Transcript
Speaker: As the saying goes, follow the money. On the next episode of The Market That Moves America, we'll learn about what chief financial officers in mid -sized companies are thinking about for the year ahead. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: As the middle market moves ahead in 2019, one group of executives is keeping a sharp eye on how good business is and on what companies need to do to keep performing whatever the weather. Those folks are chief financial officers. What are CFOs seeing? What are they thinking?
Speaker: I'm Tom Stewart, I'm the Executive Director of the National Center for the Middle Market at the Ohio State University's Fisher College of Business. We're the nation's leading research outfit studying mid -sized companies which account for a third of private sector employment and GDP and the lion's share of economic growth. It is the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and Grant Thornton LLP, Cisco Systems and Chubb.
Speaker: I've got a special guest with me today, Nick Arako. Nick is the chief executive of the CFO Alliance. The CFO Alliance is a network of about 7 ,000 top financial executives, mostly from middle market companies, and a strategic partner with us at the National Center for the Middle Market. Nick, welcome to the podcast.
Speaker: Thank you, Tom. It's a pleasure to be here. So tell us a little bit about the CFO Alliance and the CFO Sentiment Study. Sometimes when I think of CFOs, I don't think of them as having sentiment so much as thoughts. But you just completed a big sentiment study of CFOs. Tell us a little about the study.
Speaker: Yeah, Tom, so we produce this study every year. So this is our ninth year of producing our sentiment study. And given that our community of finance executives have an objective and goal in mind around sharing of best practices, benchmarking, and ensuring that they have an ability to harness the power of a qualified peer network,
Speaker: The opportunity to get them to tell each other and us what's on their minds is nothing new to our community. But we've decided to anchor each year the understanding and opportunity for that type of benchmarking through the production of a sentiment study. So between Thanksgiving of each year and the first January of the following year, we're out and about collecting insights and information from our member base.
Speaker: and this year close to 600 of our members participated in the study. So that's a good solid number.
Speaker: It is. It provides us an opportunity to really better understand and help them better understand what they and their peers are committing to this year, what could get in the way of that commitment they're making on behalf of their enterprises. But more importantly, we believe help them build confidence in decision making around key objectives and issues that will drive enterprise performance.
Speaker: So one of the things that I think is interesting is you were out soliciting these opinions, as you said, between Thanksgiving and New Year's Day when sort of two things were happening simultaneously. First of all, companies are putting the final touches and the duct tape and WD -40 on their budgets and plans for the next year. So they're finalizing plans. And the second thing, as we all recall from that period of time, is
Speaker: The stock market was going wild, and there were lots of jitters in the economy. With this group of nearly 600 CFOs, what did they tell you about how they think business is going to shake out in this year?
Speaker: Well, it's interesting. I use this headline when asked this question that Wall Street and Main Street should brace itself for a very interesting year. And interesting does not mean negative. It means that while three quarters of our members
Speaker: characterised their sense of confidence in themselves and their ability to increase top -line performance, i .e. revenues, and more than half said, yes, we're going to
Speaker: commit to increases in bottom line performance and shareholder value, all of them did say that it wasn't going to be easy. So the headline is brace yourself for a very aggressive year focused on increases in top line, bottom line, and shareholder value performance. But an individual and collective group of CFOs who say, we're going to sweat a lot. We're going to have to roll up our sleeves. And the devil is going to be in the details and ensuring we pull the right levers to do it.
Speaker: So one of the things that's interesting is, as you know in our middle market indicator survey, which was out in the field in the first two weeks in December, so it basically overlaps with yours. We found really similar sentiment. We found, first of all, economic confidence. Confidence in the economy as a whole was high, but it had dropped. But it dropped a little bit. And short -term expectations were low.
Speaker: But plans, like how much are you going to spend in CapEx? How much are you going to introduce new products? Are you going to open a new plan or facility? Are you going to open a new market? Those seem to be unchanged. So people were saying it's full speed ahead, but I'm less confident.
Speaker: That's exactly what we're hearing from the Office of the CFO individually and collectively. Flat and or downward is not acceptable. So we're going to, with all faith and confidence, and as we call them the chief reality officers at the table as CFOs, they have strength and confidence in the numbers and in their ability to produce the results, but none are going to think it's easy.
Speaker: So you talked about levers a couple of seconds ago and pulling different levers to basically keep the—this metaphor is going to be terrible—but keep the ship sailing strong and quickly, whatever the weather.
Speaker: Your study showed that CFOs are sort of looking at three things, operational excellence, talent, and digital transformation as the things that they can do to deliver on those top and bottom line promises. Is that the right trio of sort of big activities or big initiatives that CFOs think they have to do?
Speaker: Absolutely. It's the combination of those three and the detail and the levers they intend to pull and the accountability they'll tend to create and the empowerment they'll intend to provide to their counterparts across the enterprise that will make or break their performance objectives, actual versus planned.
Speaker: So let's unpack each of them. Operational excellence. What are CFOs saying and what are CFOs saying that it's, you know, my job is Mr. and Ms. CFO. This is where I can contribute to it.
Speaker: Yeah, well, last year, the emphasis really was on the CFO ensuring that he or she and their team spent time creating accountability and empowerment to the sales leaders and sales professionals at their enterprise to drive top line revenue growth. And while three quarters of our members are still committing that they will play a role and their enterprises will increase top line,
Speaker: this year the survey told us something different. They said that this year the emphasis is now on operations and that 40 % of the survey respondents said that they expected to work more closely with the operational team and in operations as a whole directly than any other area of the company
Speaker: Well, why? Because they view it this time that operational responsibility is going to require them to help their counterparts lead some major type of business transformation project in the year ahead. That this is a year where automation throughout the enterprise needs to happen.
Speaker: that the information and flow of data and information that they can now capture needs to be captured, analyzed, and provided to ensure that the efficiency and effectiveness behind operations is directly tied to their understanding of the results.
Speaker: So that's a little bit different from what I was expecting that you'd say. I was expecting that you'd say that the CFOs are saying that at a time when the weather may be unpredictable and stormy, we want to make sure that we are
Speaker: as lean as possible, as efficient as possible, because the cheapest source of capital is the capital we don't need to use, the capital we can free up by efficiency. The cheapest source of revenue or profit is the money we don't have to lose in efficiency. But you're saying that the CFOs are looking at operations and saying,
Speaker: We need not just leaner but maybe transformed operations, or both. Yeah, you are directly on point with your interpretation of what my members are saying and what we're hearing in our community. Remember, it's the intersection of people, process, and technology in operations that ultimately determines the performance behind the operations themselves, i .e. the results.
Speaker: So this isn't a defensive approach to operations. What they're saying is we want to use operations aggressively, not defensively. That is exactly right. And there's the key sentiment within the middle market that you and I both know. But for many, the last remaining source of competitive advantage is that
Speaker: that customer experience and how something is delivered, product or service, and ultimately how the strength of the relationship then transfers itself to the performance in the top line and bottom line. And so for most of these enterprises, the emphasis is on viewing that experience and the operations and the performance behind it as an offensive move, not a defensive move. Got it.
Speaker: This kind of connects to the digital piece, too, doesn't it? If you think about operational transformation, but when CFOs are looking at this amorphous idea of digital transformation, what are they telling you?
Speaker: Well, I'll tell you a very kind of blanket statement. Last year at this time, we asked our CFOs, how is your intention to increase and bring more data and quote the numbers to the rest of the business with better dashboards? The answer was about 40 % of them said we're doing it. We saw a 20 percentage point increase
Speaker: in that answer this year with more than 60 % of our survey participants saying, nope, you know what, this year we're going to enhance our ability to collect, analyze, and provide the power of the quote numbers via dashboards across the enterprise.
Speaker: so that this is an overall enterprise strategy so that the idea of financial data and KPIs could really be a way to ensure that not only is the enterprise and these various kind of silos within the enterprise executing instinct,
Speaker: but that they have great power to be agile and shift should they see something there that they don't like or they see a trend where that they didn't see before. Getting back to that overall sense that this could be a year of some volatility and agility will also be needed to execute.
Speaker: Right, so if the weather's going to be bad, the sooner I get notification, the faster I can read the weather, the better I can adjust it. You know what? You're giving me this image a few years ago, gosh, many years ago. I was near Philadelphia in your neck of the woods, and I went to visit an electrical power grid
Speaker: distributing organization. I went down to their bomb -hardened basement control room. This was a place that basically you couldn't take it out with a bunker -busting bomb. On the wall was this enormous screen and dashboard that basically showed
Speaker: all of the electrical network connections through eastern Pennsylvania and the connections out to New England and upstate New York and all that sort of thing.
Speaker: It was the Starship Enterprise. It's this cockpit that allowed me to see everything. And that's the image I'm getting, that CFOs think that 60 % of your numbers saying they are really going to try to create cockpits for visualizing the business in real time.
Speaker: You are absolutely right. They believe they have a real opportunity given their natural comfort with the idea of data driven decision making and an ability to capture, analyze and in a concise and efficient way communicate that information.
Speaker: towards decision making or towards influence in decision making. All of that is in place. But here's another unique piece, Tom. Over 55 % of those surveys respondents said they intended to meet regularly with the functional leaders in operations and across the enterprise to align this use of data and technology with decision making. So they're not just going to say, here's your dashboard, have at it.
Speaker: They recognize and have some sensitivity to the fact that maybe a number of their counterparts, regardless of their experience level, regardless of their leadership level, may not be naturally inclined to approach the operational responsibilities they have with that data and dashboard in mind, or they may not know how to.
Speaker: I'm thinking that this is a really interesting potential competitive advantage for a mid -sized company. Big enough to put the resources together and smart enough to put the resources together to create that sort of
Speaker: omnivision dashboard and small enough and agile enough to actually use it to make decisions in the company much quicker than big companies would. So big companies might be able to afford that view better, but they're going to be slower to react.
Speaker: In theory, a mid -sized company that really is digitally aware like this might also be able to be responsive much more quickly than big companies and with more oomph than smaller companies.
Speaker: I couldn't agree more. And there's a great sense of empowerment and opportunity that the center and organizations like ours are trying to accelerate, at minimum, reinforce so that they're acting with a sense of confidence that maybe you, in many cases, what you said may be right. And we want them to test that. We want them to feel empowered by it as a middle market enterprise instead of waiting to see or saying we can't do.
Speaker: Yeah, yeah. So let me talk about the third theme, which is the people theme. You know, our organizations, the CFO Alliance and the National Center for the Middle Market, we've done a whole bunch of things together, and quite a number of them have been around talent.
Speaker: And to some extent, that's always been a bit of a surprise. Again, the CFO and the CHRO are often oil and water, or they seem to be looking at – capital and human capital seem to be looking at the world through somewhat different lenses. But we've seen – I mean, I've seen in our interactions with you, and you've seen this incredible
Speaker: Responsiveness from CFOs to thinking about the talent agenda. What's going on? Well, you know, I am, as you know, as CEO of the CFO Alliance, both blessed and spoiled to sit in the middle of real time interaction between our members talking about what drives the value in their business.
Speaker: And I will tell you collectively, and you are not surprised by this because you in the center in the middle of this all, the majority of our members truly believe that they can link directly the shareholder value and performance of their company to the talent. And so I will tell you one of the most
Speaker: Heated debates you'll find is that someone comes into our communities and says, you view human capital individually collectively at the cost. You're the CF know as it relates to talent. And my members will say, no way. We are spending the bulk of our time and have a real sense of authenticity and purpose
Speaker: playing a role in attempting to help our enterprises attract, motivate, retain, and drive value out of our most important asset, which is our people.
Speaker: or I'm the marketing guy, whatever it is, you're the suit, and I'm this other. What are the three things that I should ask of you as a CFO to be something other than the CF no when it comes to talent?
Speaker: Well, look, we've been asking this question. In fact, I had a group of our members together yesterday in New York and a number of them brought their CHROs with them to our discussion around equating talented values. So I will share with you a bit of what's been raised. Number one, the CHROs and the other C -suite executives
Speaker: are asking the CFOs to empower them with data and information that they can use that have some level of explanation to the financial statements themselves, even if it's a degree of separation from or two degrees from the actual numbers entered on that income statement, that balance sheet, or some other form of financial statement. So show me, help me understand where our quote, our data
Speaker: fits with what drives the business itself. So show me KPIs that are not just numbers, but that are financially focused. The impact of employee retention or turnover. Yes, that's exactly that. Show me the real cost or show me the real impact of revenue. It's that simple or profitability.
Speaker: Number one, number two, CFO, please make this a two -way street. Don't jam the language of finance at me on the bridge like a toll taker. Know that it has to work both ways. Help us help you as CFOs do your role better. So please don't make it a one -way conversation. Turn on the right side of your brain. Yeah, turn on that other side, right? And number three, what can we do together
Speaker: to accelerate top line, bottom line and shareholder value performance. So let's find a project. Let's find an initiative where the CFO and the CHRO go arm and arm together. Correct. This is what when we were in Philly, we were talking about, for example, Salesforce Effectiveness as a beautiful way in which you could see the CFO and the CHRO coming together to sort of pull a project that would equally engage both of them and have very clear financial impact.
Speaker: Correct. That's exactly right. Yeah. So give me the data, understand my, help me understand your world, help me understand, help you understand my world, both with data and facts. And then let's find a project that we can do together. Three things on the CFO's HR or talent agenda. That's very true. But what that does also uncover is a real growing need we're seeing in the middle market, which I'm sure you're seeing as well, is that if we're going to let the numbers speak,
Speaker: We have to ensure that we have the competency in -house or around our CFOs and their colleagues with FP &A or financial planning and analysis competencies that can be applied. Because talking about it and being able to understand and do it and an ongoing basis, being able to monitor, create accountability, and let the numbers speak is not necessarily something in terms of a skill or competency that's been embedded in each of us.
Speaker: And I will tell you, the CHRO and CMO, as an example, said, great, let's look for that skill and competency. Can we borrow that skill and competency from you and your team? Can we train others within our own teams and enterprises outside of finance to play that type of role? You know, I once, years ago, was walking through the lobby of the Charles Hotel in Harvard Square, and I saw a guy carrying a coffee mug that said, budgets are for wimps.
Speaker: And I said, where did you get the coffee mug? And I said, I'm at this conference it was given to us by, it's part of the conference. I said, are you guys in marketing? And I said, how did you know?
Speaker: But let's get back to this and sort of wrap up. Nick, what I'm hearing is talent, technology, and a tight ship. Those are the three things that are top of mind for chief financial officers for mid -sized companies as they face into an uncertain 2019. Tell us a couple of words more about the CFO alliance. And if people want to get the rest of this study and dig into the details, how can they find it?
Speaker: Yes, so I appreciate the opportunity. The Alliance community itself is meant to be a place where finance executives can gather online and offline in a setting where they are gathered with a qualified set of peers and an environment that's quote, off the record, where they can openly discuss, debate and dissect
Speaker: the opportunities and issues that they and their enterprises are facing, and the best way to build confidence in decision -making is to harness and access a qualified peer network. So we have our groups within our 7 ,000 members who gather based upon shared interest in issue, industry, and metro market with a mix of online and offline gatherings all housed at the CFOAlliance .com.
Speaker: And that's the CFO Alliance. It's www .thecfoalliance .com, right? That's correct, Tom. Thank you. And thank you, Nick. Thank you so much for these insights. As I said, the shared partnership, the shared mind space between the CFO Alliance and the National Center for the Middle Market has been, I think, highly certainly valuable to us and I hope valuable to you as well.
Speaker: above all, valuable to all of you out there in podcast land listening to this. We'd like to thank you for listening to The Market That Moves America. Never miss a new episode. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts can be found. Or you can subscribe and learn more about us at our website, which is middlemarketcenter .org. Thanks very much.
