June 27, 2019

A CFO’s Guide to Digital Transformation

Terri White

Topic:   Analytics

Last updated: July 28th, 2020

If digital transformation is about anything, it needs to be about money.

There are a lot of people who won’t like that statement. Digital transformation should be incredibly cool, interesting, delightful for customers, and so on. It changes the mission of the company, with ripple effects throughout its supply chain and customer pool. It’s transformative, for crying out loud.

But without margin, there’s no mission.

The new, transformed business is a bit like a start-up: It requires investment, maybe a lot of investment, because it probably won’t be profitable on day one. The old, traditional business needs to fund the new business until it can stand on its own. It can be very complex to keep the margins from the old business going while the margins from the new business are starting to ramp up.

Suppose you want to transform the way you sell engines, going from a one-time sale with a maintenance contract to an “engine as a service” model where the client pays by the operating-hour. You’ll still need to keep the sale-plus-contract model going profitably while you ramp up the as-a-service model. The as-a-service model may get you more money in the long run, but your revenue will come in as a stream over time rather than a large, discrete initial transaction. That could cause cash flow issues if it’s not managed well.

The CFO, whose job is to marshall the financial resources of a company to achieve its business strategy, is of course acutely concerned with issues like this. And that means the CFO needs to understand a company’s digital transformation as well as anyone else – and to help drive it, if possible, to ensure that the company attains the margins in the new mission.

There are at least three clear ways in which the CFO needs to direct the digital transformation process. (There may be more, so feel free to raise them in the comments.)

  1. Identifying the new margins in the new mission. As with any new venture, executives must continually adapt business models as markets, ideas, and clients change. They generally gravitate toward “what works,” or what their clients are asking (and paying!) for, rather than the idealized model that they had originally discussed and agreed to. These are forces of entropy that can make it difficult to achieve the transformation everyone is seeking.The CFO is the natural focal point for the question, “How will the new business model work?” She needs to constantly analyze business performance relative to these models, and especially the “what works” adaptations that are taking place, analyzing the short- and long-term value of adapted models relative to the original.It’s important to be transparent about how the company is performing, too, so that additional adjustments can be made along the way as needed before things get to a point of failure. One-off analyses have their place, but shared dashboards and analysis are just as important to ensure that everyone understands how their tasks contribute (or not) to the achievement of new revenue and profitability targets.
  2. Understanding what everyone needs to know, from a financial perspective, as the transformation is taking place. If the new business model is like a start-up, a digital transformation is something like an acquisition: There’s a new business being brought on board, and the entire company has to transition to “NewCo.” As this is going on, someone needs to be focused on the question about where the money is coming from as NewCo is being ramped up – and what aspects of OldCo need to be ramped down.This could be a long-term issue. Not every customer for an engine will want to shift to an engine-as-a-service model right away, even if that’s the future of the industry.The CFO is critical here because someone has to ensure that the company doesn’t run out of money before the transformation is complete. You might think, of course, the CFO has to help prevent the collapse of the company. Pretty obvious. But success is defined in terms of the new mission, not the old one. Mere survival of an unsuccessful digital transformation attempt is a failure. The CFO needs to direct energy to ensuring that investments are made properly and financial targets are achieved in ways that feed the new mission. If the new mission starves, the old mission will never be deprecated and the transformation will never take place.
  3. Coping with new information systems requirements. There will probably be new systems put in place to support the new business model. At a minimum, there will be new standards and reporting requirements. The CFO needs to work with IT to understand the system requirements that will change (as any start-up’s systems change) and how they map to the old systems, and how they reconcile.In particular, the CFO needs to use these systems to engage in constant financial analysis and benchmarking against business models, which will help the rest of the business align with a sustainable approach to the company’s new mission. As with the chrysalis I presented in an earlier post, everything has to keep moving in the right direction at the right time, or the digital transformation will never fully take place. The CFO provides the financial transparency needed to ensure that everyone knows how their task, right now, affects the achievement of transformational goals.

I made the case in a previous post that data and analytics lie at the heart of digital transformation. I hope you can see that the CFO’s importance in using data and analytics to guide that digital transformation can’t be overstated.