Financial Engineering Is the CFO’s Next Frontier. How to Meet the Challenge?

For years we’ve heard that CFOs need to develop business and strategy skills as their responsibilities across the organization expand. The move from record keeper to business leader demands that CFOs develop competencies in new and different disciplines. Wharton even built an executive education program around this trend.

Yet CFOs seem to have set their sights elsewhere. In a recent EY study, CFOs reported that cost management, risk management, and cash flow remained top priorities in their roles. A recent CFO Signals study from Deloitte also revealed that the direct responsibilities of the CFO are still dominated by corporate finance, treasury, and accounting/reporting.

The trend towards a new, strategic business role for the CFO would seem to be a myth, or at least overblown by industry watchers. However, the same Deloitte study revealed that nearly 75% of CFOs have responsibility for business strategy along with product oversight.

The capabilities and responsibilities of CFOs are indeed expanding, even as the CFO remains in a traditional financial role. In fact, CFOs were never trending away from finance. The real trend is broader and has much bigger implications for business.

Armed with financial engineering capabilities, CFOs are on the cusp of a new era in which they will have influence equal to CEOs

A Path Paved With Data

Improved business acumen does not account for the growing influence of the CFO. Strategy has always been more of an art than a science in most organizations.

The CFO’s office is actually taking a different path, analyzing ever-more sophisticated data to find their strategic solutions.

Traditionally, financial modeling had limited usefulness because organizations didn’t have the data necessary to build truly predictive models. Often, too many assumptions filled the cells on corporate spreadsheets, limiting how seriously they could be taken in a strategy discussion.

Big data changes this paradigm.

Today, CFOs are shifting from reporting and on to forecasting and strategy because they have the tools and the data to do legitimate financial engineering. Wall Street has been doing this for decades – perpetually seeking alpha, as we are fond of saying. It is no surprise then that CFOs in a variety of industries have begun to follow their example.

Armed with financial engineering capabilities, CFOs are on the cusp of a new era in which they will have influence equal to CEOs. Gone are the days when financial executives were merely a spreadsheet-based support system for other executives’ decisions.

The CFO is becoming the best source of performance analysis in the past (reporting), present (real time analytics), and future (forecasting and modeling). This evidence-based view of the entire organization gives CFOs the ability to drive innovation with a degree of certainty the CEO never could muster. 

Finance and strategy will become one and the same.

The Talent Gap

Financial engineering requires a new skillset – a hybrid of finance and data science that is both rare and complex. It’s a stretch to ask the next wave of CFOs to be versed in programming languages like Python and R. They need to build teams that can do it, and that means they will have to enter a talent war with Silicon Valley, pharma, Wall Street and more.

Technology industry researcher IDC predicted that by 2018, businesses in the US will need 181,000 employees with deep analytical skills and five times that number of people with data management and interpretation skills. These abilities are in such high demand that salaries are skyrocketing and the Silicon Valley elite is investing in ever more extravagant benefits and perks to keep their recruiting edge.

A typical CFO would be justifiably frightened by the daunting odds of attracting and retaining this new talent.

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