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Tuesday, 23rd April 2024
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CFOs still use traditional methods in new economy evaluations Back  
A study finds that, despite chief financial officers' doubts about the ability of traditional metrics to evaluate new economy business, most still use them for capital appropriation decisions.
Greater levels of finance leadership’ are now needed arising from new business models and innovative technologies, according to Andersen Consulting and the Economist Intelligence Unit.

Introducing a study on ‘E-commerce and the CFO’, Roger Dunham of Andersen Consulting’s Finance and Performance Management practice said, ‘Finance organisations must understand the latest thinking and best practices while balancing and maintaining stewardship of traditional finance and control’.

The study of 34 international businesses, including Ryanair, concluded that finance is being forced to respond to the restructuring of cost and revenue streams. The finance function ‘must take a greater interest in accounting for the performance of ventures and alliances’. As relationships with customers and suppliers change, the ‘e-finance organisation must be able to anticipate and manage the corresponding demands for data and analysis’.

Andersen Consulting and the EIU say the survey confirmed that many CFOs doubt the ability of traditional metrics to evaluate key elements of operating in the new economy. ‘Only 17 per cent of respondents said new cost/revenue streams can be accounted for “very effectively” by established processes, although 42 per cent saw the processes as “fairly effective”… 56 per cent of respondents said they still apply legacy-business evaluation techniques to e-business when considering capital appropriations’.

Peter Currie, CFO of Royal Bank of Canada, is quoted as saying that the key to internet success is ‘focusing on revenue enhancement and differentiation, as opposed to old-fashioned cost reduction’.

The role of finance in decision support is changing from historical reporting to forecasting, the authors say. The speed of reporting is also changing: ‘new economy timelines’ make it imperative for the finance organisation to support decisions faster.

Reflecting this, business reviews ‘rarely take place anymore on a pre-determined budget schedule’. Fifty-eight per cent of respondents say that e-business strategy is reviewed on an on-going basis, with only seven per cent leaving reviews to a quarterly or annual basis.

The study also found a difference in the view of the chief financial officer’s role as between the CFO and other senior management. ‘While CFO’s seem themselves as strategy facilitators, they say senior management often sees them as investment appraisers’. Many CFOs asset that there are core fundamental responsibilities that don’t change, the study says, such as investment appraiser, funds allocator, capital raiser and cost-cutter, but new elements have been introduced ‘to help the organisation through profound changes in business organisation’.

Among the recommendations from Andersen Consulting and the EIU are the development of ‘an advanced approach to what-if analysis that minimises the role of historical data-gathering and develops a new architecture for forecasting.’ This ought to include ‘more frequent checkpoints for business reviews and a flexible approach to new criteria of assessment.’

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