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CFOs should know when to step up and step back

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Elsbeth Johnson argues that during times of strategic change, CFOs play too big a role in the wrong areas and too small a role in other areas.

17th Apr 2024
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The point when a CFO should interact with a change programme is open for debate. But what’s clear is that if the CFO gets involved too late, the transformation project could end badly or frankly become harder than it needs to be. 

Elsbeth Johnson (pictured below), a senior lecturer at MIT’s Sloan School of Management and the author of the Step up, step back leadership book, argues that CFOs should be involved right at the start of transformation projects. 

A photo of Elsbeth JohnsonBut just as importantly, in her view, CFOs should step back in the later stages of the change, rather than tinkering or, even worse, adding in so-called “additional priorities”. 

Catalyst for change

Very often, she said, transformation projects are led by the CEO and may include marketing and strategy in the beginning phase, while the CFO is just the “person who’ll pay for it” and therefore often not in those initial conversations. 

“They need to be a lot more involved in that early stage. That will allow them to become much less involved in the later stages,” she said.  

“Why are they not involved enough in the beginning?” she added. “What we know about change that goes well, as opposed to change that goes badly or ends up being really difficult, is that leaders need to step up and actually do more work in the early stages of a change than they typically do. 

“There are two elements leaders need to get right in these early stages. First, they need to be clear about why the change is needed now and what it will deliver. And second, they then need to align the business around the change they’ve asked for.”

At this point, Johnson says, the CFO should be playing a critical role and perhaps even leading on what the ideal outcomes will be as the “keeper of the profit and loss (P&L) and the keeper of the financial statements”. 

CFOs should also target margin outcomes rather just revenue outcomes (that can result in putting poor-quality revenue on the P&L) or cost outcomes (which can often lead to poor, short-term cost-cutting decisions). 

Assess the gaps

However, Johnson is often asking CEOs and change officers during transformations: “Where’s the CFO? I think they should be here for this critically important early work of establishing clarity and alignment.”

She continued: “If you do that critical early work so people are clear about the outcomes they need to deliver, and the business has been aligned to deliver that, then leaders, including the CFO, will be able to step back in the later stages of the change and do much less tinkering or fire-fighting at that point.” 

Instead, when clarity and alignment wasn’t delivered at the start, senior leaders have to intervene and very often adopt what Johnson has termed the “Hollywood style of leadership”. “Sleeves are rolled up and they wade into the project like a hero coming to the rescue,” she said. 

Meet the desired state

In order for businesses to meet this desired state, Johnson stressed the importance for businesses to understand the CFO’s role in decision-making during a project, not least because they have a good sense of which projects will make the most material contribution to the P&L, and also the sensitivity to missing a milestone on a particular project, relative to the whole change and the overall P&L. 

Equally, if a CFO is not involved, then there is a greater risk of the project getting closed down potentially infinitely. “CFOs, in my experience, hate surprises. It’s the big thing they’re allergic to,” explained Johnson. 

“They’re at the cutting edge of explaining this stuff to the market. So the sooner businesses can get them involved in the process, the more likely that they’re going to help and support. Whereas if you tell them at 10 minutes to midnight, before they’re about to go off to the quarterly earnings report, there’s not much they can do even if they wanted to.”

So while not every change project needs a finance person on the core team – after all, there are not enough finance people and hours in the day to resource it – there needs to be at least a two-way dialogue where finance can challenge the key assumptions in the projects and help project teams to ensure all their activities are linked to the P&L. 

“Change teams can fall in love with the activities, and forget about the outcomes, so they need to be kept accountable for that linkage,” said Johnson.

The first 90 days and beyond

The first three months of any change programme should be the clarity phase. Then past that three-month point, Johnson said that this should be where the change team is working on aligning the organisation around the change. 

Her research reveals there are four sources of alignment.  

  1. Alignment by conversations: What leaders talk about, ask about, and agitate for.
  2. Alignment by actions: Changing organisations charts and structures and role modelling behaviours.
  3. Alignment by resources: That means people as well as budget.
  4. Alignment by metrics: This means changing objectives and key results (OKR), and collecting different data. 

It’s the third and fourth alignment where finance teams can make the biggest impact in the first 90 days. 

Johnson offered an example of finance being required during this early stage to put together an interim budget reallocation, adding that the faster they can get that budget reallocated, the faster the change project can start their “J curve” and produce a return. The change team should also look to finance to help secure funding and help demonstrate the eventual return on investment (ROI). 

“Finance people deal with numbers and metrics every day – that’s their currency. That can be hugely helpful to project teams, who are often full of technical experts, who need to translate their activities into outcomes and returns. They can also be their critical friend, helping make sure their business cases are robust. 

Here, they can provide expertise and consulting advice on the metrics and data that the change teams should be capturing. This would enable the change team to demonstrate more clearly to the finance team how they measured the project and then link it to the outputs and the P&L. 

The third area of support the finance department can provide is to ensure the benefits are appropriately tied into the longer-term forecasts for returns. If they’re not, then the organisation either won’t see the benefit or won’t feel properly accountable for delivering it.

Measure and manage transformation 

So assuming the project has been set up correctly, leaders should be in a position to step back and simply help the system work optimally. 

So after the first 12 months, the CFO should be helping the business focus and be consistent about change, managing more by exception through the revised KPIs and making sure that the ecosystem of the transformation programmes is maximising its learning about what’s working and what’s not.

“This is where the CFO or the finance function are giving the change the time it needs, and making sure that there’s enough slack in the system to promote learning,” said Johnson. 

In a lot of the transformations I’ve been involved with over the years, we’ve tried to run too many activities and overall we’ve tried to run the system too hot. The problem with that is that people don’t have sufficient time to stand back, think, reflect and learn from the work they’re doing. And if they can’t do that, then they and the system won’t be able to improve over time. 

“Leaders need to support that, by making sure there is sufficient slack in the system. If people don’t have the time to sit down and have those conversations, then they won’t  learn,” said Johnson.

Learning loops

So slack in the system is needed to support this approach to continuous improvement and ensuring learning loops are working effectively. 

“If we’re serious about learning loops, it should not just be done at the end of a project as an after action review, it’s done every day, every week, or whatever cadence is necessary to maximise the learning. Imagine the power if every single time somebody came to ‘report to finance’ at the end of the project, the CFO asked ‘What did you learn from that?’” said Johnson. 

“We can’t wait till the end of the project to learn what we need to do better next time. The frequency of those learning loops needs to be far greater than that.”

The final role of the CFO in a change project is to be the critical friend of the CEO and stop them from being distracted by the next shiny thing. 

“Change projects sometimes go wrong and don’t actually deliver because senior leaders get a bit bored. They say, ‘I announced this two and a half years ago, do I still need to talk about it using the same words?’ And the answer is yes, you do. 

“The change is being implemented and the last thing it needs is a new shiny thing being added into the system. This is where finance can be an incredibly important supportive element and keep a bored CEO focused.” 

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