The chief financial officer’s role has evolved over the years. Now, many CEOs and boards expect far more than optimal financial results from CFOs: Many also expect the CFO to partner with them to develop the company’s wider strategy. However, ‘strategy’ can mean different things to different CEOs and boards, so different companies have different expectations for their CFOs.
To help CFOs identify how they can best contribute to their company’s strategy, the globally experienced divisional and group CFO Gary McGaghey has framed four orientations of strategist CFOs. These orientations spotlight different angles on a strategist’s role and bring clarity to a company’s capacity to change direction and execute a new strategy.
Making Choices That Inform the Strategy Process
To begin with, Gary McGaghey recommends that CFOs make a series of choices that will direct their strategic direction. He suggests that CFOs consider the following questions to make these decisions.
- What are the company’s goals and aspirations?
- What services/products does the company offer?
- In which markets does the company sell these services/products?
- How does the company stand out against peers to gain a competitive advantage?
- What management systems and processes can the company adopt to streamline and succeed?
Pairing a financial discipline with the answers to these questions can inform an effective strategy process. From here, CFOs can address the following questions.
- Are the company’s financial goals viable?
- Which products and markets deliver the highest promise for margin growth or revenue?
- How can the company organize and structure the financing of key investments to maximize competitive advantage, market valuation, and returns? Ideas could include business models; legal and tax entities; onshore, offshore, and outsourced talent models; automation; networking; and build versus buy.
- Which financial and management reporting tools can the company adopt to execute and deliver the strategy well?
When CFOs shape a strategy based on these questions, they can deliver better returns to shareholders. The challenge stems from choosing the most effective ways to engage in the process in the context of the company’s business, leadership, and directors.
Gary McGaghey explains that these four orientations outline the key ways that CFOs can engage the strategy process.
The responder guides the company’s strategy development by assisting key business leaders in the process of quantitatively analyzing the financial consequences of different strategy options. This type of CFO is well-suited to highly decentralized businesses where the CEO drives accountability for strategy and performance to business unit leaders. Responders may also be good fits for companies where the CEO limits the role of the CFO in the strategy process to analytic or quantitative support. To thrive as a responder, the CFO should have a central financial planning and analysis (FP&A) capability that delivers relevant data and analyses to the company’s leaders, who take a driving role in generating strategy alternatives.
The challenger acts as a steward of future value in the strategy process. They critically examine the risks associated with strategy alternatives (and the expected returns on these). Challengers minimize risk and ensure adequate returns to future investments and capital allocations. They may need FP&A capabilities similar to those required of responders, and they may need access to requisite information from the business units on strategy assumptions and models. Challengers work well in companies where the CEO gives the CFO permission to challenge business unit leaders and their strategies. With this permission, a challenger CFO can drive the review of major investment decisions.
The architect works with the finance department and other business leaders to make important strategy decisions and apply carefully thought-out finance strategies. Architects expand on the challenger orientation, also facilitating the financing of innovative initiatives through various financial strategies and arrangements with suppliers, delivery channels, and/or customers. These CFOs plot “paths to yes” on essential business investments. Architects often need to build trusting relationships with the finance organization and other businesses at the outset of setting the strategy so they can work collaboratively. They also usually need a strong finance team to partner with business leaders proactively during the strategy process.
The transformer partners with the CEO to shape and execute the company’s strategy. This kind of CFO plays a key role in the execution of operational and financial options for delivering value, creating distinctive capabilities, and shifting the product market mix. Transformers proactively address the core questions in the strategy process, developing options through finance so the company can effectively shift its strategy.
For example, a multidivision company with common accounting and financial systems may have once had synergies driving the product market mix that no longer exist. By upgrading the systems in a way that enables the efficient spinout of a new division, a transformer can operationally create the capacity for shifting a core strategy choice (the product market mix). Alternatively, by changing the mix of debt to equity, a transformer can free up funds to invest in future growth, opening new financial options. Carefully structured financing and lease models can enable a company to change how customers buy or use its products, allowing the company to migrate its business model to a more profitable format.
Becoming an Effective Strategist
To become an effective strategist, a CFO must think innovatively, hire an effective finance team, and opt for a strategy orientation that reflects their company and the level of permission that the CEO grants them. Although some companies recruit CFOs as strategy partners for CEOs, others must earn a seat at the strategy table. Many of these CFOs have been internally promoted from controller, finance-operations, and accounting roles. Typically, these CFOs must know the company and operate a finance organization that delivers finance and accounting processes consistently without errors. When the finance team gets the basics right, the CFO can present a credible finance organization.
On top of this, a strong finance team frees up the CFO to attend to strategic matters and provides the quantitative analysis and support capabilities that are essential to developing an effective strategy. These CFOs must also be able to generate valuable strategy ideas and opportunities. To generate such opportunities, CFOs can pose critical questions about the uncertainties, risks, scale assumptions, and dominant growth constraints that confront the company.
Each orientation offers unique benefits and suits different companies and individuals. By understanding the different orientations, Gary McGaghey hopes CFOs, CEOS, business unit leaders, and boards can better establish concrete expectations for how the CFO is to engage in the strategy process and address key questions that will pave the way for the company’s future.
On top of this, Gary McGaghey notes that different orientations suit different CFOs depending on the scope of their role and means of involvement in their company’s strategy process. He adds that the orientations aren’t static and that the ideal orientation for each CFO will evolve in line with the company’s changing contexts and performance. So, CFOs must prepare to reorient in line with shifting organization contexts and situations.
Leading the execution of the Strategy
Irrespective of the role the CFO plays in formulating the strategy, the CFO is well positioned to lead the execution of the strategy due to the wide ranging impact of the finance function and the blend of the CFO’s financial & strategic role and capabilities. A CFO can utilize the existing FP&A team or build a program management office to create a dashboard of delivery milestones and financial and non financial KPI’s to track delivery of the strategy. In this way the CFO’s can play a uniquely leading role in both creating and driving delivery of the strategy, utilizing a blend of financial, commercial and program management skills.
About Gary McGaghey
Gary McGaghey has delivered organic and M&A-driven growth for a plethora of private equity, privately owned, and listed companies. In 2019, he joined Williams Lea Tag, a €1.3 billion end-to-end marketing production and business services group, owned by the private equity firm Advent International, as its Group CFO. In this role, he oversees the company’s mergers and acquisitions, divestitures, cost restructuring, carve outs, working capital cash flow management, and balance sheet refinancing.
Gary McGaghey has also held leadership roles for companies like Unilever, Nelsons, and Robertsons. Having studied at the University of Natal and the University of South Africa, he holds a bachelor’s degree and a postgraduate honors degree in Commerce. He also holds a non-executive director diploma. Gary McGaghey is a chartered accountant in South Africa (CA (SA)) and a chartered management accountant (ACCMA) in the UK.