CFOs at Work: Viewing Business Strategies through a Finance Lens
Finance executives play an ever increasing role in determining the larger strategy for their companies, weighing in on questions about risk management, growth opportunities, business process outsourcing, IT strategy, and marketing returns. At the same time, they continue to face mounting pressure from new regulations, such as Sarbanes-Oxley, to maintain a tight grip on controls. In this special report, in collaboration with Microsoft Executive Circle, Wharton faculty discuss the role finance can — and should — play in guiding key decisions in companies, and they address the changing role of the CFO in light of the need to balance intense reporting requirements with strategic objectives.
Leveraging Risk Management
Over the past couple of decades, executives have become ever more adept at neutralizing risk with a battery of instruments, including not just insurance but a variety of derivatives based on currencies, securities and credit ratings, as well as customized contracts with counterparties. It’s even possible to hedge the weather. Ideally, executives should look at the forest, not the individual trees, when it comes to managing risk, but that has not been the general practice, notes Wharton insurance and risk management professor Neil A. Doherty. Academic work over the past few years, he says, has shown that a more sophisticated and comprehensive approach to risk management can increase a company’s value by a significant amount.(more)
Can CFOs Keep a Foot in Strategy Post-SOX?
Scratch a chief financial officer and you’re likely to find an accountant. At least that’s the way it used to be, at companies large and small. It’s still true at many small ones, but at larger firms CFOs have gradually taken on more duties, working in partnership with chief executives to chart the future. Now this beneficial trend is being threatened, says John R. Percival, adjunct professor of finance at Wharton. The cause: accountability requirements imposed by Sarbanes-Oxley (SOX). Although new technologies can help to streamline the reporting SOX entails, the balancing act will continue to be a difficult one, Percival contends, as CFOs face continued pressure to raise capital aggressively, meet their forecasts and make their case to the analysts.(more)
Finding Value for BPO through Revenue Distance
In the last decade, companies have discovered that outsourcing some tasks to cheaper locations is one way to deliver efficiencies and cut costs. But the simple act of outsourcing to a lower cost base has evolved into a complex process that can inflict considerable damage if not dealt with in a sophisticated and scientific manner. Evaluating and ranking each business process for its contribution to creating value for customers and the company is a central part of a new model — developed by Wharton professor Ravi Aron — to help finance executives make outsourcing decisions. Called the Revenue Distance model, the tool offers a simple way for executives to put a comparative valuation on each business process that is a candidate for outsourcing.(more)
What is the best strategy for a company to grow? By increasing the sales of high-margin, best-selling products, right? That sounds like a no-brainer, but it may not always be the smartest move, says John Percival, adjunct professor of finance at Wharton. According to Percival, when it comes to growth, the biggest mistakes companies make are expecting the same extraordinary margins in new ventures that they get from their core products, and entering a new market or launching a product in a splashy way without first testing their competitive advantage. To avoid those mistakes, chief executives and chief financial officers need to ask themselves tough questions both about the sustainability of high margins in their existing products as well as the wisdom of entering a new market, he argues.(more)
That Wal-Mart, the low-cost mass retailer, and BMW Group, a high-end automaker, can have anything in common seems improbable. But they do. Both companies have figured out a way to put a long-term value on their customers, and are able to more effectively direct their marketing investment than most companies, says Wharton marketing professor David Reibstein. According to Reibstein, it is a mistake to treat marketing investments as short term. He advises finance executives not to hold marketing accountable for what happens in year one, but instead view marketing costs as a longer-term investment that has an impact over time. “There is a lot to gain in trying to measure and capture what the long-term value is,” he says.(more)
IT/Finance Alignment: A Boon for Strategy, but Will the Trend Continue?
In today’s market, where intense competition drives companies to reduce their business cycles and react faster, the interaction between Information Technology and Finance continues to gain importance, says David Wessels, adjunct professor of finance at Wharton. As technology permeates just about every activity engaged in by an enterprise, it’s only natural for the functions of IT and Finance to converge. Despite this trend, however, companies are showing increased dissatisfaction with returns on IT investment, and many forgo any formal approach to evaluating IT ROI. That, Wessels and others point out, can spell trouble moving forward, as CFOs increasingly take on the role of “chief performance officers” and rely on an IT-Finance alignment to deliver timely information about the performance of company-wide processes.(more)