Ask a Chief Marketing Officer about the challenges they confront in their organizations and the relationship with the CFO is frequently near the top of the list. The same conversation with the Chief Financial Officer usually includes frustration with marketing. Such tension is normal, and if managed well (hello, CEO) can by healthy and productive for the organization.
These tensions have increased as the roles of the CMO and CFO have changed. The traditional roles of the CFO have involved running the financial operations of the firm and managing the assets of the organization through prudent investments and risk management. In recent years the CFO has also been asked to contribute to business strategy, participate in the identification of opportunities for business growth and improvements in quality and efficiency, and help educate the entire organization about the importance of maintaining the financial health of the business. This expanded role also often includes responsibilities for pricing and revenue management, information and data management, including cyber-security, and negotiation with partners in the value chain, including suppliers and distributors. Further adding to the complexity of the CFO role is the fact that more than 80% of the assets of most large corporations is intangible: brands, customer loyalty, supplier and distributor relationships, patents and copyrights, and business processes, among others. Given these many and varied responsibilities it is not surprising that a recent brainyard survey of CFOs found that juggling too many responsibilities was the challenge most frequently identified. What does this suggest about what characteristics are required of a successful CFO and about how the organization, and marketers in the organization, can help the CFO succeed.
Successful CFOs obviously need to be strong financial specialists. They need to understand financial metrics, including margins, EBITDA, and share price and the reporting requirements of the firm. These things are necessary because the firm has legal obligations to provide information to numerous external stakeholders and managers within the firm need feedback on financial performance. The limitations of such metrics is that they tend to be focused on the internal operations of the firm and are largely a record of the past. Financial metrics can also become detached from the actual business processes that give rise to them. For example, it is easy to compute a margin without any understanding of why the specific margin exists or the reasons customers are willing to pay enough to support the margin. This means that CFOs, and other “C” level managers, must not only be good specialists, they must also understand the business.
Understanding the business means having deep knowledge of how the firm makes money. This requires an appreciation for industry, market, and company metrics that focus on what customers value and what is happening in the world of customers. It requires external metrics related to factors that both facilitate and constrain the business. Such metrics can and should be forward-looking so that they can inform strategic decision-making, the allocation of resources, and the use of assets. The role of intangible assets, and how they may be used for market growth or enhancement of margins is a critical part of this understanding.
Managing for the future also means being comfortable with change and risk. Markets change; old technologies are replaced by new technologies; new competitors emerge, and long-time competitors innovate; products that were once market leaders become stale and outdated. There is often more risk in failing to respond to these changes than in making changes in response. The CFO needs the ability to help the firm quickly shift resources away from low value-adding activities to higher-value adding uses, while managing the risk of doing so. Since “value” is determined by the market, this requires an external focus.
Finally, the successful CFO needs to be a team player. This means building trust and helping others to appreciate the financial implications of actions. It includes the ability to anticipate financial management issues and address them in a transparent and consistent manner that builds confidence in the integrity of the CFO and always focuses on the big picture that is the company’s future.
Even the most qualified CFO will not succeed without help, however. CFOs have a difficult task in managing the financial resources of the firm. There is never enough money to do everything and even if there were, some uses will produce greater returns than others. Directly or indirectly, all of the uses of resources come to the CFO, and there are many potential uses. There are many ways to spend money: improve products or service operations, increase efficiency of production. There are alternatives within the product portfolio: invest in Product A or Product B. Invest in Market C or Market D.? Which product markets represent the best opportunities and what role would marketing and branding play in realizing these opportunities? And there are a whole host of specific potential marketing actions related to the individual product or brand: improve the advertising message, support distribution channels, respond to competition. What the financial decision maker attempts to do, if they are doing their job, is to look across all of the many alternatives for spending money and search for the highest and best use of resources.
There are always other opportunities and alternatives to any investment. One is to simply drop funds to the bottom line. Another is to invest in safe three-month T-bills which these days are providing a return better than 5%. If you cannot credibility argue that the return on advertising is better than investing in the three-month T-Bill, you probably should not be spending money on marketing. Investment decisions are forward-looking. The firm invests today to get some return in the future. CFOs appreciate help in making the inevitable trade-offs faced by the business. This means the rest of the organization also needs some understanding of the larger business and the financial consequences of actions.
Finally, it is important to appreciate the world in which the financial decision-maker lives and works. CEOs and CFOs, at least in publicly traded firms, are legally required to report financial results. This does not mean this is their favorite activity, but it is a requirement. And CEOs and CFOs are usually compensated based on financial results. So, from a marketing perspective, when justifying investments, make their job easier and speak to their incentives by framing actions, like brand building, in financial terms. The CFO needs to understand the whole business and the role of branding, but marketers need to also understand the whole business and the requirements of financial performance. Such common understanding does not eliminate conflict, but it does make it more functional.
Contributed to Branding Strategy Insider by Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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