When the going gets tough

Written by Anil Chanana | Updated: Mar 19 2012, 09:55am hrs
Confucius once said, By three methods we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest.

Indeed, what we are experiencing is the bitter taste of this tumultuous and uncertain environment. We have embraced the year 2012 with mixed sentiments. While Indian GDP growth projections have been slashed in the backdrop of high inflation and a volatile currency, the economic turmoil in the US coupled with the European crisis have triggered a much bigger fear in the developed Westthe fear of the unknown. The economic impact of such events is anybodys guess. So as I analyse the ground for future, here are a few aspects that have to be deliberated as we prepare to sail through unchartered waters.

Since the onset of the financial crisis, CFOs around the globe have been redefining the risk matrix. The financial crisis and its aftermath have forced CFOs to reconsider their idea of risk and risk appetite. This risk, in addition to operation, financial and strategic risks, is about managing the potential effects of uncertainty throughout the business operations. This is not in context of any particular function but is all pervasive across business. Moreover, the pace of emerging risks has been unprecedented in recent times. The key macro risk factors playing in the market such as liquidity/credit crunch, regulation policy risk, financial market volatility and economic de-growth have made the task of effective risk management more challenging and dynamic.

Amidst uncertainty and risk aversion, there have been other challenges including a protectionist stance that is being adopted in some countries due to political compulsions and intervention in the foreign exchange market to protect export competitiveness. Hence, CFOs need to re-apply risk definition in strategy setting across the enterprise in order to identify potential events that may affect the entity.

The next perceptible change will be in the way in which CFOs address the issues of fiscal discipline. CFOs are facing the toughest business environment in todays corporate environment. This is characterised by the ever increasing pressure on resources. Moreover stringent commercial terms from customers and suppliers have not made their jobs any easier. This has forced CFOs to think innovatively on controlling costs leading to improved profitability.

Though the underlying parameters for optimising costs and improving profitability remain the same, the traditional ways of working on these parameters are pass. In todays organisations, functions of a CFO have transformed from mere controlling costs to actively participating in the business growth. Improving margins and profitability will now emerge from agile reactions to market conditions and clear value propositions in the market. For example, in the software industry, the delivery structures are being realigned to focus on the business pain-points of the customers. CFOs will need to step on the accelerator to realign their internal structure to improve efficiency, participate in improving operations and financial performances of the business and align with the market forces to read early warning signals to help the organisation to adjust quickly.

Another difficult proposition is the decision making process in this ever changing environment with variability and correlations of business drivers not adhering to any predictable trend. However, in order to take control, the CFO needs to make informed decisions by leveraging accurate and effectively managed information. Right decisions at the right time and with the right speed will be critical in such an environment. Needless to say there will be an overarching need to focus on the right information and right sourcesboth internal and external. I suppose this is the hardest part of operating under such a risky environment. Moreover, in such a complex environment there is far higher risk of indecision rather than acting with the available parameters. Thus, CFOs across the globe need to seek and invest in newer analytical capabilities to transform a companys disparate, non-specific and often duplicated information network into a more integrated and coherent structure.

So today when CFOs face unprecedented challenges, they need to understand that the answer to these challenges lies in fresh and innovative perspectives and approaches. From sharing insightful business intelligence and forecasting to anticipating and responding to erratic market conditions, todays CFO is expected to be as much a business strategist as a financial expert. The most successful CFOs will find themselves leading cross-functional teams to fuel real change and sustainable value.