How can CFOs uncover the material among the immaterial

The reporting environment continues to evolve at pace, leading to the rapid transformation of the finance function and its operating model. For example, digital technologies can transform how finance works, accounting knowledge can be integrated into artificial intelligence (AI), and controls and compliance monitoring can be automated, with alerts triggered when risk metrics trend toward unacceptable tolerance levels.

When external factors change at an unprecedented scale and pace, and in unexpected ways, incremental changes to how finance works and operates may not suffice. A compelling vision for the future can be required, that can help finance teams to be proactive rather than reactive and master the disruption. The 2023 EY DNA of the CFO study found that finance leaders who drive bolder changes in finance teams can deliver better performance today and position themselves to outperform in the future:1

• However, the research found that only 14% of finance leaders surveyed plan to pursue a bold transformation agenda in the next three years.
• The 14% of finance leaders pursuing a bold agenda are 1.4 times more likely to believe they have an above-average or best-in-class finance function today (73% vs. 52%) and 1.7 times more likely to believe they will reach best-in-class status after transformation (47% vs. 27%).

A bold vision for the future can also galvanize and inspire finance teams, and motivate them when change can be difficult or when they hit barriers. Paying attention to the ‘emotional turbulence’ that people can experience during fundamental change in the finance function can be critical to success. More than three-quarters (77%) of CFOs surveyed in a recent research collaboration between the EY organization and the University of Oxford’s Saïd Business School say they experienced at least one underperforming transformation in the last five years.2 Yet many CFOs fail to provide sufficient support to address the psychological and emotional pressures caused by a transformation program. By prioritizing six key levers that place humans at the center of the change effort, CFOs can more than double the likelihood of transformation success from 28% to 73%.

Although each function’s vision will be unique, this research shows that there are three priorities to build on.

1. Data-driven decision-making and reporting
   
   Companies can face significant data challenges when meeting fast-changing reporting requirements. For example, the financial controller respondents are primarily concerned that their organization lacks “the real-time data needed to inform decision-making and reporting on a continuous, ongoing basis” (selected by 35% of respondents as one of their top two challenges).
   
   To address these challenges, companies will likely require seamless information and insight flows where finance functions are able to gather, clean and analyze data as an asset. And subsequently, they could extract insights using analytics and tools, such as AI, and then build the connectivity so that insight and data flows to stakeholders in real time, with intuitive visualization and self-service tools. However, only a minority of CFOs and finance leaders currently believe they have the end-to-end capability to meet reporting and disclosure requirements.

1. Disrupting the talent and skills mix

CFOs and finance leaders surveyed say they are willing to actively disrupt the finance function’s skills mix. While core finance skills may continue to provide the foundations of the function, the research asked leaders to identify the other top two roles and skills areas that may be required for the future.

More than a quarter of respondents (27%) see a requirement for operating officers with experience in shared services, outsourcing and managed services, and close to one in five respondents (18%) see a requirement for “futurists,” including digital strategists — futurists are defined as professionals who can present scenarios of the future based on how digital technologies will develop and affect organizations and the economy.

However, building a team with diverse skills – including financial analysis, data science, and data storytelling expertise – will likely require greater focus on the talent agenda. The Global EY DNA of the CFO study found that while finance leaders see technology and data analytics as critical priorities for finance transformation, talent was seen as the least important (selected by 19% of respondents as a priority). Implementing the tools and technologies for advanced analytics may not deliver value if a finance team does not have the people who can interpret the output and translate it into insight for business leaders or external stakeholders.

At the same time, finance teams may struggle to drive value from data analytics technologies if legacy, back-office mindsets continue to dominate how people think and behave. Driving value from data analytics will likely require a willingness to experiment and collaborate. This can also require a culture that strikes a balance between risk awareness and granting the freedom and permission for finance teams to innovate and experiment with data analytics.

Finally, the ongoing skills strategy should also tackle how people keep their skills refreshed and relevant, which can be particularly important given how fast demands can change. More than half of CFOs and finance leaders (55%) say that finance people “will need to do more to embrace self-learning and continuous improvement,” if they are to keep their skills relevant.

1. A more fluid operating model

CFOs and finance leaders could find it difficult to meet changing reporting demands and other expectations if their function’s operating model is too complex and fragmented, or slow to react. The research shows that CFOs and finance leaders face a range of operational delivery challenges. For example, in the Americas, the most significant issue is “we invest significant time in responding to information requests as we have no capacity for self-service reporting.”

Thinking about the ability of your finance team to respond with agility to financial and ESG information requests, what are the main operating model challenges you face?

CFOs and finance leaders may not realize their aims — be it digitalization or new ways of working — without changes in organizational behaviors and norms. For example, they should provide a culture that promotes collaborative rather than siloed working, and an appetite for continuous learning and experimentation.

Finance teams are more accustomed to performing technically work that requires precision and working to results cadences. However, this can stifle some of the capabilities and behaviors that drive innovation. In the research collaboration between the EY organization and the University of Oxford’s Saïd Business School, finance teams were more inclined than others to believe that failed experimentation would negatively impact their careers (70% of finance workers versus 62% of workers in all functions).

However, the research suggests that many CFOs and finance leaders see certain traditional finance mindsets as limiting and are impatient to change their team’s culture to a more agile, innovative and value-driven footing. More than half of corporate respondents (54%) say, “traditional back-office behaviors and mindsets in finance are slowing the modernization of the function.” And more than half (52%) of respondents also say, “we should shift the mindset and behaviors of the finance team from ‘generating reports’ to providing valued insights that drive business decisions.”

CFOs and finance leaders should take a proactive approach to reshaping the culture of the finance function and they should reflect on their leadership skills as part of this. They should strike a balance between the traditional and more technical competencies required to effectively lead a finance function (e.g., risk awareness) and the more “social” attributes required for people leadership (e.g., listening and empathy).

By focusing on two key areas, CFOs and finance leaders can enhance corporate reporting and strengthen the sustainability narrative for investors.

1. Leading transformational change

There are a range of success factors when it comes to driving transformation, but it arguably starts with one area: a vision that inspires finance people and explains why the transformation program is important.  For finance leaders, this means changing the way they think about transformation. As well as seeing transformation in terms of program milestones and organizational goals, CFOs should also think about people’s individual journeys and personal milestones. This is about creating a narrative that inspires people, addressing anxieties around impending change, and motivates them to see the required changes through to the end.

1. Driving culture change

A successful culture shift in finance is likely to require change along a range of dimensions, from taking a fresh look at finance’s vision and purpose (and how it enables the wider purpose of the enterprise), to building a more inclusive and diverse workforce. However, one key focus area for finance leaders should be to create a culture that supports experimentation and innovation.

Traditionally, finance functions undertake highly technical work as part of carefully controlled processes. While this can be an important part of the finance team’s role, it can also potentially affect people’s willingness to experiment and innovate. Therefore, CFOs should find a balance: encouraging experimentation (innovation), but also setting clear boundaries around the scope of that experimentation (discipline). As a starting point, CFOs can take a fresh look at roles, responsibilities and decision-making rights, setting out where teams further down the organization can make decisions and where they should seek leadership input. This will be an important step to making finance people feel empowered and able to embrace innovation.

Summary

Corporates are looking to their CFOs to help balance short-term financial performance expectations with long-term sustainability goals, but CFOs face challenges in articulating this through corporate reporting. The research found that CFOs and finance leaders are uncertain if today’s ESG reporting is communicating what is material. The research also found a fundamental gap between companies and stakeholders when it comes to sustainability performance and corporate reporting. CFOs need to improve corporate sustainability narratives to make the case for a company’s long-term, sustainable value.