FBP - Series 1, Post 1: The Evolving Role of Finance
Series I. Strategic Alignment through Finance Business Partnering: 1. The Evolving Role of Finance
During the next months I’ll write up my ideas in a series of posts. Writing in the past weeks in short bursts felt as if I’m just scratching the surface without getting to the bottom of things. I’ll now research and write about one topic for two to three months across several posts. The topic at hand, as mentioned in the title, is Finance Business Partnering (FBP).
I’ve come across the term in LinkedIn and in different finance podcasts. From one hand it’s not clear why we’d need a new name for a role that finance should be fulfilling anyhow, but breaking out from a mould that is not working as it should be sometimes requires this. The core ideas around the term are appealing, so I aim to get a better grasp of the fundamentals and reach step 3 in the Learning Loop advocated by Shane Parrish of Experience → Reflect → Compress/Abstract → Action.
The outline that I’ll start off the post series is as follows:
I. Strategic Alignment through Finance Business Partnering
The Evolving Role of Finance (current post)
Collaborative Tools and Strategies for Financial Business Ecosystem
Trends in Finance Business Partnering
II. Collaborative Planning as a Catalyst for Growth
Stakeholder Engagement in Vision and Strategy Alignment
Sustainable Growth through Collaborative Financial Planning
Being Directionally Correct: Navigating Business Constraints
As I learn about the FBP (Finance Business Partnering) concept in the coming weeks and months, there can be iterations to the structure. Or who knows, maybe any additional posts (well, should finish by Christmas).
And now, to the post of the day.
The Evolving Role of Finance
I. Introduction
The role and impact of finance function is evolving together with technical and organizational development. Finance function is not the most innovative business functions given the low tolerance for error. Perhaps also the perception of what finance can and should do is not very business oriented. However, modern solutions enable finance to close the books and access data ever faster with high reliability and therefore dedicate time for bringing out actual insights that enable unlocking new value. Perhaps we are at the gusp of an exponential growth curve of finance value to the organization. At least I hope and feel that we might be getting there.
In researching and writing the current post, I’ve first utilized two articles to illustrate the trends how finance role has evolved: McKinsey's "Finance 2030" and Anders Liu-Lindberg's "Welcome to Finance 5.0". I’ll summarize the past, present, and potential future of finance from its its transactional roots to the strategic role of today.
Based on the insights from Netflix co-founder and first CFO Jim Cook, I’ll then describe the importance of finance partnerships. Further, by integrating lessons from Jim Collins' "Good to Great" and Donella Meadows’ “Thinking in Systems”, I’ll draw parallels between the transformational journey of companies and that of finance roles. Furthermore, I’ll propose how at a time when business evolve ever faster and we have access to more and more data, the ability to think in systems is becoming critical for finance.
Lastly I’ll speculate on the emerging trends, technological advancements that finance professionals should be aware of, emphasizing the mindsets needed to be adaptable and to have strategic foresight in this ever-changing landscape.
II. Historical Perspectives of Finance
Once primarily seen as the organizational backbone responsible for bookkeeping and transactional activities, the finance department's role has dramatically shifted over the decades.
Cost and Efficiency Drive: Relying on the McKinsey’s Finance 2030 article, over the past ten years, finance departments across various sectors have streamlined their operations, decreasing costs by an impressive 15% to 35%. These weren't mere austerity measures. Instead, they were deliberate strategies to move from manual labour to driving greater value with leaner operations.
Emergence of Finance Leaders: Amidst this transformative phase, some finance departments emerged as "finance leaders", setting a benchmark in operational excellence. While already efficient, they challenged traditional paradigms, pushing the boundaries to realize even better outcomes. Being a leader meant to not just drive cost-cutting but optimizing company’s resources to derive maximum value.
Shift to Value-Driven Activities: According to McKinsey, the transformed finance organizations departed from the conventional finance roles. No longer relegated to just numbers, finance professionals evolved as strategic partners. They played central roles in shaping organizational strategies, leading financial analysis, and pioneering risk management initiatives.
III. The Modern Finance
Today's finance function stands at the crossroads of tradition and innovation, guided by strategy, enabled by technology, and driven by vision. Inspired primarily by insights from Anders Liu-Lindberg’s Welcome to Finance 5.0 article, I’ll write about the new finance paradigm.
Beyond Transactions: The contemporary finance professionals are not just executors but strategists. As Liu-Lindberg puts it, they are now at the helm, steering their organizations' strategic directions. This sentiment echoes in McKinsey's findings, with leading finance teams being the enablers, not just the controllers, playing an indispensable role in guiding their firms towards data-backed, informed decision-making.
Tech-Centric Approach: The digital age demands a tech-centric approach, and modern finance is rising to the challenge. While Industry (and Finance) 4.0 is about technological advancements, including AI and advanced analytics, Liu-Lindberg's "Finance 5.0" envisions that human is back at the centre of work providing the value by utilizing the technological capabilities. Artificial intelligence, machine learning, advanced analytics are not useful without somebody applying them.
Upskilling for the Future: The dynamism of the modern business landscape necessitates continuous learning. Both McKinsey and Liu-Lindberg stress the unavoidability of upskilling. As the level of complexity and speed of change increase, finance professionals cannot rely solely on their numeric knowledge. Even though we have easier access to tools with no code and low code solutions, finance professionals need to have the capacity to know what to ask from these tools.
At the same time, upskilling cannot be approached as just attending workshops or courses; it's about cultivating a mindset of perpetual learning, embracing change, and staying ahead of the curve. A mindset that may not come naturally for finance professionals.
IV: Finance Partnerships: Beyond Numbers to Business Strategy
Today, in the ever-evolving corporate environment, finance's role is undergoing a fundamental transformation. We (should) see the end of siloed finance teams and move to the paradigm of integrated partnerships. Taking inspiration in this section from a recent FP&A Today podcast titled “Parnering & Chill”: Netflix’s first CFO on Blockbuster FP&A with Jim Cook, this partnership extends beyond the ability to present the numbers. Early and sustained collaboration is critical to be able to provide actual impact that enables business success.
Embracing a Collaborative Culture: The role of finance extends beyond ledgers and spreadsheets; it's a vital partnership. Finance professionals need to possess a holistic understanding of the business in order to be able to ensure that the organization has a solid financial foundation. The collaboration and learning that finance enables allows business stakeholders to understand how their activities impact the bottomline, ensuring that both sides are comfortable asking questions at a relevant time and deepen their understanding.
FP&A: Delivering Strategic Insights over Spreadsheets: FP&A professionals are urged to see themselves as stewards of insights rather than just data handlers. The real product finance offers isn't the spreadsheet but the actionable insights derived from it.
“Your job is not the spreadsheet. Your product is not the spreadsheet. Your product are the three or four key insights of that report and maybe some recommendations how to course correct and developing that relationship to figure out how to grow the company.”
Think of jobs to be done. In this sense, you are the CEOs of your unique products, ensuring that each insight carries strategic significance, rather than drowning your business counterparties in an ocean of data.
The Rise of FP&A Personnel as Mini CFOs: With the responsibility of bring out insights and actionable recommendations, FP&A professionals are the “mini CFOs”. Thanks to ever-easier BI capabilities, FP&A roles are no longer confined to creating reports but extend to guiding business units with strategic clarity. This is a different mindset that is also sometimes hard for finance introverts to embrace, but it brings depth to their roles, elevating their value to the business.
The Importance of Going Deeper than Data: Rather than passively presenting numbers, FP&A professionals should probe deeper, constantly asking from their insights “so what”, “now what”, and crucially “why”. Of course getting to the “why” requires finance to look up from their spreadsheets. Both an active engagement with their stakeholders as well as the data helps unearth real connections, fostering a more nuanced understanding of, for example, the path from sales leads to performance.
The Courage to Communicate: The best insights are ineffective if not communicated with conviction. It's vital for emerging FP&A professionals to hone their “soft skills”, establish relationships, seek mentorship, and cultivate the courage to voice their insights and recommendations with confidence. We cannot put the responsibility of picking out the valuable insights from our detailed reports on business stakeholders. Either we communicate with conviction and test our hypotheses through this or we’re not doing our jobs.
Cultivating Relationships through Active Listening: Jim Cook brought out in the interview as one aspect that resonated with me the value of building robust professional relationships early on. This includes active listening tours, deploying non-judgmental open-ended questions to delve deeper into company sentiments and identifying potential points of tension.
“What you're looking for is where is the tension in the partnership between finance and that in that org? How can you better serve them? How can you go faster with more clarity? Developing relationships means starting with a conversation, not starting with a spreadsheet. You do not start with a spreadsheet. You start with a conversation of the business, how they think about the business because you're going to learn something as well.”
Such proactive engagements fortify FP&A roles, ensuring we're more than just number crunchers but become the valued partners.
V. From Good to Great – Learning from Top Companies
The journey from mediocrity to excellence is often arduous, laden with challenges, insights, and invaluable lessons. One also often doesn’t notice what is mediocre or doesn’t have incentives to step out of the comfort zone “when things are fine”. Jim Collins' "Good to Great" masterfully encapsulates why a journey from good to great is needed, how to identify what is greatness. The transformational stories in the book resonated with me also from the perspective of finance business partner evolution.
Insights from "Good to Great": At its core, "Good to Great" delves into what differentiates good companies from truly great ones. It underscores the importance of visionary leadership (level 5 leaders), disciplined culture, and an undeterred focus on core competencies. Level 5 leaders have personal humility and are more interested in company success than personal accolades. Aside from an inspiration for CFOs, from FBP perspective as well, one should focus on what you as a finance professional can do to make the company successful, as opposed to admiring how elaborate your financial models are.
In addition, the book describes the Greek parable of the hedgehog vs the fox. The fox knows many things and is cunning, while the hedgehog knows “one big thing” and is able to always outsmart the fox. The “one big thing” as described in the book would in the business context comprise of three things:
What you can be the best in the world at,
What drives your economic engine,
What you are deeply passionate about.
By this, organizations should focus on what they can be best at and finance business partners need to shed light on this. FBPs must identify key financial metrics and drivers and ensure that resources are allocated efficiently towards them. It's a call for us to understand the strengths, weaknesses, and economic drivers of the companies we operate in.
The Flywheel and the Doom Loop: According to the book, "Flywheel" represents the cumulative effect of multiple efforts, consistently applied in the same direction, resulting in momentum and eventual breakthrough. In contrast, the "Doom Loop" depicts inconsistent, disjointed efforts leading to a lack of sustained momentum and direction. Finance Business Partner role is not about transactional financial duties but about driving consistent strategic actions and help the organization build sustainable momentum. Conversely, sporadic or reactive financial strategies can trap organizations in the Doom Loop, preventing them from achieving long-term financial stability and growth.
Mirroring the Finance Evolution: Much like the companies that transitioned from good to great, the finance function role is undergoing a similar metamorphosis. Previously stuck in transactional duties, the modern finance partner is a strategic ally, armed with insights and integrated into core business functions. One should bear in mind what forms a mutually beneficial partnership. It’s not about being the service provider who just answers what is being asked for without taking ownership of the context. The role evolution resonates with the companies' transformational journeys, underscoring the importance of adaptability, learning, and growth.
VI. Systems Thinking and Its Significance for Finance Business Partners
In business, every decision, no matter how trivial, has ramifications. Understanding the breadth of the impact requires a holistic approach to decision-making rooted in systems thinking, as articulated in Donella Meadows’ "Thinking in Systems."
Introduction to Systems Thinking: Systems thinking isn't merely a concept; it's a perspective. It encourages viewing problems not in isolation but as part of a larger system. In essence, systems thinking is about recognizing patterns, understanding relationships, and predicting outcomes based on various inputs into a system.
Leveraging Systems Thinking: For financial partners, systems thinking is invaluable. No decision is made in a vacuum. The decision have an impact on and are impacted by numerous factors - market and organizational dynamics, operational constraints, to name a few. There are both reinforcing as well as balancing feedbacks that you need to understand and take into account. Your actions can add fuel to the fire (when needed and when not needed), as well as extuingish the flame (when needed and when not needed). By embracing systems thinking, finance partners can understand the implications of their recommendations and decisions, ensuring they are the enablers in unlocking business value.
Real-world Implications: Adopting systems thinking in finance has tangible benefits. It aids in creating robust financial models that are based on reality, account for the second and third order circumstances as well understand that there will always be a level of uncertainty that no model can represent. A great FBP understands when the situation is complicated, when it’s complex and when it’s chaotic to tailor how to approach building the financial modelling with a relevant goal in mind.
Most importantly, systems thinking cultivates a culture of proactive decision-making, ensuring financial partners are not just reactive to challenges but are perpetually prepared to account for them.
VII. The Future of Finance Business Partnering
The finance landscape, known for its adherence to tradition and precision, is amidst a transformation that beckons an entirely new era. And as with any transition, it paves the way for contemplation – where are we headed next? Are we ready to acknowledge that there is a new path we should take? Even though we should admit that the only constant is change and it’s not worth trying to predict the future, let’s still think what could the future hold for finance.
Predictions for the medium term: The acceleration of technological advancements is steeping into the finance domain with hints of predictive and prescriptive analytics, automated finance, suggesting that also the finance domain is on the brink of needing to rethink what we stand for. Automation and AI are two domains that should enable finance to look up from the spreadsheets thanks to streamlining the transactional tasks and venture into more complex territories. Predictive analysis, so far more understood perhaps as the domain of hardware operations, should become commonplace for finance professionals.
Moreover, as the economic landscape is ever-evolving, finance professionals will find themselves at crossroads where we should be able to utilize external and internal intelligence. Finance business partners will serve as bridges, merging internal insights with external developments and outlook, ensuring business remains evolving in accordance with external circumstances.
Technological Advancements and Changing Landscapes: The growing influence of technologies like AI, blockchain, quantum computing and the like may redefine both financial transparency and transactional efficiency. At any given moment of time, finance needs to be on top of the technological developments and step out of the compliance focus to real risk management. Lagging behind in technology adoption may become a risk on its own.
Similarly, real-time data analytics will enable finance business partners to make instantaneous decisions and recommendations to business, merging foresight with real-time insights. Finance business partners should have the technological prowess to understand what insights are relevant to be gained on a real-time basis, what at daily, weekly and monthly intervals. The judgement of efficacy and value from the insights is a skill that will be critical for finance business partners to hold. We can’t be the “CF-nO”s, we need to be the CF-why’s and CF-hOw’s of our business domains.
Additionally, as businesses grapple with novel challenges – be it sustainability concerns, shifts in consumer behavior, or one-off extreme events – finance roles will need to be agile and open to learning areas that it was more comfortable to say that it’s not part of our responsibility. The finance business partner of the future is a mix of strategist, a tech whiz, a product manager, and a financial modelling guru, all rolled into one. We need to be T-shaped generalists.
VIII. Conclusion
The finance function has historically been viewed as a largely transactional role within organizations. However, the evolution of technology, organizational structures, and business needs has seen this function pivot towards more strategic and value-added activities. While finance was once primarily concerned with bookkeeping and financial recording, it has now evolved to become a strategic partner in business, shaping organizational strategies, and pioneering risk management initiatives.
Finance professionals, in their modern incarnation, are not just number crunchers but proactive, strategic thinkers who embrace technology, upskill continuously, engage deeply with business units, and adopt a systems thinking approach. As the lines between finance and other business functions blur, the modern finance professional must be versatile, tech-savvy, and business-oriented, all at once. At the end, it's not about predicting where finance is heading, but actively shaping its trajectory.
Some takeaways from today:
Finance's role has evolved from transactional to strategic partnerships
Finance 5.0 puts the human back at the centre, but one needs to utilize the tools from 4.0
FP&A as a product: Your product is not the spreadsheet. Your product are the three or four key insights
Don’t be satisfied with good. Know what great looks like and see that you enable your business stakeholders reach it.
Systems thinking is essential for understanding how your inputs reverbate through the organization.
Interconnectedness ensures adaptability and trust in changing landscapes.
Thanks for sticking with me! Next article in two weeks.
I. Strategic Alignment through Finance Business Partnering
The Evolving Role of Finance (current post)
Collaborative Tools and Strategies for Financial Business Ecosystem (est. 20 October)
Trends in Finance Business Partnering
II. Collaborative Planning as a Catalyst for Growth
Stakeholder Engagement in Vision and Strategy Alignment
Sustainable Growth through Collaborative Financial Planning
Being Directionally Correct: Navigating Business Constraints