The Role of the Strategic CFO Function in Creating Shareholder Value in Growth Oriented Service Businesses
Introduction
The two primary objectives of this educational overview and guidance document is to briefly outline and present the Fractional Strategic CFO function:
The below are five high level functions of the Strategic CFO role that have proven to provide the greatest impact on shareholder value increase and the best utilization of a competent & experienced Strategic CFO professional:
Management Science created by Measurement and Metric Systems
Provides Credentials, Integrity and Presence for the Company
Identify Value Proposition/Service Enhancements through Cross Functional Collaboration within the Organization
Human Capital & Time Invested in Leadership Talent Development
Cultural Engagement in Financial Performance
Provide a Job Description and Role Definition Outline of the Skills
Management Science Created by Measurement and Metric Systems
Most finance and lower skilled legacy type Controller/CFOs can define some measures that track performance, which means defining high level ways in which success is recognized. Any appropriate measurement & metrics reveal trends, risks, and opportunities, and are always a good high level indicators of performance awareness, but in general they do not provide guidance into the appropriate actions to improve operating performance.
However, most of the well-established financial metrics, including margins, EBITDA, and share price, likewise are ill suited in today’s complex service environment for strategic decision making, empowering operational business model and process improvements. These high level metrics are too internally focused, they are lagging indicators that show progress (or lack of) against preset expectations, rather than providing information and data on how to create value and how to execute on operational improvement actions in the near and long term.
A highly skilled Strategic CFO’s who is a sector knowledgeable and a domain specialist will develop and implement sector/industry-specific and company-specific measurement and metrics (Management Science) that better orients the business process and leadership behavior toward customer value, cost scalability, productivity enhancement, while linking the business planning cycle to enhance operational process & capabilities, or identify the most economic efficient use of assets and other resources.
Simply stated: Financial metrics are simply not sufficient Management Science for service business models.
For example at Tablero, we have developed a template of 12 scalability and productivity metrics for technology enabled and outsource business services models that provides the Management Science for the CEO Entrepreneur to pragmatically manage their businesses and make “informed decisions”, not only against internal expectations but to industry performance benchmarks.
Of special note; often a company has many “disparate systems and technologies” that “don’t talk to each other” therefore a highly skilled Strategic CFO will project manage the integration of these systems to create “holistic” and “practical” reporting systems to ensure the creation of effective Management Science and automated reporting.
One final note: once Management Science, including measurement and metrics are implemented, they should not be treated as static; the Strategic CFO must continually revise and refine them to match changes in market dynamics, technology enhancements, regulatory influences, and other exogenous factors. In fact, continually evolving and improving the “Science” will ensure that the company and its leadership are consistently focusing on the “right” business levers and drivers.
Provides Credentials, Integrity, and Presence for the Company
To the “outside” and institutional investment world, the Strategic CFOs skill is highly regarded and has long been thought of as the financial gatekeepers of the corporation, the guardian of shareholder value, and the pragmatic and unbiased mind, both internally and externally. Internally they ensure that all initiatives are aligned to the business strategy, create enduring value, and the human capital is focused on the right activities.
Myself having been a Chairman or Executive Chairman nearly a dozen times in my career, I feel it is absolutely critical for the Strategic CFO to have a unquestionable integrity and proven credentials, that is resident in the company. Additionally, a highly skilled Strategic CFO involved in your business is an absolute must for institutional capital raising and financial engineering effectiveness.
Growth oriented service businesses need the professional skill of somebody who’s capable of walking that tightrope between supporting the individual business initiatives, while making the right decisions for the overall enterprise value. It’s quite a delicate balancing act.
Integrity is not just a matter of probity; it requires skillful communications, and the kind of authentic leadership style that is sometimes called “Presence”. A highly skilled Strategic CFO has to set a tone of transparency and candor, forming trusting relationships in all directions: with the CEO, the management team leads, the investors & shareholders, as well as all external stakeholders. From a potential institutional investors perspective a Strategic CFO Professional adds great value and credence to due diligence processes, and the resulting final terms of the investment.
Finally again, from an institutional investors perspective: even a part-time/fractional Strategic CFO many times is the difference between an institution investing and not investing, and without a doubt this skill has significant influence on the “attractive” nature of the terms and conditions of the investment. In fact it is common at Tablero for us to see the “payback” on the monthly fee dollars paid to the Strategic CFO to be 6-8 times in “enterprise value” in institutional investment situations.
Identify Value Proposition, Price, and Service Enhancements
Although the typical small service company Controller/CFO generally illustrates an accounting and controller oriented background, that person is typically missioned to exclusively provide accounting services and financial reporting. Therefore, due to “the small departments in most small companies”, controller types are generally not skilled or have the time to spend to assist the CEO Entrepreneur and leadership team members in maximizing operational performance or to understand the factors that drive or affect operational performance improvement.
Realizing the true performance potential of the company requires a highly skilled Strategic CFO to develop an unbiased, holistic, end-to-end view of the company’s full value chain—from customer needs to back-office operations to suppliers’ contributions to competitors’ positioning—and pinpoint the areas that need both process and technology enhancements. A Strategic CFO should help and enable the CEO Entrepreneur and leadership team to convert these “insights” into specific action items and initiatives.
A highly skilled Strategic CFO executive can also reinforce the idea that coherent strategic choices and cross-functional collaboration will ultimately lead to exponential increases in shareholder value.
This represents a shift from the traditional financial executive orientation. For decades, managers and shareholders have conducted a philosophical battle: Does functional collaboration across the organization ultimately lead to increased shareholder value? Or does managing for short term profit lead to maximize long-term shareholder value? Or vice versa? The traditional super Controller type CFO has put creating value in the short-term for shareholders first.
A highly skilled Strategic CFO resolves this debate, by becoming the advocate of a “balanced perspective” of both a near-term and long-term shareholder perspective, versus the legacy CFO exclusive short-term view.
In the “new economy” and it’s many complexities especially in the services sector, time has proven to Tablero, and its clients and investments, that consistent and predictable increases in shareholder value is very dependent upon building distinctive collaborative cross-functional business process and models.
Human Capital & Time Invested in Talent Development
Highly skilled and the most successful Strategic minded CFOs invest a great deal of their time in recruiting, meeting personally with key team members within all functional areas of the company and making sure people recognize that the company is committed to their success. They support and recognize that training and increasing caliber of the Human Capital is crucial to the success of any company.
A Controller short-term oriented CFO would state: “Our training costs are too high” versus: A Strategic CFO would state: “What does it costs us if our best performers leave?”
At Tablero our the successful CFOs “make the time” to provide leadership team members and “star performers” in providing formal training on company finance, leadership mentoring, and personal coaching for promising staff members; as well as providing hiring plans and development plans for the entire organization. A Strategic minded CFO is committed to ensure that the company on an ongoing basis has the core human capital talent necessary for orderly growth and shareholder value creation.
Cultural Engagement in Financial Performance
The most effective Strategic CFO’s we have worked with, use their influence and presence to help make the organization stronger and more flexible in general, and more resilient in the face of market place changes and disruptions. Strategic CFO’s that are effective at “Cultural Engagement”, move the company to utilize its resources more efficiently, such as helping build the kind of culture where people naturally want to invest their time only in projects/activities linked to the capabilities that matter most in the creation of shareholder value. In essence they engage the Culture to be financial performance oriented. .
“One of the most successful Strategic CFO’s I ever worked with once stated to a leadership group: “simply saying I got something done is not good enough: what is good enough is: what was the outcome and how will we know success”?
At Tablero across all management teams we insure that “financial literacy s is a core competency” of everyone on the leadership team in all of our businesses. We have learned that just focusing on and creating some financial literacy is a huge step in creating a “perform & accountability based culture”.
The above only reiterates the importance of effective Management Science and Measurement and Metric Systems that pragmatically define success. At Tablero “cultural development” is a fundamental role of the Strategic CFO function.
Fractional/Strategic CFO Role Function Description
CFO Role Outline
Project Manage the actions required to create Management Science including, the consolidation of all appropriate systems, technologies, modules and processes needed for accurate & timely financial reporting and forecasting and operational management and metric systems.
Work cross-functionally with the leadership team to insure collaboration on “performance monitoring and performance improvement initiatives are not “siloes”.
Automation of all back office financial and operational reporting systems, along with creating required forecasting processes in order to accommodate accurate financial forecasting and budgeting.
Oversee and assist the company in developing line items detailed financial budgets for the current year, plus future 12 month basis on a monthly/quarterly basis, that is directly correlated to the stated objectives of the company, and the operating measurement and metric goals.
Create a Net Working Capital Utilization and Forecasting Model to ensure the Company has the required near term and long term working capital to execute on the growth and business objectives.
Quarterly updates to the Company Investor Presentations and Confidential Information Memorandums information and analysis to reflect current capital market trends and conditions.
Communicate as required to Institutional Equity investors and Debt providers, to insure the financial engineering and cost of capital is efficient to current capital market conditions.
Provide ongoing Strategic CFO advisory and guidance to the company, its CEO and the Operating Leadership team.
Provide Appropriate Operational Guidance that supports the financial objectives of the company.
Plan and Implement Financial Process, Policies, and Departmental Capability that enable to company to be institutional capital worthy
Project Manage the Due Diligence Process for the Institutional Investors as required.
Engage and educate the leadership team and “key contributors” of the company on Financial Literacy: engage with all areas of the company in creating a “perform & accountability based culture”.