FP&A Innovation, Issue 5

ISSUE 5 | FINANCE

FP&A

INNOVATION

THE CFO & CORPORATE RESPONSIBILITY How central is CSR to the CFO role? We determine how the CFO can make companies more sustainable

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LETTER FROM THE EDITOR Welcome to this edition of FP&A Innovation.

The finance department has never been so crucial to a company’s success, with the function taking on new strategic responsibilities.

The sophistication of data collection tools has made the finance department a far slicker machine, but the use of algorithms has also meant that the effectiveness of established roles such as financial advisors have come under scrutiny.

Aaron Fraser will explore this and will determine whether technology is now more effective at spotting market fluctuations than financial advisors.

With the CFO second only to the CEO in many organisations, Dan Miller takes us through his top-five to look out for in 2015.

In addition to this, we will determine how falling oil prices are affecting the global economy and also see how the CFO can affect corporate social responsibility.

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As always, if you are interested in contributing or have any feedback on the magazine, please contact me at ghill@theiegroup.com

George Hill Managing Editor Are you are looking to put your products in front of key decision makers?

For Advertising contact Giles at ggb@theiegroup.com

Managing Editor: George Hill Assistant Editors Simon Barton Art Director: Joe Sanderson Advertising: Giles Godwin-Brown ggb@theiegroup.com

Contributors: Daniel Miller Harriet Connolly William Tubbs Aaron Fraser General Enquiries: ghill@theiegroup.com

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CONTENTS

17 THE CFO & CORPORATE RESPONSIBILITY How central is CSR to the CFO role? We determine how the CFO can make companies more sustainable

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ARE FINANCIAL ADVISORS BEING SQUEEZED OUT BY ALGORITHMS?

CORPORATE FINANCE & CYBER-SECURITY

In the main, data has been beneficial for people in finance, but can the same be said for financial advisors?

The complexity of transactions means that cyber security is more important than ever before - we see what it means for corporate financ

14 HOW FALLING OIL PRICES ARE AFFECTING ECONOMIES AROUND THE WORLD How will Russia deal with the drop in the value of oil? We see what the implications will be for the rest of the world

21 THE CFOS TO WATCH IN 2015 2015 promises to be an important year for CFOs. Dan Miller picks out the ones he’s expecting to succeed

10 ENHANCING THE PERFORMANCE OF THE FINANCE FUNCTION We evaluate how the finance function is helping companies run smoother than ever before

ARE FINANCIAL ADVISORS BEING SQUEEZED OUT

BY ALGORITHMS? Aaron Fraser Director, FP&A Innovation

ARE FINANCIAL ADVISORS BEING SQUEEZED OUT?

Technology has allowed us to do things previously thought impossible.

From the ability to soar above the clouds to simply being able to add millions of numbers together in seconds, few would argue that it hasn’t had a positive impact on society in general.

In some cases though, we have seen that people have turned against new technology when it appears that people might lose their jobs as they are replaced by machines.

This has seen some backlash, especially in jobs that rely more heavily on manual labour, with manufacturing being hit especially hard.

What people did not envision was that other more desk based work that always used a high level of technology may go the same way as well.

This is currently happening in the financial world that may be changing this though. (don’t understand what you mean here)

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As the baby boom generation are retiring, we are seeing the

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people want to have a way of investing that is more in tune with how they approach the rest of their life, through technology.

This has led to companies like Wealthfront, Betterment and FutureAdvisor, who offer investment algorithms, moving people away from traditional financial advisors to more technologically based solutions.

The basis of their model is by using algorithms to create investment portfolios based around the needs of the customers and the classifications of the companies invested in, allowing them to safely make sound investments.

A model like this appeals to the younger generation, who are both cash poor (many fear that the current generation may be ‘lost’ due to credit issues and wealth distribution) and tech savvy. Many people in the younger generations are also wary of those working in the financial sector due to the media perception of them following the credit crisis in the

The difficulty of these systems in relation to overall financial success is not that they are not effective, but that they are limited to how they can analyze and not pick up the subtleties that humans may be able to pick up.

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Many people in the younger generations are also wary of those working in the financial sector due to the media perception of them following the credit crisis in the late 2000’s late 2000’s, meaning that they would rather trust their money to a computer system than a person.

The difficulty of these systems in relation to overall financial success is not that they are not effective, but that they are limited to how they can analyze and not pick up the subtleties that humans may be able to pick up. This could be from rumours of irregularities or impending problems that could have an impact on what may have been considered a safe investment.

However, as we have seen with multiple other systems throughout several industries, the ability to disseminate information from multiple sources, including sentiment and web analysis, will mean that these systems will certainly have the capability to make these kinds of nuanced decisions.

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ARE FINANCIAL ADVISORS BEING SQUEEZED OUT?

Some people prefer to do business with somebody directly, others would rather do it remotely through technology.

Presently, it seems that these algorithms are based primarily on the market perception of stocks and shares, which may not always be the reality. A prime example of this is Enron from the 90’s who had one of the best stocks in the world, just before it plummeted to nothing and the company ceased to exist.

However, the information that was received by many financial

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advisors would be exactly the same as the information received by algorithms, meaning that questionable business practices would still throw off experienced advisors in the same way as any technology.

The truth is that the difference between the two investment approaches boils down to the individual. Some people prefer to do business with somebody

directly, others would rather do it remotely through technology. It is for this reason, that although algorithms will undoubtedly increase in popularity amongst investors, it is unlikely to completely replace financial advisors at any point in the future.

CORPORATE FINANCE & CYBER-SECURITY Simon Barton Assistant Editor

8 Cyber security is now an issue that every board is treating as a priority.

It’s importance has been heightened even further within corporate finance due to the large volumes of data and the complexity of the transactions involved.

It’s now the case that cyber security has to be present at each step of the process so that the data created along the way is protected. The information that’s passed between parities in corporate finance transactions is often very sensitive and therefore very attractive to cyber criminals.

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Imagine if financial data, intellectual property or contract details were in some way leaked - it could cause multimillion dollar deals to fall through, costing hundreds of people their jobs and the loss of original ideas to a competitor that doesn’t have the

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CORPORATE FINANCE & CYBER-SECURITY wherewithal to take the product in the direction you wanted.

Notwithstanding the financial implications, cyber attacks can also damage a company’s reputation and see them lose valuable contacts.

Cyber security threats come from a whole host of different sources, ranging from sophisticated organised crime networks, state sponsored attacks to individual hackers who identify opportunities to sell data to the highest bidder.

In terms of stopping cyber attacks, there’s no sure fire way, but there are a number of methods that can used to help the situation. First and foremost, it’s important to keep the number of people involved with the transaction down to an absolute minimum - the less people that know about the intricacies of the deal, the easier it is to monitor and pinpoint where errors could

Cyber security threats come from a whole host of different sources, ranging from sophisticated organised crime networks, state sponsored attacks to individual hackers who identify opportunities to sell data to the highest bidder.

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It’s now the case that cyber security has to be present at each step of the process so that the data created along the way is protected. have been made.

It’s imperative that everything is monitored so that any suspicious activity is identified and stopped as soon as possible. When monitoring is carried out intermittently, small and on the face of it, insignificant diversions often get missed or written off as anomalies that aren’t going to affect an organisation’s security. Continual monitoring gives organisations the capacity to analyse these small differences so that the chance of a security threat from this angles is decreased to almost nothing.

Decreasing the amount of cyber attacks within corporate finance is often down to asking yourself questions about your security efforts and making sure that you’re doing your upmost to guard against hackers that are now seemingly ready to pounce from any angle. As mentioned above, one of the most important things is monitoring every transaction extensively, allowing hacks to be spotted quickly and efficiently.

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E H T G N I C N A ENH F O E C N A M R PERFO N O I T C N U F E C FINAN

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ENHANCING THE PERFORMANCE OF THE FINANCE FUNCTION The finance function is so much more than simply measuring P&L and paying salaries. It has a vital role to play in the smooth running of a company.

From creating budgets that allow for significant growth to negotiating deals with suppliers over credit lines, its performance is key to company success.

Despite this, there are several ways that finance departments could improve moving forward.

Enhancing the performance and the finance function is something that many will need to look at in order to make the most of opportunities in the future.

Update Systems One of the keys to successfully navigating a finance department’s leadership is through the systems it uses.

Many are currently struggling with legacy systems and the new requirements that legislation and regulation demand.

This means that systems need to be updated or fully replaced in order to maintain performance and improve it in the future.

Legacy systems are also unlikely to support the needs of the more complex systems that will be needed in the future.

Be Flexible Following the financial crisis

of the late 2010s, many departments needed to change their approaches and functions. The finance function was chief amongst these and arguably found itself under the most pressure from these changes.

These requirements are constantly evolving and this means that finance teams need to be flexible and capable of keeping up with what’s needed of them.

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This is about more than making changes when they are needed, but having changes being made to improve the state of the departments and its output, as it’s going to put the entire finance team in the correct frame of mind. This doesn’t mean changing for changes sake, but instead identifying how they can improve and then changing to achieve this.

It is also important for these changes to make a difference, set goals and rewards for the team to work towards within these changes to keep motivation.

This way, when a major shift occurs from an external source, the flexibility inherent in the team will allow for a smooth transition.

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Simplify Complexity According to the Accenture Survey ‘The CFO as Architect of Business Value’,

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many of the key challenges were found in complexity.

This is becoming common as

The finance function was chief amongst these and arguably found itself under the most pressure from these changes. new rules and regulations are constantly being introduced and this means that there can be several layers of rules and regulations for each individual piece of work. This creates significant issues for finance teams, slowing down processes and causing frustration.

Therefore, it is important to make the complex, simple.

This could be done through digital means, effective communications, dedicated teams or simply better education.

This could be done through digital means, effective communications, dedicated teams or simply better education.

By making the complicated simple you will speed up work rates and improve moral

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ENHANCING THE PERFORMANCE OF THE FINANCE FUNCTION

Being able to draw in information from several datasets can help not only with finding out information about what the company is currently doing, but through predictive analytics, give an idea of where it may be in the future. amongst the team, creating situations where more can be achieved and your team are happier in doing it.

Adopt Big Data The Accenture survey also found that only 4% of those asked had fully implemented Big Data systems, whilst 20% expected to do so within the next two years.

We have seen from case studies across multiple industries, that the insight that can be gained from Big Data and analytics can create a vast improvement in the fortunes of a finance department.

Being able to draw in information from several datasets can help not only with finding out information about what the company is currently doing, but through predictive analytics, give an idea of where it may be in the future.

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CFOs Need Strategic Influence One of the most important aspects that the Accenture survey found, was that the CFOs who had the best performing finance departments were also the ones who had the most strategic influence throughout the wider company.

‘Finance leaders of high-performance businesses report a greater increase in influence over providing insightful analytics to the business, executing business transformation initiatives for the broader enterprise, and influencing the strategic planning process’.

This strategic input allows the CFO to be able to see the wider business implications of the decisions made in their departments. It also means that the finance function can be aligned to the wider business strategy. This will allow for decreased friction between departments and an increased ability to work towards a common goal.

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HOW FALLING OIL PRICES ARE AFFECTING ECONOMIES AROUND THE WORLD Abigail Fletcher Sponsorship, FP&A Innovation

FALLING OIL PRICES & THE ECONOMY 15 Up until mid-2014, global oil prices had remained stable for four years, costing around $110 per barrel according to the BBC. However, June 2014 sparked a decrease in its value, with Brent Crude Oil costing a mere $50 per barrel, the first time since May 2009 that the price had fallen below the $50 mark. This has been primarily caused by decreased demand in countries that are experiencing slow economic growth and America’s increasing ability within fracking.

The Russian economy will be seriously affected by the drop in oil prices. The rouble has lost almost 50% of its value against the dollar due to falling oil prices, which has led to interest rates being increased to 17%.

Financial Analysts are now predicting that the Russian economy will dip into recession by 2015, despite it being heralded as one of the BRICs only a decade ago. As one of the biggest exporters of oil, the business landscape in Russia is bleak at the moment and reigniting it will undoubtedly be one of President Putin’s biggest challenges this year.

The situation is arguably even more volatile in Venezuela, where the economy is also teetering on the edge of recession. The Venezuelan economy was experiencing

difficulties prior to the fall in oil prices anyway, with extensive subsidy costs setting the government back around $12.5 billion a year.

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The President of Venezuela has been pressured to cut these costs, but will have the petrol riots of 1989, where hundreds of people died, fresh in his mind. Saudi Arabia, also a major oil supplier, is likely to experience less in the way of financial hardship due to its substantial oil reserve fund, but the fall will still pose questions that the Saudi Arabian government will have to solve, including the decision as to whether they’re to cut back its own production to support an effort to increase global oil prices.

The increase of fracking has been one of the main drivers of falling oil prices around the world. The US, now able to produce much more of its own oil and gas, has caused conventional demand to fall.

Additionally, countries which import much of their oil look set to make considerable savings, with China, India, Japan and many of Europe’s flagging economies just some of the nations set to reduce their economic output due to the fall in prices.

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For workers in countries struggling to get out of economic depression, the fall in oil’s value will represent

As one of the biggest exporters of oil, the business landscape in Russia is bleak at the moment and reigniting it will undoubtedly be one of President Putin’s biggest challenges this year. a reduction in weekly bills, making it likely that many Britons, for example, will view the drop in oil prices as a positive thing. Companies operating in the United Kingdom are also unlikely to view the drop as negative, as raw material prices are likely to lower considerably - all good news for the Conservative government ahead of the general election.

Even for the counties which on the face of it look likely to profit from falling oil prices, there will be caveats which will cause problems, with inflation being a real issue. Whatever the case, falling oil prices are having a real impact on the

The situation is arguably even more volatile in Venezuela, where the economy is also teetering on the edge of recession

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FALLING 16 OIL PRICES & THE ECONOMY wider economy and are of major concern to the main exporters of oil and gas. The business landscape will be affected by fluctuating inflation rates and unpredictable demand. This year will be crucial for countries such as, Russia and Venezuela, whose economy seem to be riding on the price of oil increasing.

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Other fears around the sustainability of the fall in oil prices are based around the view that prices will either stay stable or decrease further in the coming years, and with vast amounts of oil being pumped out of the ground, supply will go up, which will contrast with the lowering of demand across the globe’s faltering economies.

But even this however this isn’t the clearest danger facing todays’ major economies, the expectance that the USA’s interest rates will rise, will be a greater cause of alarm.

Oil is priced in dollars, which means that prospective buyers must trade in dollars if they want to get contracts.

Low interest rates encourage this behaviour, as loans are cheaper, whereas a hike in interest rates will make debt more expensive - likely to cause a backlash. Those holding contracts are likely to default on them, which in itself will drive down costs. The US Federal Reserve has yet to

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Even for the counties which on the face of it look likely to profit from falling oil prices, there will be caveats which will cause problems, with inflation being a real issue increase interest rates, but it’s a distinct possibility.

When it comes to the effect it will have on the world’s economies, there will be winners and losers.

Oil exporting nations like Venezuela and Russia are likely to be hit the hardest, although the decrease isn’t likely to be greeted negatively by organisations in many nations, as their raw material costs are likely to decrease.

THE CFO & CORPORATE RESPONSIBILITY George Hill Managing Editor

THE 18CFO & CORPORATE RESPONSIBILITY Corporate Social Responsibility (CSR) is a term that many people associate with PR. It is something that people claim to have in order to attract customers, employees and investors, so many of the claims are often exaggerated and do not tackle many of the issues that companies need to address in order to fully have a functioning CSR and corporate responsibility programme.

The CFO has a key role to play in this process.

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One of the keys to a good CSR programme is about having an effective budget that can be flexible enough to give charitable donations and fund

This is arguably the most important aspect of any corporate responsibility programme as transparency allows a company to work effectively whilst maintaining an open nature that allows others to see how your company is working

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effective employee schemes/ training. The ability to budget effectively for these aspects is going to be the responsibility of the CFO. Having a flexibility in the budget that can allow for these kinds of actions is not something that is easy to achieve, especially in the current economic climate, so a CFO must have a strong resolve and communication skills to make sure his vision is fulfilled.

Another aspect is transparency within a business.

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This is arguably the most important aspect of any corporate responsibility programme as transparency allows a company to work effectively whilst maintaining an open nature that allows others to see how your company is working. This transparency comes in terms of allowing your books to be looked at and completed deals to be fully researchable As the finance department is ultimately the benchmark against which a company’s performance is assessed, it is arguably the most important area in terms of transparency as it gives an accurate portrayal of how a company is operating.

A prime example of how this can fail is with the recent Tesco financial problems, where their poor business practices were highlighted by their financial results.

Therefore this corporate responsibility falls heavily on the shoulder of the CFO, as they need to not only make sure that their end of year reports are accurate, but that the processes by which they are created throughout the rest of the year are robust enough to create a good report at the end of the year.

However, as we are increasingly seeing with CFOs today, many

This could be from small things, like using energy saving lightbulbs, which reduces a company’s overall energy consumption whilst also saving money on energy used, to larger initiatives such as changing consumable products to becoming harder wearing and therefore need less replacements. are taking their responsibilities away from accounts and reporting and moving into a more strategic role that can have a wider overall impact of the company.

This means that cost saving initiatives, which also have

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The CFO has a significant role in improving the CSR of a company, often equal or greater than a CSO. an impact on financial performance, will often be overseen or at least signed off by the CFO. Cost savings frequently have an environmental impact as a positive unexpected side effect. This could be from small

things, like using energy saving lightbulbs, which reduces a company’s overall energy consumption whilst also saving money on energy used, to larger initiatives such as changing consumable products to becoming harder wearing and therefore need less replacements.

These kinds of initiatives are focussed on saving money in the long term whilst also helping the environment.

What they also require is a, sometimes significant, financial outlay initially. This needs to be

agreed with the CFO as well as fully justified by a CFO to the board.

The CFO has a significant role in improving the CSR of a company, often equal or greater than a CSO. This is simply because in order to make any initiative work, it needs to have working capital behind it, they need to be able to control the outflows and inflows to make sure that it is more than just a PR exercise.

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THE CFOs TO WATCH IN

2015 George Hill Managing Editor

THE 22CFO’S TO WATCH IN 2015 In this article we will go through four of the finance world’s most promising stars, individuals who are likely to play a major role in their respective companies success over the coming year.

1 Michael Everson, CFO, GE Healthcare Michael Everson has been the CFO of a number of GE’s healthcare branches, joining the company back in 2005 as Finance Manager of the Americas.

Last year he took control of GE’s entire US Central Zone. At an Innovation Enterprise, FP+A summit he attached a new meaning to the FP+A acronym, changing it to ‘Financial Business Partnering’. This was done to represent the new opportunities for financial planners and analysts in the field.

With a proven record of business strategy optimisation and a dedicated leader who promotes talent from within, Michael is well placed to bring GE’s finance function forward as they drive towards their sustainability endeavours.

2 Marin Ychakarov, CFO, Pebble CFO of smartwatch manufacturer Pebble, Marin is likely to be in for a busy year ahead of the company’s new software release in 2015. Still relatively new to the role at Pebble, Marin will have to rely on his 20 years of experience in global public, private and start-up companies.

With Pebble well placed to take the wearable-tech industry by storm, Marin will have to make sure that his finance function can deal with Pebble’s probable success over the next year.

3 Galagher Jeff, CFO, Walmat US eCommerce Retail giants, Walmart, recently hired Galagher Jess to be CFO of their US commerce division.

Noted as being an excellent motivator and an excellent teacher, Galagher has always taken time to guide the people around him.

With Walmart looking to compete with Amazon by turning existing stores into distribution centres for its e-commerce section, it’ll be essential that Galagher maintains a steady financial ship throughout the year.

4 Jennifer Reilly, Business Unit CFO, TIAA-CREF CFO of TIAA-CREF, the recruitment provider that works across academic, research and medical fields, Jennifer has a proven track record of success.

Highly detail oriented and possessing skills across a number of different fields, Jennifer has been a leading strategic finance figure for TIAA-CREF for a couple of years now, having direct leadership of the Accounting and Finance Operations for Marketing function.

As someone whose always been promoted quickly, it’ll be interesting to see just how far Jennifer’s career can go in 2015 This concludes the rundown. Let’s hope that they all perform well and take their respective finance functions to the next level in 2015.

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