Operational Excellence: The vital role of CFOs

Inspirational. Forward-thinking. Adaptable. Strategic. If you thought the chief finance role was just about number-crunching, think again. The CFO of a portfolio company is increasingly seen as pivotal in securing a successful exit, and the job is evolving to reflect this.

A report by Fortune 500 recruitment firm Robert Half Finance 2020: Closer Than you Think uncovered a clear shift in the priorities of a CFO from the need to meet accounting and reporting standards to a more hands-on role where keeping pace with technology, harnessing big data and meeting regulatory demands are becoming the main priorities.

The CFO role is especially pressured at private equity firms where the drive is to strip portfolio companies back to the “core essence of what can make value”, says Luke Davis, vice-president at Robert Half.

“That requires the CFO to be a forward-thinking leader who can cope with external change, changes with technology, changes with regulation and the evaluation of geo-political risk such as Brexit.”

It also requires charisma: “Private equity firms ask themselves whether the CFO can inspire the people around them to drive the change.”

Nadja Essmann, head of the CFO practice at private equity recruiter PER, says you have to be a jack-of-all-trades. “PE firms are looking for a smart generalist with a very broad range of technical skills, someone who can solve problems with a hands-on mentality and very good pre-sentation skills.”

Consultancy firms have noted a similar transformation in the role. Deloitte runs a CFO programme that helps train finance executives to cope with the multiple challenges faced by the modern CFO of a PE-backed portfolio company.

Strategic thinking forms a core part of the programme, which is specifically tailored to the exacting demands placed on the CFOs of a company acquired by a private equity firm.

“Overnight, you are fundamentally in a different organisation where you’ve got to manage against a different set of metrics that stack up against future exit scenarios,” says Sanford Cockrell, the global leader of the Deloitte programme.

Cashflow, rather than earnings, become king, and the CFO’s role is transformed into becoming “hyperfocused” on forecasts and projections.

“The question becomes ‘what are the critical processes than can be improved to maximise cash generation,’” says Cockrell.

“It’s a catalyst role. It’s about leadership and influence. To be a CFO today, you’ve got to influence an organisation to make the necessary changes. Communication is key – not just to the CEO and the board but to the PE sponsors.”

The dramatic impact that CFOs can have on value creation comes out clearly from interviews that Deloitte conducted with more than 130 CFOs, CEOs, chairmen and private equity investors for a report published last November called “The Role of the PE Backed CFO: Maximising Value on Exit”.

All agreed, without exception, that CFOs can have a positive impact on the exit value, with 63 percent of PE investors and 61 percent of CFOs believing the impact can be material.

The individual responses shine a light on the demands of the role. Vision is vital. “The CFO should challenge the strategy and how it is applied, and confirm whether the strategic decisions are supported by the financials,” one private equity investor told Deloitte.

As is the ability to perform under the spotlight. “Lack of confidence in the CFO is never sustainable. It is relatively common for us to make a replacement,” said another investor.

For the CFOs themselves, the task is all-encompassing. “The CFO is the glue – involved in everything and the point person throughout the exit,” said one CFO of a PE-backed company.

And it’s not just about improving the bottom line. It’s demonstrating how you have done it. “The B+ CFO analyses and presents financial information. The A* CFO takes this further to present the information in the most attractive way,” said another CFO.

CFOs that successfully steer the firm to a successful exit can expect big rewards.

“Remuneration is usually very highly incentivised with a disproportionately large bonus,” says Ashley Crich, a manager at recruiter Morgan McKinley. Or as PER’s Essmann puts it: “There are a lot of incentives in the bonus on the exit side for CFOs.”

But recruiters confess that the multiple demands can make it a difficult role to fill. Robert Half’s Davis recalls one private equity executive saying that he was being kept awake at night worrying whether the CFOs at its portfolio companies were up to the job.

“CFOs are at the heart of growth, and that means securing the right person for the role is of crucial importance, both for the sake of the portfolio company and for the private equity firm,” says Davis.

“Getting the right CFO really can save some sleepless nights.”