EY’s Danny Buckley: The Changing World of the CFO

Danny heads up EY’s Financial Services CFO Advisory team. With over 20 years’ experience including leading finance teams in multiple divisions within Bank of Ireland, now having returned to practice with EY he works with Ireland’s leading financial services companies, partnering with CFOs and senior finance teams to deliver on their increasingly demanding agendas.

We live in uncertain times for business. You’ve lived through this before – the 2007/8 meltdown for example. What’s the playbook for uncertainty for a CFO?

For me, in a crisis, the key is to breaking the challenge down into bite-sizes and to understand the things that you can control. When you have done this, then you can determine the right courses of action.

While, stereotypically, you might think that the first thing that an accountant would focus on in a crisis is the financials – for me, the first thing that you should focus on is your team. Without a team, a CFO has nothing!

Whatever uncertainty you feel as a CFO, the team is going to feel that same uncertainty magnified, and it’s part of your job to create a firm foundation for the team to work from. At EY, during the current COVID crisis, we could see that, universally, the smart organisations we were talking to were communicating constantly with their teams from the outset, ensuring they had the right infrastructure to support them and understanding the team members who had challenges that needed to be addressed. Key to this was engaging with teams, perhaps more frequently than beforehand, to make sure that concerns were floating to the top quickly.

When you’ve got the team settled, you need to look at the other impacted parts of your business that you can control, allocating the right people to each of those elements, developing plans and monitoring them effectively over the coming months as things evolve. It all sounds quite obvious, but when you are in the eye of the storm, taking the time to put these structures in place does not always happen.

In this continually changing environment, being ready to flex your plans is also key. To my mind, that’s the only way to tackle the steady flow of changing demands on your finance function and your business.

Some key challenges thrown out by the current crisis have been the remote close of Q1 financial data (moving quickly to Q2!), the urgent response to bank customers needed and determining expected credit losses. And, to reiterate, for each of these major hurdles, a CFO needs to go onto a crisis management footing, in the same way as their organisations have, ensuring that there is someone on point on their team dealing with each of the hurdles that need to be scaled.

“Whatever uncertainty you feel as a CFO, the team is going to feel that same uncertainty magnified, and it’s part of your job to create a firm foundation for the team to work from.”

The traditional role of a CFO in a crisis is, I would have thought, to be the guardian of liquidity, access to cash and a safety runway. Does that hold in the current crisis?

I still believe the CFO is a guardian of the business’s resources, be it financial performance, capital or liquidity. There are, however, nuances to each crisis and different jumping off points as we enter into it.

For example, unlike the 2007/8 crisis, the capital and liquidity positions of European banks now are much stronger. Challenges may be around the corner, but they haven’t yet materialised. As a result, the current challenge for banks has been to rapidly focus on supporting their customers through this period of volatility.

These crises, 2008 and today, have different symptoms; these different symptoms need different customer solutions. Finance function must understand the solutions that are being provided to customers, support the business in the delivery of these solutions and anticipate the regulatory or financial implications of the steps being taken. It is critical that CFOs have the right processes, data and systems to understand and predict the implications of the crisis on the institution and the implications of the institution’s response to the crisis.

Now that businesses are finding their feet in the ‘new normal’,  how can CFOs perhaps stop thinking about the day-to-day and look forward?

I think it’s instructive to look back before we look forward. There was a trend in the early 2000s where CFO functions were beginning to evolve from bookkeepers to more strategic roles: business partner teams started to grow within finance. But during the 2007-8 crisis, the role of finance functions narrowed as a result of cost pressures, increasing regulatory demands and the intense focus on getting the numbers right. Business partnering and the element of finance which looks strategically to the future was diminished; and maybe even seen as discretionary rather than necessary.

More recently, I felt that we were again moving towards a more forward-looking, strategic ambition for the CFO; but the current crisis may set things back again. However, as things return to normal, and growth is talked about, the need for finance functions to understand their businesses and provide the insights to drive their business forward will again increase in priority.

I would just add that, even in the current crisis, it is critical that CFOs are focussed not just on the matters at hand but also thinking beyond to what is on the horizon – these things shouldn’t be done sequentially.

It occurs to me that it’s actually harder for CFOs right now, because whilst governments are doing their best to support businesses with furloughs and other interventions, it creates a false perspective of a company’s wellbeing…

Understanding the financial position of their customers during this period of volatility, government intervention, and payment moratoria are all key areas of focus for CFOs. This creates a particular challenge for CFOs in relation to estimating the Expected Credit Losses that they need to reflect in their financial performance. For larger business customers, banks can focus on sectors that may be higher risk. However, further down the line into smaller businesses and retail more generally, the data required to understand which of their customers’ financial position may have deteriorated is currently much more difficult to obtain. A couple of examples:

·        A view must be developed on the performance of the economies in which the businesses operate and what is the institution’s expectation of what will happen in the next number of years. Expert opinion has varied initially from a V-shaped recovery, a U-shaped recovery, a W, and now we even hear about the ‘swoosh’!

·        Another challenge is understanding the impact of the government reliefs which have been introduced and what will happen when they taper away. The UK has had government intervention in relation to SME lending and furloughs; similarly there are reliefs here in Ireland for employees and emerging support for SMEs.

Banking CFOs working closely with their Risk colleagues have to try and understand and estimate the net latent loss in their lending books incorporating these uncertainties. What is key is that CFOs have strong scenario planning capabilities to flex to the varied and changing outlooks as they rapidly develop!

Notwithstanding these challenges, CFOs have to take a position on each of these uncertainties, and the sensitivities to changes in outlook, to ensure that there is no misinterpretation of their company’s position.

Let’s turn to the changing role of the CFO. The CFO was previously someone fairly consistently engaged in retrospection, but is now more forward-looking…

The role is largely driven by being a partner to the business: working closely with the business to  predict the future, develop their budgets, forecasts, business plans and business cases for growth opportunities. But to simplify, I just think a finance professional needs to be fully aligned with the business because that’s where the bills get paid from!

Moving forward, the CFO as a business partner is going to have to move deeply into data. Again, let me use banks as an example, because they are a great illustration of the direction of travel. Historically, the simple spreadsheets we used to have might look at seasonality: in March and April, credit card income would start to go down after the Christmas splurge. Now, the move is towards looking intricately at customer spending in real-time and across categories – finance functions will need to harness this data to drive their businesses.

Finance should have the best data in the organisation; they need to exploit this to ensure their businesses can see what’s around the corner and feed that insight into a business’ decision-making process.

That’s where I really see the future for finance professionals; this insight coupled with the accounting training, discipline and independence of perspective that finance professionals bring to a venture are critical as we look forward. It takes a little investment and it needs a strong strategic CFO to see the benefits, but that’s the future.

“Finance should have the best data in the organisation; they need to exploit this to ensure their businesses can see what’s around the corner and feed that insight into a business’ decision-making process.”

Ten years ago, if I wanted data from my business, I would have to go to the IT team. There seems to be a move today towards CFOs being the commercial guardians of data. Is that what you’re seeing to support this new role of the CFO?

Chief Data Officers (CDOs) are appearing at very senior levels in organisations. It’s sometimes been wrested away from the CFO, but either way, data does require a very senior lead. EY did a survey in September 2019 which showed that 85% of CFOs felt the need to build up their data skillsets; and that’s because data spans across business, finance and technical disciplines. I see the data role growing so dramatically that I think it will become more typically a direct report of the CEO, hopefully with strong connections into finance.

What’s on the horizon?  I’ve never felt that there were more technologies reaching maturity at the same time.

I would have to agree: there is a lot of change for finance functions and there is a lot of change for financial institutions. I believe Open Banking will be a key driver of this change. The potential for match-ups between the products that fintechs have developed combined with banks’ customers is very exciting.

Some in the traditional banking industry are concerned about fintechs accessing their customers, but I think that banks could seize the opportunity through developing the ways to use fintech applications to bring value to their customers.

Conversely, there is a risk in not getting close to fintechs. Right now, I think it is moot as to whether existing financial institutions or fintechs will come out of this as the strongest – I think the smart money, for now, will be businesses which show an ability to closely collaborate.