The future of finance
The challenge for every “financial” is to embrace the new, while maintaining the positive aspects of the old. Therefore, says Paul Smits – former Chief Financial Officer (CFO) of organisations including Havenbedrijf Rotterdam and KPN: “Keep innovating and challenging yourself without any compromises, but don’t forget what the basis is of your profession. Embrace the transformation in the financial role, but also make sure you remain the professional who ensures there’s enough money and reliable reporting.” Our interview with him concerns transformation, digitisation, sustainability, innovation, and people management.
From bookkeeper to adviser
The basis of the financial role won’t disappear anytime soon – Paul Smits is absolutely convinced of that. “But perhaps that’s the only thing that isn’t changing. The role of the bookkeeper as it was ten or twenty years ago really has disappeared and been totally transformed into the role of advising the managing director and the rest of the company. They need to be able to rely on a CFO really getting a few things right: there needs to be enough money for the company to be able to grow in both the short term and the long term, and everything needs to reported on properly. There have to be reliable figures that everyone can rely on, both inside and outside the company. That was true a hundred years ago and it’ll still be a hundred years from now. The importance of the financial function in the current coronacrisis is evident. Nevertheless, it is extremely important that the CFO not only looks at today's cash flow and risks, but also at the structural improvements and the price changes that can now be initiated. The combination of the short and the long term is crucial."
The biggest challenge is the transition itself
The big challenge during a transformation is the classic problem of keeping the shop running while having to do renovations at the same time. “If you want to change a system,” says Paul Smits, “you can’t just close down for three months. You have to keep things running, produce reports, and so on. That’s what the company and the world outside expect of you. But at the same time, you have to make sure that you keep up to date. This applies to systems but also to the people in your department. If you know what you want to achieve, then the makeup of your team might need to be different. But you can’t arrange that inside just three months either. The biggest challenge is the transition itself. If you know what the point on the horizon should look like, how the supporting processes should run and which disciplines you want to strengthen, then the biggest challenge is how to get from A to be B in the shortest possible – or at least acceptable – time. That’s really complicated, because if you tackle it the wrong way, you run the risk of it getting bogged down or taking far too long, of nothing actually happening, of it becoming too expensive or mistakes being made – so that eventually it all just falls apart.”
Artificial intelligence is not a threat but an opportunity
In the changing financial role, digitisation plays an important part. It used to be that systems were there to provide support for the work, but nowadays the entire financial administration is located within such a system. ‘Robotic process automation’ automates manual tasks and eliminates transactional work. “At the same time though", says Smits, “business units that were outsourced to the Far East or Eastern Europe are returning to the Netherlands. The fact that it’s cheaper to automate in the Netherlands than to outsource in India is directly due to digitisation. Increasingly, automation is also playing a tactical role. To a large extent, you can automate management reports and use machine learning algorithms to generate a forecast for the rest of the year, and even for subsequent years. Machine learning cuts out all kinds of non-rational factors and removes the subjectivity that negatively affects the accuracy of that forecast. It’s also much cheaper and much faster. I expect all kinds of decision-support programs based on artificial intelligence to play a role in finance. That’s not a threat but an opportunity to further professionalise our work. Developments are only a threat if you don’t understand them. If you do understand them, then they offer opportunities. So stay alert and immerse yourself in them. Experiment, see what suits your work and your company and make sure that you keep yourself, but also your company’s financial position, up to date.”
"I expect all kinds of decision-support programs based on artificial intelligence to play a role in finance. That’s not a threat but an opportunity to further professionalise our work. Developments are only a threat if you don’t understand them. If you do understand them, then they offer opportunities. So stay alert and immerse yourself in them. Experiment, see what suits your work and your company and make sure that you keep yourself, but also your company’s financial position, up to date.”
The CFO as a sparring partner with added value
The significance of the role of CFO has to do with how much of an impact it has on the rest of the company. “As the CFO,” says Paul Smits, “it’s pointless if you think you have a lot of strategic value but nobody else does. It’s extremely important for the whole company to have confidence in you as the CFO. If they don’t, it’ll have a drastic impact on your effectiveness and you’ll be ‘only a bookkeeper’. And then you’ll be back where we were 20 years ago. So don’t just stay in your office thinking up clever stuff. Instead, make sure that your output finds its way to people who will actually do something with it. You’ll only have an impact if what you say is correct and people realise it is too. So devote at least as much time and energy to building up a relationship with the rest of the company, and make sure that people start seeing you as a kind of sparring partner with added value. That’s not an easy task, because it requires different competencies and skills from those that a financial person is used to. It’s not something you learn at college but that you realise and understand as you get older.”
The CFO as a people manager
Paul Smits strongly believes in the CFO as a people manager who utilises the strength of his team. That requires a mature team made up of employees who display professionalism and assurance and who dare to give feedback, including to the CFO. “That’s a far better guarantee than if you think you have a monopoly of wisdom by yourself and give all the orders,” says Smits. “You have to have an idea of what you want the company to achieve, but then you need to look for people who will help you implement that strategy and tighten it up. Because then they become co-owners of that strategy, they’ll do things on the basis of a vision rather than an order. That’s a fundamental difference. If employees are motivated by a vision of where they want things to go, you’ll no longer need to tell them what to do. They’ll already know, and they’ll also believe in it. That’s crucial as regards their effectiveness, motivation, quality, and job satisfaction.”
The CFO must drive innovation
In Paul Smits view, what also contributes to a successful transformation is if the CFO acts as a driver for innovation. “Innovation remains a choice of course, but if you don’t innovate, you’ll need to accept that your margins and market share will shrink. And you’ll then have to distinguish yourself in other areas, for example by being highly cost-efficient or by relying on existing business contacts for as long as possible. What I firmly believe in are small units powered by people who feel driven to make things a success, as if they were start-ups. Give them the scope within the company and a certain amount of money to do their thing and prove themselves.
The digitisation unit at Havenbedrijf Rotterdam started out like that, with just five people and a very limited budget. They based themselves deliberately at a different location, several kilometres away from our offices. This prevents there being too much interference from other departments. That’s irrelevant in the beginning, because a unit like that first has to work out for itself what it wants and what added value it has. What that means for the rest of the company and what they can offer the company is at first only disruptive.
Another effect of five people working together in a small room is that that in itself has an effect on their motivation. Their thinking is that if they don’t do it, then it won’t happen. People who think that’s cool will really get things moving. The digitisation unit started out with those five people. That became 10, 20, 30 … and it then became so big that the team decided that the influence they had on the company – but also that the company had on them – had become so great that it was wise to move back to headquarters. The unit now has a staff of 70 and it’s impossible to imagine Havenbedrijf Rotterdam without them.
When I was at KPN, we took a stake in a company that we later acquired for 100%. It was located up in Groningen, which didn’t make it easy to integrate it with KPN in The Hague. It took five years, but it was really good because its business model conflicted with that of a similar department within KPN. That business unit therefore needed to become fully mature and gain its own position with its own customer base, so that it wouldn’t be squeezed out when it became part of ‘Big Bad KPN’. That worked out well, because it’s now the main proposition in the field of workplace management.”
Sustainability as a quantitative company objective
Besides digitisation and innovation, the energy transition is highly topical, including for CFOs. “Take sustainability and the problem of CO2 emissions,” says Paul Smits. “How you decide to report on it is important. You often see that indicators are thought up afterwards in the annual report, and are then reported on. That’s not of course the way you want to operate – you want it to be integrated into your company strategy. You need to decide in advance what your quantitative goals are in terms of people and planet, just like you do for profit, your turnover and profit. In actual practice, that often doesn’t work out (or not immediately) because of the resistance to change and inertia within the system. Needless to say, it’s much easier to just keep on doing what you’ve been doing for years already. If you and your company need to change, it makes you uncertain. But, the average CEO and CFO aren’t all that good at being uncertain. If you’re struggling with the question of how you, as an incumbent, can become successful again when a transformation takes place within your market, you need leaders who have the guts to make themselves vulnerable and who want to embrace uncertainty – leaders who do understand that things need to be done differently and don’t know exactly how, but at least get things moving. And who are rigorous about it and dare to make tough decisions.”
Make impact with a bold purpose
According to Paul Smits, there are two very clear examples in the Netherlands of companies that have succeeded in doing that, namely DSM and Unilever. “Both their CEOs had the guts – but also the character and competence – to successfully achieve financial results with their companies in the old way and at the same time increase their impact on the planet and society. They are competitive commercially while still trying to make sustainability important. If such companies put their shoulder to the sustainability wheel, it has an impact on the world and is far more effective than a much smaller and more idealistic company would achieve. Such companies may perhaps do a lot more about sustainability, but because they’re smaller and make far less profit, they also have a much lower impact. Ultimately, it’s all a matter of impact. A few years ago, Unilever stated: ‘we want to twice the turnover but half the footprint’. An idealist would then say ‘half the footprint is still a great deal’. Yes, a company like Unilever has a big footprint, but you have to start somewhere. I’d like the CFO to have come up with that message, so as to say: ‘we have a quantitative target that we don’t just include in our annual report but that we make an objective for our entire company’. That way, you have a powerful purpose that guides your business operations. And that’s the finest thing you can achieve as the CFO, isn't it?”
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