McKinsey on why the CFO is critical to digital transformation
The Chief Finance Officer (CFO) and all managers that work in the finance division in a company tend to be focused on managing budgets, tracking revenues, and prioritizing investments that maximize growth.
In the age of technology, finance managers and leaders, especially the CFO, must change their outlook. CFOs have a critical role to play in an organization’s digital transformation strategy — and it’s important to remember that their training helps bring critical insights into the boardroom.
According to McKinsey leaders and senior partners Tanguy Catlin and Kate Smaje, CFOs can help operations, marketing, and other divisions get on the same page, and be better aligned when it comes to their definition of digital transformation.
“[…] more progressive CFOs are asking more provocative questions like, “How aligned are we, really? And if I’m managing my business plan on this definition of digital, are the commercial officer and the operations guy too? Do they all agree with that definition?” said Smaje.
The only way to succeed with digital transformation and maximize returns on digital projects and initiatives is to ensure that the organization’s board and leaders are aligned on the definition of digital and are able to articulate that definition in a way that the entire organization can rally around.
“As for the role of the CFO, there are two lessons worth emphasizing,” explained Catlin.
The McKinsey leader pointed out that CFOs understand macroeconomics extremely well. According to Catlin, what’s new with digital is that the marginal cost is zero: you can instantly and at no cost replicate an offering. It leads to massive shifts in the supply and demand curves.
This means that economies of scale take on whole new proportions, which leads to the rise of ecosystems.
“So, I think the CFO’s first role is to explain to business leaders how the economics of their businesses are changing. It is quite dramatic. You ask yourself very difficult questions once your marginal cost is zero,” said Catlin.
The second lesson for CFOs pointed out my the McKinsey leader is ‘congruence’.
How much money do we spend on digital, and how do we report on the effectiveness of our digital efforts, and is that congruent with what we are trying to accomplish? Those are the questions that the CFO must ask.
According to Catlin, the CFO must become the evangelist helping people understand this digital economy, and serve as the architect putting the pieces of the puzzle together in a way that is quantifiable and measurable.
This point was emphasized in a recent TechHQ story pointing out that staff buy-in may be a determining factor for a successful transformation, but the CFO is the leader that must work magic with numbers, technology, and people to drive the change.
McKinsey’s Smaje made one very important point during the conversation about the role of CFOs in the future — “A resurgent incumbent in your sector is significantly more damaging than many of the digital attackers”
Smaje said that a majority of firms tend to fear digital disruptors or attackers using technology to create new and innovative solutions.
However, CFOs know that a resurgent incumbent, with all their brand equity, brand loyalty, and customer base, is the real threat. Identifying and warning the board and managers against such threats is what CFOs can really help with.
In the coming months, CFOs and their teams, have a real opportunity to shine and make a big contribution to transformation efforts. Will they be able to rise to the challenge?
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