CFOs increasingly are being counted on to evaluate business models, reckon with ESG challenges to fiduciary matters, figure out compensation strategies for a labor-tight era—and do everything else they already were doing. Now, add another major responsibility: straightening out the supply chain.
Two consultants from BDO USA helped attendees at Chief Executive Group’s recent Strategic CFO Forum understand how one of the greatest new business challenges of the last few years has landed in their laps, and how they can make the most of it.
Supply-chain accountability “used to be a stepchild,” Jim Clayton, principal and business-transformation leader for the Chicago-based accounting and management consulting firm, told the gathering. “But now it’s moved up the food chain to where it’s considered a strategic responsibility because of its impact on financials.”
The difficulties in managing the supply chain these days involve “rising material costs, transportation costs and demand unpredictability,” Clayton said. “Every one of them impacts [financial] forecasts, cash flow and revenue.” And even though Covid is now “in the rear-view mirror,” he said, “there are [rising] oil and gas prices and global unrest. These things will keep happening. There’s not going to be nice stability where everyone has everything under control.”
As more CFOs are being counted on to drive supply-chain and, therefore, business resilience, there are five ways they can do so, according to Val Laufenberg, partner and co-leader for strategy and growth at BDO. As she told the Forum, they are:
- Providing data insights for strategic planning and budgeting on lines of business, and customer-product-market combinations.
- Assist the organization in driving out unnecessary complexity.
- Drive transparency into the supply chain, connecting supply to demand and including your outside partners.
- Champion migration of the business risk related to the supply chain into your scenario planning.
- Add resiliency review as part of your normal processes.
Here are some components CFOs must consider as they typically take on more responsibility for supply-chain management, according to the two BDO consultants:
Becoming Dr. No. Many executives “didn’t think [the supply chain] was a scalability issue,” Clayton said. “That’s why CFOs are well-positioned to drive this stuff.” Supply chain crises or future investments are “usually asking to spend money,” he said. “Someone says we need a supply-chain solution. But one of your roles is to say, ‘No.’ It’s one reason a lot of companies move this to the CFO suite—no one is more used to saying no.”
ESG can be important. Environmental, social and governance issues are taking over many corporate decisions, and that can be especially true in supply-chain matters. It reminded Clayton of when the Sarbanes-Oxley Act (SOX) of 2002 abruptly imposed vast new record-keeping and reporting requirements on companies to help stem the kind of abuses that led to the Enron scandal.
“Everyone is talking about ESG, it’s the buzz word du jour, it’s the new Sarbanes-Oxley,” Clayton said. “Everyone is scrambling, but things are unclear. The environment is one big issue” in the supply chain. “What is your carbon footprint? It’s becoming a real financial lever that companies can move by trading off suppliers and trading in carbon credits.
“And there are ‘social’ requirements such as pay transparency. You’ve been told to shift your mindset from being gatekeepers of secret data to, ‘Hey, we need pay transparency.’ Not only within the company, but you have customers and you want to make sure you don’t have discriminatory pay practices.”
And when it comes to governance issues, Clayton continued, “This is the biggest reason ESG is landing in the CFO’s lap. There are new internal and external reporting requirements and requests. Most boards are setting up committees for ESG. And it ends up with the CFO because it’s part of the financial and control environment. It’s like SOX: It’s a cost of doing business, and you’re going to have to do it.”
Risk management rises. In a geopolitically and economically more dangerous and uncertain world, and one still being affected by pandemic hangover, Clayton said, supply chains are involving more risks to the business. “That didn’t used to be in business-risk planning; everyone assumed they would get stuff,” Clayton said. “Now strategic plans must include mitigation. You must build scenarios into revenue-cost models” taking account of uncertainties such as petroleum prices.
Insurance is becoming a bigger factor as well. Covid-era vulnerabilities in business-interruption insurance have been revealed, prompting companies to revamp such policies, and CFOs must be in the middle of that.
“Insurance companies are about protecting their own financial statements,” Clayton said, “not necessarily yours. The onus is on you for coverage taps.”
Remote work still ripples. The work-from-home revolution prompted by the pandemic created a list of new IT-security issues, and CFOs have been enlisted in addressing them. “People were sitting at home not on secure networks,” Clayton said. “Everyone makes risk-based decisions at some point, but during Covid, cybersecurity came front and center because of the remote worker.”
Laufenberg said that she doesn’t see cybersecurity issues declining, either, “because of what we need in terms of more transparency. More data puts more information out there at risk.”
Another issue stemming from the rise of remote work is its effects on productivity. CFOs should be intimately involved in discussions about a “return to the office” in part because of this factor. One major BDO client, Clayton said, has seen a drop in productivity of as much as 15% to 18% compared with before Covid.
“We haven’t seen this kind of impact in higher functions such as [controller], but home-based transaction throughput suffered during Covid because there was no infrastructure,” Clayton said. “We didn’t have the tools.
“And what’s really disturbing to me at this point is that everyone is sitting on a piece of real estate now and may be shuttering a piece of it. But no one has pulled the trigger yet. Most companies are stuck in long-term, high-cost [leases] with exit clauses. So they’re kicking the can down the road.”
