CFOs: You Don't Need All The Answers, Just The Right Questions

FORBES | Jeff Thomson

CFOs play an increasingly integral role within an organization – so much so that Frank Cespedes, Senior Lecturer in the Entrepreneurial Management Unit at Harvard Business School and author of “Aligning Strategy and Sales,” says that CFOs can and should start acting as a catalyst to help integrate roles across C-Suite functions, particularly between the sales and strategy teams. I spoke with Frank to learn more about what CFOs can do to foster these connections.

This interview has been edited and condensed.

Jeff Thomson: CFOs are playing an increasingly large role in strategy, but you contend that the strategy must be tied to sales to be effective. What must CFOs understand to ensure their strategy is linked to sales and company growth?

Frank Cespedes: The goal of strategy is profitable growth, and “profitable” includes a positive return on invested capital. There are four core ways that a company increases its valuation: 1) invest in projects that earn more than their cost of capital; 2) increase profits from existing capital investments; 3) reduce assets devoted to activities that earn less than the cost of capital, and 4) reduce the firm’s cost of capital itself. Most CFOs know this, but few understand the sales factors that materially affect each mode of value creation:

1. Customer acquisition – knowing how compensation plans and key sales management practices determine call patterns and customer priorities.
2. Earning more from existing investments requires both higher sales productivity and closing the right sales with the right customers.
3. More communication between the C-Suite and the field is needed. Reducing assets devoted to underperforming activities requires understanding how customer realities evolve.
4. The selling cycle is typically the single biggest driver of cash out and cash in. Accounts payable accumulate during selling and accounts receivable are largely determined by what’s sold at what price and how fast.

If the CFO and C-suite can’t make these crucial connections between strategy and sales, then they often end up pressing for better execution when the firm really needs a better strategy or changing strategic direction at great cost and turmoil when they should be focusing on the basics in the field.

Thomson: In what ways can CFOs keep their pulse on the sales activities of their organization? How does this affect their relationship with other departments?

Cespedes: I once heard Sam Walton remind his executives that “There ain’t many customers at headquarters.” There is little substitute for field information. Technology helps by gathering more data, providing better analytical tools, and shortening the time lag between sales/marketing efforts and customer purchasing behavior. But you also need a shared framework for analyzing data. Without that, all of the current enthusiasm about “big data” will be another iteration of garbage-in-garbage-out. Good CFOs have always known that interpreting data is not only a search for truth; it’s also about actionable dialogue with the people who use that data.

There’s no such thing as effective selling if it’s not linked to strategic goals. And this has practical implications for how you select and use available selling resources, how to measure sales effectiveness in a given situation, and how to get the C-Suite talking about the right things. If you’re a CFO evaluating sales numbers, you don’t need to know all the answers. But you should know the right questions. It will help you and your colleagues avoid being suckers for glib generalizations about selling—and, believe me, as someone who has worked with many firms and served on boards, it happens.

Thomson: As CFOs play a larger role in business strategy, how has this affected their relationship with the CEO? Are they becoming the most influential member of the C-Suite?

Cespedes: In any organization, influence is bestowed as well as earned. It requires relevant expertise, but also being recognized by others as adding value through one’s activities with colleagues. CFOs are no exception to the rule. Changes in companies are creating the conditions for increased CFO influence. For example:

1. The number of executives in the C-suite of U.S. firms has doubled since the 1980s, largely driven by more people responsible for specific functions (CIO, CMO, etc.), rather than general managers responsible for activities across functions. Why? Business is more complex, and more specialist knowledge is needed to stay up-to-date with required functional needs.
2. At the same time, the percentage of companies with COOs has decreased to about 35% of Fortune-500 and S&P-500 companies. Three decades ago, COOs outnumbered CFOs in those firms, but the proportions have flipped.

Increasingly, the CFO needs to play an integrating role across C-Suite functions. One primary way of doing that is the strategic planning process, where CFOs are typically very prominent, often establishing the time lines, data requirements, meeting agenda, and other factors. There’s a problem here. About two-thirds of companies treat strategic planning as a periodic annual event, usually as a precursor to next year’s capital-budget. The average corporate planning process now consumes 4-5 months. But buying processes have no interest in accommodating your planning, and sales must respond issue by issue and account by account. In other words, even if the output of planning is a great strategy (clearly, a big if), the process itself often makes it irrelevant to sales executives. This is an area with much room for improvement in most firms, and one where influence is bestowed on CFOs.

Thomson: Can you provide examples of companies where the CFO is assuming their strategic role, by aligning it with the sales process and creating growth?

Cespedes: Here are two examples discussed in my book. One is disguised and it’s about a start-up. The other is about an established corporation trying to deal with market changes. So, it’s two ends of a spectrum.

I call the start-up Business Processing Inc. (BPI). Like many companies, it grew to a certain level of sales, but then stalled. The leadership team, in its early efforts, had accepted any business and had never thought-through its core customer segments. The CFO was key to gathering and analyzing the available CRM data, and then leading meetings aimed at clarifying the characteristics of profitable customers. When BPI did this, it sold faster and more profitably with a smaller sales force.

I cite this example because surprisingly few firms are clear about who is their kind of customer. Most sales comp plans focus purely on volume and so are saying to salespeople: “Go forth and multiply!” That’s what those salespeople do. They bring back diverse customers that fragment the selling company’s investments and resources.

The other example is Dow Corning. For decades, Dow enjoyed profitable double-digit growth by selling through a solutions-oriented sales force that bundled products with relevant technical services. But growth stopped as smaller “disruptive” sellers entered the market through online channels. Dow eventually realigned its sales approach and strategy by analyzing the sales tasks for different types of customers, developing different business models for each segment, and then using the levers that I highlighted earlier—People, Control Systems, Sales Force Environment—to execute efficiently.

This was a multi-functional effort but the CFO was a driving force. I mention this example because, as a leader, you can worry prudently and diligently all you want about “disruptive innovations,” but you ultimately need a sales effort aligned with strategy to do something about it. Otherwise, all you’re doing is worrying in a currently acceptable manner. CFOs who do know the pulse of sales are more able to be strategic partners and help craft actionable responses.

This article was written by Jeff Thomson from Forbes.

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