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When the CFO Runs out of Capacity – Then What?

April 21, 2022

Today, I’m taking a stand on an ominous trend in business. 

The trend is ominous for one role in the C-Suite. 

For the past several months I’ve mentioned the concept of ‘capabilities’ in several articles I’ve shared. Not surprisingly, an onslaught of articles has emerged, some of which are current and others dating much further back. The trend is in the notion that the CFO has a strategic role that encompasses functions not typical of a finance role.  This notion seems to apply particularly to 1).  Remote working in the post-COVID world, 2). Development of organizational capabilities,  3). Risk management,  4). Cybersecurity,  5). Compliance and more.

Of course, the CFO role is strategic!  What we must also consider is, what the role is not.

While I have great respect for the CFOs (and other CXOs) I’ve worked with over the past 20+ years, I believe we need to examine the effects of such expectations more deeply.

Before getting into the implications, I’d like to posit a definition for ‘capabilities’.  I’ve used this definition with clients and my executive students alike. I believe this definition is reason enough to pause and reconsider the proposed changes to the mandate of CFOs (unless it’s a small business).  This meaning presents the basis of my argument that the expectations may not be entirely reasonable or achievable, at the risk of burnout, yet again.

Capabilities = skills + capacity + taking appropriate action.

All three elements must be present concurrently for a capability to exist.

Most often capabilities are discussed as skills, behaviours, and mindset.  I include the latter two as part of ‘taking appropriate action’.

What is missing in widely accepted definitions is ‘capacity’.

Why is capacity important?

Capacity is important because it helps a business to budget, to scale and to identify its optimal levels of operating. Understanding the limitations of capacity (at the individual or organizational levels) helps businesses to determine their operating model, staffing requirements, servicing options and financial plans.

Of course, excess capacity allows them to capitalize on opportunities.

Consider the fact that North American productivity has slowed dramatically during the last decade.  There are several reasons that economists will present.  I propose a key contributor is that people are working at beyond their capacity.  As tiredness/stress/burnout set in, productivity is reduced.  Not having the capacity to operate effectively is one reason why companies focus on efficiency. But there is a high price to pay when the focus is on efficiency.

In an HBR article, Ron Ashkenas writes:

“Most managers I talk with these days are struggling with the feeling that there is more to do than is possible in any given day, week, or month – and that no matter how hard they work, it’s impossible to make enough progress.  If you are one of these managers, you might want to ask yourself whether the feeling of overload is solely the result of the complex business environment, or whether it is at least partially self-inflicted.”

Businesses have become very complex – we all know this.  It is the complexity that has made efficiency difficult.  Individuals often overestimate how much they can accomplish. This is where the self-inflicted part comes into play.

What being a consultant and educator has taught me is that skills and behaving rightly are not enough to achieve anything.  We must have the capacity to be able to execute and we must be able to do it effectively.  That means getting the right outcomes the first time – not efficiently, which is proven to cause substantial rework.

Implications for Capacity and the CFO Role

Most CFOs I work with today and in the recent past are already at capacity.  This is a ‘condition’ that they expect as a member of the strategic leadership team.  In most organizations, there is the triumvirate of CXOs – CEO, CFO and COO. These three ‘Cs’, in my experience, are the ones that “square off” and lead with the focus on assets and market position.  They determine how they can best employ strategies in the future. This is using their strategic capabilities. It is this focus that gains the advantage against competitors and helps to create value.

In recent years we’ve seen the addition of the CIO/CTO role and the CHRO.  They are members of the strategic leadership team.

The implications of broadening the mandate of CFOs are in four distinct areas.  In many companies, there will be more, but for today, these rise to the surface.

Complexity

Even medium-sized organizations have reached unprecedented levels of complexity.  Companies have been transformed into a so-called ‘System of Systems’.  The management of these systems is becoming increasingly fragmented.  As an example – consider the inter-relationships between a Communications System and a Health & Safety System.  The slightest misalignment and neither works effectively. Being able to know the nuts and bolts of each, be good at developing scenarios and to make strategic assumptions is a huge ask of the knowledge base and risk-taking in decisions. A CFO will require several deputies – why not then, engage with other CXO teams?

Complexity requires first principles thinking. It’s a method to break down the complexity and ensure that systems remain continually in synch and are adaptable to changing conditions. The capacity to apply systems thinking and focus on the constituent parts of a system is necessary.  It allows for the understanding of how it works in the context of larger systems over time. Leaders often struggle with this approach as it can conflict with the short-term view of the business versus where complexity is taking them.

Dynamic Adaptability

This implication has surfaced in recent years.  It represents the ability of a system or group, let’s say an employee group, to independently modify its behaviour and adapt to changing conditions while the execution of a strategic initiative, such as digital transformation, is in flight.  This is another situation where systems thinking is essential.  Given experiences over the past few years, this process is difficult.

While the CFO may have the capacity to oversee strategic initiatives, a collaboration of different thinking styles is what will generate the best solutions over time.  Even agile environments struggle to achieve wholesale adaptation to new circumstances.

Internal Politics

Politics or what is commonly referred to as ‘organizational politics’ has negative effects.  Period!

It impacts employees, management, and shareholders. Internal politics create the perception of job dissatisfaction, lack of organizational commitment and certainly reduces productivity. It creates the perception that the ‘players’ are more interested in posturing than paying attention to achieving the outcomes of their mandates.  CFOs have bigger priorities than shuffling through internal politics.  Yet, they cannot help being pulled in by their C-suite colleagues.

Key areas where CFOs are most implicated in internal politics are with decision-making and planning. Delays in making decisions are brought on by internal debates over what the priorities are and who will bear accountability for outcomes.  This is important stuff!

The pressure to make timely decisions is a function of capacity.  CFOs want to take the time to critically think about all the facets that impact a decision, without the interference of multiple agendas.

Should CFOs spend a large portion of their time on negotiating agendas and posturing?   I suspect not.

Return on Investment (ROI)

Over the years the one true characteristic of an effective CFO has been their process of achieving a certain ROI for investments made. However, they don’t control the outcome.

Some examples of where it matters to CFOs include Mergers & Acquisitions, Investments in Digital Transformation, Training, Marketing dollars, and there are more.

What has been lacking in the ROI calculations is the value that has been lost due to insufficient capacity to execute and inadequate clarity on the objectives and their outcomes.  These are the two primary contributors to poor ROI.

Conclusion 

The greatest implication and risk to the CFO with the proposed added mandates is a breakdown in the management structure.  It is already starting to show cracks, especially in companies where everything comes down to dollars.

If there is one thing that is evident, it is that the CFO role is one of the most valued.

To protect that role, let the finance groups first upgrade their environments to match the digital capabilities that less than 25% of finance groups have achieved.

Only then let’s talk about what else the CFO should take on.

Until next time,

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