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CFOs face transformed roles in Internet era

Madanmohan Rao reports from the CFO Summit in Singapore

Right through the turbulent rise and apparent demise of the dotcom era, the role of a company's chief financial officer (CFO) has gone through dramatic changes in the Internet Age.

Raising e-capital, outsourcing IT, e-security, online payment, evaluating knowledge assets, e-procurement and e-taxation are issues that go well beyond the traditional finance function, and the CFO today has to balance the competing demands posed by the roles of custodian, visionary and technopreneur.

CFOs, financial analysts and IT consultants throughout the region gathered in Singapore recently for the annual CFO Forum hosted by DNM Strategies, the producer of executive programs for Business Week magazine.

For a while, the euphoria of the Net Economy seemed to turn all financial laws of gravity on their heads. But the era of the Internet as unfettered experimentation is over -- and as the dust from the NASDAQ-led correction settles, the CFO's role has been restored as the custodian of the value-creation process in the "New, New Economy."

A key issue which arises in devising a company's e-business initiatives is the role and mission of the CFO, according to Mohan Sawhney, e-commerce professor at the Kellogg Graduate School of Management in Northwestern University. This involves questions like who will finance the e-business initiatives, how they should relate to current corporate structure, how they should be integrated further on down the road, and in what outside start-ups a stake should be taken.

Some companies have attempted to spin off their e-business initiatives as separate ventures, with mixed results: some have failed, as with NBC and NBCi, or CompUSA and CoZone.com; some have succeeded, as did Herman Miller in the office furniture industry; and the jury is still out on P&G's Reflect.com site for consumer-oriented beauty products.

Due to a combination of fear and greed, many established players may have swung off course for some time on the investment front: such as Starbucks (which invested in Living.com, Kozmo.com, Cooking.com and TalkCity - but has re-focused now) and Nordstrom (which took a $20 million loss on Streamline.com).

Some, however, have successfully juggled a suite of investments, such as MRO supplier W.W. Grainger which invested over $150 million by the end of 2000 in Grainger.com (digital storefront), OrderZone (for SMEs), FindMRO.com (for discontinued supplies), MROoverstocks.com (for surpluses), and TotalMRO.com (e-procurement solutions for large companies).

Factors which CFOs must take into account to assess such initiatives include scope of impact, anticipated payoff, time to payoff, competitive differentiation, trialability, and risk. By investing in other start-ups, companies can gain access to "windows into the future, borrowing eyes and ideas from innovative entrepreneurs" about new technologies, business architectures, channels, and business cultures, said Sawhney.

Examples include Kraft Foods, which gained valuable learnings (if not earnings) about online impacts on grocery shopping via tie-ups with Webvan, NetGrocer, Peapod, Food.com and EthnicGrocer.com. Accenture Technology Ventures invested in Asera, Jamcracker, Rivio and MarketSwitch.

Today, the current global economic slowdown - over and above the IT slowdown -- will continue to put downward pressure on earnings, and CFOs will have to focus on the sustainability of their competitive advantage and e-business initiatives in the long run, said Sawhney.

Just-in-time recruitment, salary cuts, voluntary retirement schemes for workforce pruning, rationalisation of international salaries, restructuring of business units, scaling back IT expenditure, retrenchment of employees, and cutting back on overseas expansion are becoming key priorities for CFOs at many global companies.

CFOs also have to master the art of "intangible capitalism," or valuing relationship and knowledge assets of the company's employees and partners, according to Christopher Westland, professor at the Hong Kong University of Science and Technology and author of "Valuing Technology: The New Science of Wealth in the Knowledge Economy."

"In the knowledge economy, many new ideas are often produced from a recombination of existing ideas. Companies and regions with a large base of advanced technologies and innovation are best placed to innovate still further, and thus the rich can get richer," said Westland.

He classified countries into three groups: technology innovators (with ten patents or more per million population), technology adopters (with high-tech exports of at least 2 per cent of GDP), and technologically excluded.

Assessing the evolution of customer relationships through new technology-mediated channels is also a key task for CFOs, according to Peter Watkins, CTO of the McGraw-Hill group of publishing companies.

The Net has helped increase the value of existing content via access to published archives and push-services, increased customer reach for publishers, and created new online marketplaces, said Watkins.

Adapting to these new market opportunities, McGraw-Hill has created the world's largest digitized textbook database for the college and university market, called Primis Online, with paid-for services for viewing and downloading information as well as buying books. Its other e-learning initiatives include ALEKS (Assessment and Learning in Knowledge Spaces), an artificial intelligence system for individualized math learning in post-secondary school markets, and an online community for students called The Learning Network.

CFOs must not only focus on operations and governance but also manage innovation through a portfolio approach, Watkins advised, based on varying parameters of business impact and innovation.

The Internet Age is also driving an increasing trend towards outsourcing, which is a manifestation of "Coasean economics," said Watkins, drawing on the work of books like "Unleashing the Killer App" by Larry Downes and Chunka Mui.

According to economist Ronald Coase, as markets become more efficient, there is an increasing organisational trend towards downsizing, outsourcing, and decentralisation ("The Law of Diminishing Firms"). As transaction costs decrease, more functions can be outsourced and the complexity of firms diminishes.

Focusing on a company's core competencies can often entail outsourcing non-core activities. The trend toward outsourcing some activities within the finance function, which started in the United States, is becoming popular elsewhere. There are risks, of course, in unanticipated costs, inability to control quality, and potential for fraud.

There are two major types of outsourcing: IT, and business process outsourcing (BPO), such as receivables management, payables management, taxation, and cash management, said Tay Kok Keong, head of cash management products at Deutsche Bank Asia-Pacific.

The global BPO market is expected to reach US301 billion in 2004, largely accounted for by North America but growing in Europe (U.K.) and Asia-Pacific (Australia, Singapore) as well.

Outsourcing provides two kinds of benefits: tactical (cost containment, overcoming resource shortages) and strategic (improved focus, access to world-class capabilities). CFOs play a key role in weighing the benefits, costs, flexibility and risks of outsourcing, said Keong.

For CFOs, banks like Deutsche Bank offer cash management services which can interface directly into customers' ERP systems - offering the financial equivalent of door-to-door delivery. Other companies active in e-procurement solutions include American Express (whose e-purchasing solutions are used by over a thousand global clients including McKinsey, Motorola and Nestle), Oracle (with its procure-to-pay portal), TX123 (with its e-market for procurement of indirect materials), and Deloitte Touche Tohmatsu.

Intangible as they are, knowledge and relationships assets have grown to enormous social, economic and political importance. The ability to properly assess and value such things as brand names, relationships with suppliers and customers, and the knowledge-base and degree of collegiality among knowledge-workers have become essential components of a CFO's role.

There are many "knowledge drivers" that create value in a company. It is fundamentally important that managers, investors and entrepreneurs be able to determine the value of the activities and assets that matter in today's knowledge-based economy, which is central to the work of the CFO.

Other challenges confronting CFOs include balancing the need to embrace risk versus the need to identify and manage risks, which calls for innovative approaches to modeling and managing varied business risks. Such risks are particularly daunting during activities like forming alliances, mergers or acquisitions. 

The Internet is changing working capital management on three fronts: real-time information availability; integrated information systems with suppliers, business partners and financial institutions; and e-procurement and e-commerce systems.

As the portfolio of the CFO expands, his input in shaping the strategic direction of the company is becoming more important. Such driving forces as changing business models, technological obsolescence and managing innovation all necessitate a corresponding transformation of the finance function. Being a strategic partner with the CEO entails embracing such cutting-edge practices as real-time reporting, forward-looking and opportunity-based budgeting and planning, new-age metrics for assessing intangible, knowledge assets and new methodologies for decision support.

"CFOs must successfully transition from being analysts and reporters of past information to business partners providing CEOs with the information and knowledge to seize new opportunities," concluded Chandru Rajam, business professor at the National University of Singapore. 


The writer can be reached at madan@techsparks.com

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