We are facing a period of uncertainty, which calls for companies to have a flexible approach to company strategy and execution. Social and political unrest was one of the risks sighted as most significant to CFOs in the Middle East in 4th quarter of 2011. Many of the companies in countries caught up in the Arab Spring were left in a reactionary mode with no business continuity or crisis management plans in place to face the challenges thrust upon them. The fundamentals of the region indicate high growth economic potential but there is a need to remain cautious, says James Babb, Middle East clients and industries leader, Deloitte Middle East. “Cost control, pursuit of disciplined strategic growth and bolster the cash reserves are all CFO priorities at the moment,” he told Khalil Hanware of Arab News in an interview. “I would also advise them to continue to monitor the external environment with diligence and to present their management and boards with a series of ‘what if’ scenarios centered around the high-risk events that could impact their organization in order to understand the impact fully and take reasonable steps to prepare. This calls for an “Out of the Box” approach to strategic thinking,” he said.
Excerpts:
What role does the CFO play in setting company strategies?
Ideally the CFO is acting as the co-pilot for the CEO in setting company strategy. The roles a CFO undertakes within the strategy process are to provide the CEO with the following:
1. A financial perspective which improves risk awareness: The CFO should offer insight as well as pose questions such as whether a strategy entailing the focus on a few large customers results in the potential for an excessive concentration of credit risk.
2. Strategic decision-making: The CFO should challenge a company on whether it understands how its profits are truly derived. Is the company segmenting its markets geographically rather than on a customer basis resulting in the mispricing of contracts and misaligned sales and marketing efforts? The strategic thinking CFO starts with the business first then works back towards the numbers.
3. Integrating performance management: The CFO should be leading this initiative and communicating the results to ensure internal alignment of resources with the external strategy of the company. Does the company understand the key value drivers from within and across functions and are they clearly aligned and document mapped to the company's overall strategy? Value mapping leads to the elimination of evaluation criteria and incentive schemes, which promote activities and decisions disconnected from the strategy of the company.
A CFO demonstrates the following competencies as a strategist:
1. Critical thinking ability: A CFO should temper the wave of euphoria demonstrated by others in a company about a good idea which has yet to be placed under the rigors of analysis and due diligence.
2. Analysis and presentation of data: A CFO should understand the difference between forward-looking managerial financial information and backwards looking accounting information and which type applies to a particular decision-making process.
3. Global financial perspective: A CFO should recognize the importance of cross-border investment laws and regulations, effective tax planning, and actively managing the components of the company's cost of capital.
4. Dealing with ambiguity: The CFO should be a thought leader to the company in forming points of view around the changing business environment and demonstrate the ability to move out of the drudgery of the numbers and step back to understand the wider picture.
A CFO actively addresses the following critical issues as a strategist:
1. Providing a financial perspective on innovation and profitable growth: CFOs should be actively engaged from the beginning through "what if scenario analysis" discussions and analysis with company management as new business ideas are considered. The CFO should be a leader in the company for instilling a "value mindset" culture for all activities and decisions taken.
2. Translating expectations of the capital markets into internal business imperatives: If liquidity in capital markets is drying up, this is a factor, which needs to be dealt with proactively rather than reactively.
3. Providing the information and tools necessary for the organization to make sound business decisions.
In business, strategic ambiguity can have disastrous effects — and cause major stress for CFOs. What should CFOs do in such circumstances?
Agreed and it remains a very prevalent dilemma. CFOs would do well in such cases to undertake a competitive strategic analysis of their industry to understand their company's position relative to others and decide which competitive course they need to pursue either through strategic differentiation of their company's products or services or to become a low cost producer in their industry. When companies try to be pursue both aims research has proven the companies underperform due to the ambiguity of aims and lack of strategic definition. Another responsibility of the CFO in their role as a catalyst in their company is to ensure the functional leadership internally are behaving and aligned to the overall company strategy. This is an often overlooked or underinvested responsibility, which can lead to the company steering off course.
Do companies have clear strategies for future (in the Middle East)?
We are facing a period of uncertainty, which calls for companies to have a flexible approach to company strategy and execution. Social and political unrest was one of the risks sighted as most significant to CFOs in the Middle East in 4th quarter of 2011. Many of the companies in countries caught up in the Arab Spring were left in a reactionary mode with no business continuity or crisis management plans in place to face the challenges thrust upon them. The fundamentals of the region indicate high growth economic potential but there is a need to remain cautious. Cost control, pursuit of disciplined strategic growth and to bolster the cash reserves are all CFO priorities at the moment. I would also advise them to continue to monitor the external environment with diligence and to present their management and boards with a series of "what if" scenarios centered around the high-risk events that could impact their organization in order to understand the impact fully and take reasonable steps to prepare. This calls for an "Out of the Box" approach to strategic thinking.
In your view what is the preferred way to implement the strategic direction into concrete action?
The company, its owners and management have to be aligned and clearly understand what the strategy for the company is and how it is to be executed. If there are people who are not committed or not aware of how they are to align around the strategy this can cause disruption and underperformance. Senior leadership sets the tone. They must walk the walk and talk the talk consistently and with passion.
