Am I a transactional leader or a trans-formational one; am I great at what I do, or do I create new ways of doing it? It's a question familiar to most CEOs. But these days, it's one you're just as likely to hear in the finance director's office.
"The role of the finance professional has changed," says Ian Graves, managing director for continental Europe at finance recruitment specialist Robert Half International (RHI). "They are no longer seen as only processors and analysts of figures but have an important role in giving strategic advice."
According to RHI's latest Financial Directions survey, 50 per cent of financial professionals now believe that people management skills are more valuable than technical skills. Transactions are fine, but if you can't transform your subordinates and other employees, you're little more than a financial controller.
It's easy to see why FDs have become more prominent and influential. First, technology has allowed them to get away from simply producing accurate and timely figures. As long ago as 1997, the seminal book from Price Waterhouse, CFO: Architect of the Corporation's Future, highlighted the way that integrated systems were allowing CFOs to focus on a "steering" role by letting the finance function analyse the heart of the business and take the guesswork out of decision-making. Nine years later, that same approach-a single database, company-wide systems and analytical tools-is available even to smaller businesses through customer relationship management (CRM) and business intelligence software.
Second, a combination of embedded IT and globalisation has accelerated the speed with which companies need to make decisions-right at the point when margins have shrunk and barriers to entry have fallen. Today, you need good data and thorough analysis-and fast-to avoid gambling on a weak idea.
The FD's role is at the heart of risk management. And, as the perceived risks to business increase due to a more competitive environment, it follows that he or she becomes more important.
FDs have always handled a lot more than just finance. This is because they see the company "in the round". "FDs are in a unique position to understand what's required of the top team because of the broad overview they have of the business," says Martin Craddock, former FD of Rank Hovis and a management veteran. "It's easier for them to work out where the gaps are and step in to fill them, certainly in smaller companies where the board may not be big."
And, as a company gets bigger, the FD is often the person best able to build a system of controls; board agendas and formal procedures are the core of accountancy training. But, during a growth phase, the task for the FD is not just to "layer on" processes. Other, more subtle, skills come into play. "One of the problems that sometimes arises with businesses that have grown is that the CEO still thinks they own the company because they started it," says Craddock. "But often they'll have brought in outside investors, perhaps even floated the business, and in those situations the FD, in particular, is there to make sure that that broader responsibility is met."
Meeting that responsibility means thinking of the commercial development of the business. It is the FD's job to manage risk, not to eliminate it; any control system must be reasonable as well as robust.
"The role of the modern FD continues to change with fashion, but has to retain the essential responsibilities. They include: keeping the score in accordance with ever-changing rules; ensuring proper risk management; safeguarding the entity's assets; and acting as financial adviser, negotiator and wise counsel to the board without allowing entrepreneurial flair to become suppressed," says Craddock.
The partnership between the CEO and the FD is crucial. "A key question is how an FD resolves any difference of opinion that arises with the CEO," says Craddock. "The FD has to decide whether it's a resigning matter-certainly if you're talking about something that's putting the future of the company at risk, or putting the board in an ethically questionable position. But if the FD doesn't accommodate the CEO as much as possible, the relationship will quickly become unworkable."
So the FD has to feel their counsel will be valued-and the CEO that the FD is filling the gaps in their own make-up. "The secret to our FD/CEO relationship is regular communication, complete trust-as well as identifying where our skills are best focused," says Martin Leuw, chief executive of £20m-turnover software group Iris. "Often the CEO and FD will have very different personalities, so an understanding of each other's strengths and weaknesses is essential."
What does Leuw look for in an FD? "I once heard someone describe the FD as the 'conscience' of the business," he says. "So I certainly look for integrity from an FD. But they should also have strong business and commercial acumen, an ability to look beyond the numbers to identify future opportunities and issues, as well as a willingness to challenge everybody in the team-particularly those with more optimistic tendencies than the FD, which is most of us."
It's not just CEOs who value this balance between control and creativity. "Many businesses fail because they've had a finance director who lacked that ability to interact with the entrepreneur," says Huw O'Connor, FD-turned-managing director of hotel chain City Inn. "It's about empowering creativity, but also ensuring that the business stays on an even keel." Put simply, the FD is there to help the business stay in business.
The FD and you: tips for the CEO
Know the job spec. The FD's principal contribution at the boardroom table is timely, accurate data about the business, but they should also be able to offer strategic advice outside the finance function. In many cases, the role of FD covers considerably more than just finance, encompassing HR, legal, property and admin.
Don't waste their skills and experience. An FD should not be engaged in low-level tasks that could be handled by other staff-they have too much talent to offer to waste their time in this way.
Groom their successor. If you have good management accountants in your business, expose them to operational roles. You can do that by assigning them as a personal FD to divisional MDs. If they're experienced enough, they can step directly into those departmental or subsidiary leadership roles.
Expect them to add value. Does the FD spend all their time pointing out why things can't be done? Or do they pick up ideas from around the business, find ways to make them possible, and ensure they make money?
Outsourcing
Third party, first choice?
Can't afford £65,000-plus a year for your own FD? Using a freelance might buy you the skills you need, when you need them
If you're starting to feel the pressure on the financial management side of the business, it's natural to think about bringing in an FD. But when do you take the leap?
Perhaps you don't have to-or at least not as soon as you thought. "Our typical clients are companies that want a big-ticket FD, but either can't justify the salary, or wouldn't be able to use an FD full time," says Simon Walters, joint managing director of FD Solutions (FDS) and himself a former finance director.
FDS is made up of a dozen experienced financial managers who "hire themselves out" to companies. At one client, magazine publisher Intersection Media, Walters worked closely with the company's director on the preparation of a business plan that attracted funding under the government's Small Firms' Loan Guarantee Scheme. He now monitors Intersection's current account balance daily to ensure that excess funds are kept in an interest-bearing deposit account. And he covers banking, credit control, payments, VAT and tax-leaving management to concentrate on the creative side of the business.
"Simon helps us manage the company by providing constant feedback on operations and strategy from a rigorously financial viewpoint, but always with a wider understanding of the issues we face," says Dan Ross, one of the creatives behind Intersection. "We're able to draw on this array of services whenever we need, paying only for the hours we use."
FDS is one of several companies in this fast-growing market; there are a variety of freelance options. Groups such as Ashton Penney, BIE, Executives Online and Albemarle specialise in placing interims, who take short-term posts when a company is "between" permanent FDs or needs specialist help. MyFD offers a slightly different service, providing growing companies whose turnovers range from £3m to £20m with a financial controller and FD team on a monthly basis.
"A big issue for many growing businesses is that the financial management effort is condensed into a small budget," says myFD managing director Fred Edwards, himself a former FD with Wickes. "So they focus on the transactions first-managing payables, invoices and statutory accounts-then some conventional management accounting. But that doesn't help them with the additional inputs they need at the strategic level."
MyFD pairs a financial controller, who'll drive excellence in data management, with a more experienced FD, who'll provide the decision-support and influencing role.
Freelance FD support can be particularly useful during acquisitions. Mark Tatam and Andy McNaughton acquired Connaught Mason, a specialist office fit-out contractor based in central London, in 2003 when it had a turnover of £4m. "We found there were a few issues to address, such as undisclosed debts," says Tatam. "One bank manager we spoke to suggested that we contact myFD. We make more informed decisions now about what we need to do. MyFD has helped us to see where there would be peaks and troughs, and when we needed to bring in more business." Both the transactional and strategic advice seems to be paying off: this year's turnover should top £20m.
Even businesses with a strong in-house finance team can benefit from a freelance FD. "I always ask people whether their finance director is keeping score or scoring goals," says Edwards. "In smaller organisations, the person who's called 'FD' is often what would be, in a bigger company, a financial controller. So they may not be so comfortable providing advice and strategic analysis at board level."
The only way is up
More financial directors are making it to the top
Many FDs see themselves as CEOs in waiting. Former FD and now managing director of hotel chain City Inn Huw O'Connor says: "One of the things that really attracted me to finance was the knowledge that many of the FTSE CEOs were chartered accountants. It's a great foundation and training for business."
It's a perspective familiar to Nick Eaves, executive director of the finance division of recruitment firm Badenoch & Clark. "One FD of an investment bank told me how he had engineered his exposure in his early days so that he had both product and financial control experience to draw on," he says. "Only in this way would he ever be considered for the top job."
So how many FDs achieve their ultimate ambition? Dr Elisabeth Marx, a partner at headhunter Heidrick & Struggles, has analysed the background of the FTSE-100 CEOs. In 2005, 38 per cent had a finance background (followed by sales and marketing at 23 per cent and general management at 18 per cent). That's up from the 24 per cent reported in her 1996 study, Route to the Top.
So natural is the progression from FD to CEO that Marx even commented on the dangers of the trend. "This pattern suggests that UK companies need to ensure that executives with a different background from accountancy and finance have equal chances to progress to the top position through targeted leadership development," she wrote.
The in-tray
The FD's forecast
What keeps the FD awake at night? Andrew Bignell look at five issues that are marked for their attention
1. The pensions crisis
For many businesses, defined benefit (DB) pension schemes are history. According to the Government Actuary's Department, "a significant proportion" of defined-benefit schemes with more than 100 members were closed or frozen by 2005.
For companies that haven't shut their DB schemes, the nightmare continues. The returns environment remains historically low, with no sign of interest rates rising to boost scheme funds. And rules set by The Pensions Regulator (TPR) and the Pension Protection Fund (PPF) actively encourage investment of scheme funds in low-risk vehicles such as bonds-which results in even lower returns and a widening of the deficit.
TPR rules also mean you can't take a decision that will materially affect your company's structure, or generate significant income, or even pay a dividend if your scheme is in deficit.
Worse yet, because pension fund trustees can now exert a degree of control over their sponsoring companies, FDs are facing a massive diplomatic and strategic battle.
One company that's been through the pensions fire is leather maker Pittard. It brokered a deal in May for the PPF to take over its scheme, which was carrying a deficit of over £30m. "The deficit has grown very rapidly over the last 10 years," FD Lindsey Blackford told BBC News. "There has been no solution to it. Receivership was the alternative we presented to the PPF."
2. New accounting standards
Tightening regulation is keeping FDs busy. The UK Accounting Standards Board has been bringing UK reporting rules into line with International Financial Reporting Standards (IFRS) and companies of all sizes are having to grapple with issues such as the valuation of intangible assets and the "expensing" of share options. All AIM-listed companies will have to use the standards from January 2007.
"FDs will need to work out the differences between their existing accounts compilation and IFRS," says Stuart Poyner, KPMG partner in charge of IFRS conversion. "Then they'll need to work out what information they'll need in order to report under IFRS-there are some new ways of handling reporting on different segments of businesses, for example.
Then, they'll need to work out how to embed the mechanics of that data collection into their processes so they can do it automatically in future years."
3. Return on investment in ICT
Technology has redefined both internal processes and how companies interact with customers and suppliers. The investments aren't cheap, and FDs have been working hard to find adequate ways of calculating return on investment.
At the heart of the issue is productivity. The Centre for Economic Performance (CEP) at the London School of Economics has studied the link between information and communications technologies (ICT) and economic performance and found that UK companies could do better.
"Productivity growth in sectors that intensively use ICT appears to have accelerated faster in the US than in Europe since 1995", it concluded in a report published last year. It attributes this not only to the US's "natural advantages (geographical, institutional or otherwise)" but also to management and organisational factors.
The challenge for FDs is twofold. First, they have to work out how they can deploy technology to get more out of their people and other assets. Second, they have to work out how to hand over IT responsibility to an expert, perhaps a dedicated IT director, and whether that director-given IT's all-encompassing role-needs its own voice on the board.
4. Recruitment and retention
Like IT, HR often ends up being the responsibility of the finance director. This stems from the fact that the most significant HR function in many companies is payroll, which defaults naturally to the finance department.
FDs must understand, value and exploit human capital. In an era dominated by service industries, it's a vitally important task. "In a company like ours, the image customers see is a reflection of the people that we send to them," says Logica CMG finance director Seamus Keating. "If employees are unhappy and demotivated, that's clearly going to cause serious problems."
It's important, too, to project the right image to potential recruits. Competition for staff is intense. According to the latest Lloyds TSB Business in Britain survey, which polled over 2,200 business leaders, 48 per cent of companies have had problems hiring skilled staff this year. It's also the second biggest concern-cited by a third of respondents-for the year ahead.
The FD has to decide how much cash to inject into salaries, find tax-efficient employee benefits (cars, pensions and share options have all come under the cosh in the past five years) and, if necessary, look for outsourcing solutions.
5. Decision-making support
The FD knows more about their company than anyone else-they see across the business and they're required to monitor and control every last penny of income and cost in every department.
Today's finance chief also has to understand what's going on-and use that understanding to add value. As business intelligence (BI) software becomes cheaper and easier to use, the pressure is on to find better ways of improving performance.
"We were able to consolidate a vast amount of data into one central, manageable information point-which can now be viewed and amended by each member of the team," says Dominic Wyer-Roberts, finance systems manager at Thresher Group, which uses a BI system. "All our budgeting and forecasting was being done on complex spreadsheets. Now, staff are free to analyse the information, spot trends and help to determine Thresher Group's forward-looking business strategy." That means faster, better decisions-based on solid financial foundations.
It also means the ability to communicate with, and influence, people is increasingly important for the FD. Whether you're personally supporting and encouraging divisional and departmental bosses, or hiring smart management accountants who can act as "local FDs" to these managers, regular contact is essential.
Freelance pitfalls
The risks are usually centred on cost, confidentiality or competence-or a combination of all three. A freelance FD costs, at an hourly rate, more than a full-timer. But since you'll only be using them for a fraction of the time, the absolute cost will be lower.
Confidentiality is no more of an issue than it is with your auditors. True, there are fewer rules governing the consultancy industry-but most freelance FDs work within strict ethical guidelines enforced by their professional institutes.
You can help ensure the outsiders are up to the job by hiring specialists for different tasks, such as managing an M&A deal, preparing the statutory accounts, or writing a business plan.
The "brief" is also important. This kind of service works best when the company has clear goals-and the freelancers are working to deliver specific results.
