Apr 3, 2018 Todd Ford
Each day, CFOs are asked to predict the future. What will the company revenues be next quarter? What will earnings be for the year? Where can I get the maximum return for each incremental dollar invested?
For finance professionals that lack paranormal capabilities, becoming what I call an “operational CFO” is the best way to build predictable and scalable business processes that will allow you to answer these and other questions like a clairvoyant. The enemy of predictability is risk, which is why managing operational risk is the fulcrum of this effort.
Created by Ryan Mason
Why operational risk? The CFO is often chartered with all things risk—financial risk, cyber risk, intellectual property risk, brand risk, supplier risk, as well as operational risk. Managing all of these elements of risk is important, but operational risk is where you should spend the most time. By understanding and managing the people, processes and systems that drive performance, you will safeguard shareholder value, which is the CFO’s traditional charter, and at the same time place yourself on a path to becoming the strategic, value-creating CFO businesses need today.
That may sound obvious, but it’s actually not the way a lot of CFOs think. Many of us look at risk from a financial statement perspective, line item by line item: What's the operational risk to revenue? Cash? Expenses? Renewals, in the case of a subscription business?
That’s how what I would characterize as a “financial CFO” sees the world. There is nothing wrong with that approach if you’re focused on safeguarding shareholder value, but that’s not how incremental shareholder value is created. To create incremental value, we have to broaden the way we look at operational risk.
From financial CFO to operational CFO
I used to be a financial CFO—until I ran my own management consulting firm. We worked with high growth companies from $1 million to $500 million in revenues to help them build their infrastructure. Not only was I learning by trial and error running my own business, I also got a detailed look inside of a lot of other companies, and gained some insights on the traits that made them successful—or not.
It became clear to me that traditional financial CFO skills were not going to cut it—not in my business, or the other businesses I was working with. I realized I needed to expand my operational awareness.
As I made the transition from financial CFO to operational CFO, I broke the key operational cycles into three categories: New product introduction, quote to cash, and post-sales support. There may be some nuances at different companies, but these are more or less the core of every business—build it, sell it, and keep customers happy. Using this framework, I noted that the success or failure of each of the companies I worked with could be traced back to one of these three processes.
Risk as a springboard to maximizing shareholder value
Developing a deep understanding of the drivers of each of these processes is where you discover opportunities to increase shareholder value, and it all starts with assessing risk.
For example, when you look at the new product introduction process, are you maximizing your investment in the R&D group? How do you know we’re doing the right things? Do we have the right people who can take feedback from sales, marketing and customer success and translate that into something that engineering can build? Do we have the right engineering talent? If not, there’s a risk you won’t have the right products.
For every software release, I look to see that investment is spread over three areas: What are we doing for current customers? What are we doing to make our code base better? How are we pushing the envelope with innovation?
Under quote to cash, what is marketing doing to build the funnel? Are they approaching the right people? Do they have the right ideal customer profile? Can inside sales move them along in the sales cycle? Does the sales team have the tools to close deals in a timely manner? How fast can you collect payment? If there are problems here, the risk is that we're targeting the wrong audience, and not deploying our capital efficiently.
In support, after we close deals, how fast do we get customers live? How well are we doing at keeping them around? If there are issues, are they customer issues, or product issues? The SaaS businesses model depends on renewals, so anything that interferes with customer success is a risk to scaling the company.
There’s more to look at in each process, but point is that when you dig into the risks, you begin thinking about a bigger picture than lines on a financial statement. Once you understand the drivers in business processes, you can work with the business to make them repeatable and scalable. You can see how that’s a lot different from how the financial CFO approaches risk.
What you ultimately want is a situation where you can make investment decisions with a predictable ROI; where you know for every dollar you put into marketing you’re going to generate a predictable multiple in revenue; that every new customer you sign can be deployed at a predictable cost within a predictable time frame, and that a predictable percentage of customers will renew.
When you have the ability to consistently predict cause and effect in a given process as you scale, then operationally you're efficient in that cycle. When you’re scaling and can consistently predict cause and effect in all three areas, the engine of your company is very strong and you can make the right decisions at the right time, all while having a predictable result.
Attacking the next bottleneck
You’re never done managing operational risk, because the company is always growing and changing, and you always want to strive for excellence. If one of your processes is not working as well as it could, what's the biggest bottleneck that you can attack next? If everything is working, where can you get the most value from the next investment? You keep going around in these three business processes, asking those questions, continually refining processes and maximizing returns. It's a never-ending cycle.
A lot has been written and said in recent years about the changing role of the CFO—how the position is becoming more strategic and forward looking. This shift from financial CFO to operational CFO is at the heart of it.
It's relatively easy to say what happened in the past. The hard thing is to say what's going to happen in the future, but that’s what’s being asked of CFOs today. The key to accurate forecasts is to control operational risks. If you understand what's going on in each area of operations, predicting the future is a whole lot easier—no paranormal abilities required.