal and salary variables.

Whether they are micro or macro supply chains, there is a fundamental principle, which is the guarantee of supply. The key is to forge deep partnerships with the right suppliers, as the analysis recently published by Forbes maintains. We saw this during the first months of the pandemic: where companies and governments did not reach, non-healthcare companies did, which had been establishing relationships of trust with suppliers in the field for years.

3. Horizontality and co-governance

We are moving towards a world of alliances and co-governance. This is the example we have seen with vaccines, where competitor pharmaceutical companies have come together to find the remedy to Covid-19. And in Spain, very recently, with the large energy companies joining forces to develop green hydrogen or the electric and automobile companies joining together to co-manufacture batteries.

The PERTEs that will channel a large part of the European funds point in that direction: a more robust and horizontal industry. The financial injection seeks to lubricate the entire value chain of each economic sector and make the European Union more autonomous and less dependent on foreign supplies.

It is about drawing up common strategies with suppliers. This horizontality makes it possible to incorporate innovation and talent into the supply chain. In the short term we will most likely also begin to change the term "supplier" and replace it with "partner". The CFO will ensure that contracts include a monitoring of these advances, that partners are required to invest in research, and that a win win strategy is designed where everyone improves and grows with the association.

The new role of the CFO in companies after Covid

As we have seen, the CFO is ultimately responsible for the exit plan from the recession and, to do so, they need to find the right team and lead the entire organisation. According to leading experts on the new CFO role, it is time to talk about soft skills. This includes their ability to lead and inspire everyone in the organisation.

According to consulting firm McKinsey, these skills are more important than ever and could be summed up in one rule: show passion and lead teams with empathy. The pandemic forced them to adopt a new, more agile and frequent form of communication, and that is the way forward, both with the teams themselves and with the entire organisation, shareholders and investors. There are even CFOs who have started up their own blog to explain how they work.

Ernst & Young has gone further and directly asked CFOs what skills they believe are most needed today. This is what they found:

• The agility to adapt to continuous change. The most important one for 62% of the CFOs polled. If there is a word that is repeated today in organisations, it is just that: agility.
• The willingness to experiment and take calculated risks. It was chosen by 54% of CFOs. It is an essential quality at a time when we are rethinking our business model to survive the consequences of the pandemic.
• The intellectual humility of admitting that you don't have an answer for everything. The CFO is probably the best-informed person in the company, but they don't always have the answer. The worrying thing are not the problems, but not having a solution. Well, sometimes you have to admit it. 47% of CFOs identified with this skill.

From manager to strategist

The stress test that the CFO has had to overcome in a scenario of absolute uncertainty, where there have been liquidity problems, a drop in activity and a break in the supply chain, has elevated their role in the company. Finance is everything in business. After the pandemic outbreak, the actions taken by CFOs have been crucial to guarantee their survival. According to Professor Gloria Montes, the vaccine is to Covid what financial management is to the crisis. Although the CFO has always preferred preventive medicine, during these times they have had to step into the role of emergency doctor.

A horizontal communication model

The CFO is no longer just the cash register keeper and the ultimate person responsible for planning, monitoring and controlling finances, but rather a person with a broad vision to understand the new forms of production, distribution and consumption. They must never let go of their main mission: generate profit and ensure the company's profitability.

Their leadership extends to the entire organisation, as the catalyst for investments that make the company different and more competitive, and forces them to get to know it in depth. At the same time, their credibility makes them the ideal person to convey the new company's new post-Covid focus to shareholders, employees, financial entities and, in general, the market, as well as the measures to restore the financial balance.

As McKinsey's Ishaan Seth argues, the CFO must help manage the understandable fear and anxiety that many feel and provide a pragmatic view of what can be achieved in terms of financial performance.

The leader in digitalisation

The crisis accelerated the digitalisation process in financial departments, pioneers in the application of Artificial Intelligence. In collaboration with the Technology department, the CFO leads the digitalisation process.

In this sense, the first steps in terms of Blockchain and cryptocurrencies are being taken by financial departments, the best positioned to understand this disruptive technology that is becoming a reality in international transactions and in sectors such as finance and real estate.

Planning taking into account new scenarios

All analysts agree that once we have overcome the stages of resistance and recovery, we enter a stage of reimagining and reinvention. Accenture, in its report “Overcome uncertainty with financial planning”, advises that the CFO simultaneously respond to short-term challenges with a plan for 12 months and beyond. “Plans that focus exclusively on the short term may miss deeper trends”, says the report. He talks about 4 keys in the planning process:

1. Determine the appropriate time horizon

Combine the short term with the long term. Investors need to be presented with a solid plan that covers the next 12 months and beyond. Short-term plans, from 1 to 90 days, or medium-term plans, from 3 to 12 months, are interrelated.

2. Identify the drivers of financial forecasts

You have to look back and see what has happened during the pandemic. Many factors will stay the same, but others have been born that affect business performance. According to Accenture, many companies are facing new and largely uncontrollable variables. Among them, they cite government restrictions, supply chain disruptions and changing consumer behaviour.‎

3. Relating external and internal factors

In addition to having good quality data, the CFO needs to understand the correlations and interconnections between critical metrics such as sales, cost of goods sold, and workforce, and have models to work with what-if scenarios. Artificial intelligence will be their new assistant in this new phase, since it allows them to build very short-term prediction models to relate internal factors to macroeconomic indicators.‎

4. Create agile planning processes

All the consultants' reports agree: creating a cross-functional planning workgroup is imperative to quickly identify changes in key factors that affect the company's financial health. It must include access to all types of data and variables and have visualisation support so that the entire organisation understands what is happening in real time.

In this respect, McKinsey believes that the CFO must be prepared in three areas:

1. Prepare a team that can plan in advance,

that is cross-functional and that draws on experiences during the crisis, in which monitoring and forecasts exceeded everything until then in terms of quantity and quality. Annual periods and planning to a specific horizon are over. We talk about planning over two days, weeks, months or quarters. Have the company ready to act in any scenario. We either do it now or the next crisis will overcome us.

2. Anticipate a trend of consolidations, mergers and acquisitions

in most sectors. We can draw on experience from the previous financial crisis and how the firms that best resisted were in a favourable position to act in this sense, including when undertaking divestments.

3. Accelerate digitalisation even further

in the finance department. Make the most of the lessons learned during the pandemic and lead change in teams.

The new variables appearing on the horizon

If the pandemic taught us anything, it is that planning is no longer about years, but about days and weeks. Now we are working in real time, as we mentioned, and companies ask their planning and analysis teams to make richer predictions and model scenarios with all kinds of variables.

The sibyls of Greek mythology who prophesied the future, and therefore enjoyed a great reputation, set it out in hexameters. Today we have much more sophisticated tools that help us model and work with multiple scenarios to anticipate the future.

There are even a growing number of consulting firms who focus exclusively on detecting what is going to be next. They travel the world, like previous trendsetters or football club scouts, and even organise journeys to the future for companies where they can find the keys to redirect their business. What are some of the external concerns and risks afflicting us and which we are trying to understand and predict?

• Information security. The acceleration of digitalisation as a result of lockdown to prevent the spreading of Covid has revolutionised consumer behaviour. Internally, companies were forced to relax internal controls to protect information. Companies shield themselves from cyberattacks and even create virtual bunkers or panic rooms.
• Climate change. Decarbonisation targets are an external factor that force many companies to undertake restructuring, but they are also becoming an opportunity to adapt to changes in production and demand. Regulation, especially since the Paris Agreements of 2016, fully affects companies and deadlines are looming. The year 2050 seemed far away but every day we turn a page of the calendar.
• Energy prices. A variable that has gained importance not only in business terms, but also socially and politically. The rising cost of fossil fuels in a context of energy transition and the exponential rise, specifically, in the cost of electricity, scupper the plans for 2022 and will have an immediate impact on prices. Right now -in October 2021- inflation is at 5.4%. A year ago it was -0.8%.
• Geopolitical crises. All the variables are related. International politics is historically linked to energy crises. But while years ago it was instability in the Middle East that affected the price of oil, today that uncertainty is moving further east, with two points of friction -Taiwan and Ukraine- which we must watch very closely due to the two global players involved, Russia and China.
• Greater tax pressure. The weight of taxes on the economy broke records in 2020, representing 36.6% of GDP in Spain. Out of all the tax headings, social contributions already account for more than a third of what is collected by the State, and that amount will increase with the Intergenerational Equity Mechanism (MEI). In parallel, the 2022 Budgets set a minimum rate of 15% for Corporate Tax, and the European Commission has approved a new framework for reduced VAT rates, including zero VAT, which can benefit digital and health products and services and those that contribute to decarbonisation, such as sustainable mobility or photovoltaic systems.

Freighters stranded in ports, the semiconductor crisis...just when we thought the pandemic had stabilised, new instability factors are emerging. To paraphrase Winston Churchill in his famous self-deprecating quote about politicians:

But with multidisciplinary teams, new AI tools, and strategic leadership infusing the entire company with predictive intelligence, the CFO's forecast will ward off the British Prime Minister's fears.