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Your CFO is an algorithm

I was talking to a group of Treasury folks and the guy before me gave a pitch about the CFO of the future.  The pitch focused upon how the CFO would be managing risk, incorporating different technologies, managing M&A, dealing with globalisation and so on and so forth.  I couldn’t help but sit there and think: why the hell do I have a CFO?  What is a CFO?

Chief Financial Officer.

OK, that’s what the acronym means, but why do we have them?  Ah yes, they’re there to manage our suppliers and customers, to do our billings and receivables, to manage our working capital and supply chain, and to deal with foreign exchange and cash pooling and all that stuff.

Admin, in other words.

Admin.

Even the word admin, short for administration, is pretty contemptible in a world being eaten by software.  Why are we doing admin when everything can be automated?  I realised this when talking with some bright young things who manage their whole companies’ books through Xero.  They call Xero their Digital Finance Officer, the DFO.

The DFO is an algorithm presented as an API that automates everything.

And there’s the bottom line.  I don’t need a CFO when their function can be automated.

So, I know folks will say this is massively over simplifying the complexity of the Treasury, Accounts and CFO role, but is it?  If I could put all of my bills of lading, letters of credit, purchase orders and receivables in a shared ledger connected through APIs to intelligent algorithms that can reconcile and recognise everything, is it really so unimaginable that my CFO becomes a DFO?

Maybe.

However, I have dealt with some of the biggest firms in the world, where they have 100s of thousands of suppliers.  So yes, it is tough if you scale.  But then, equally, I always remember the opening words of Michael Hammer’s original paper about re-engineering.  This preceded the book and dates all the way back to Harvard Business Review 1990:

In the early 1980s, when the American automotive industry was in a depression, Ford’s top management put accounts payable—along with many other departments—under the microscope in search of ways to cut costs. Accounts payable in North America alone employed more than 500 people. Management thought that by rationalizing processes and installing new computer systems, it could reduce the head count by some 20%.

Ford was enthusiastic about its plan to tighten accounts payable—until it looked at Mazda. While Ford was aspiring to a 400-person department, Mazda’s accounts payable organization consisted of a total of 5 people. The difference in absolute numbers was astounding, and even after adjusting for Mazda’s smaller size, Ford figured that its accounts payable organization was five times the size it should be. The Ford team knew better than to attribute the discrepancy to calisthenics, company songs, or low interest rates.

Ford managers ratcheted up their goal: accounts payable would perform with not just a hundred but many hundreds fewer clerks. It then set out to achieve it. First, managers analysed the existing system. When Ford’s purchasing department wrote a purchase order, it sent a copy to accounts payable. Later, when material control received the goods, it sent a copy of the receiving document to accounts payable. Meanwhile, the vendor sent an invoice to accounts payable. It was up to accounts payable, then, to match the purchase order against the receiving document and the invoice. If they matched, the department issued payment.

The department spent most of its time on mismatches, instances where the purchase order, receiving document, and invoice disagreed. In these cases, an accounts payable clerk would investigate the discrepancy, hold up payment, generate documents, and all in all gum up the works.

One way to improve things might have been to help the accounts payable clerk investigate more efficiently, but a better choice was to prevent the mismatches in the first place. To this end, Ford instituted “invoice less processing.” Now when the purchasing department initiates an order, it enters the information into an on-line database. It doesn’t send a copy of the purchase order to anyone. When the goods arrive at the receiving dock, the receiving clerk checks the database to see if they correspond to an outstanding purchase order. If so, he or she accepts them and enters the transaction into the computer system. (If receiving can’t find a database entry for the received goods, it simply returns the order.).

Under the old procedures, the accounting department had to match 14 data items between the receipt record, the purchase order, and the invoice before it could issue payment to the vendor. The new approach requires matching only three items—part number, unit of measure, and supplier code—between the purchase order and the receipt record. The matching is done automatically, and the computer prepares the check, which accounts payable sends to the vendor. There are no invoices to worry about since Ford has asked its vendors not to send them.

Ford didn’t settle for the modest increases it first envisioned. It opted for radical change—and achieved dramatic improvement. Where it has instituted this new process, Ford has achieved a 75% reduction in head count … and since there are no discrepancies between the financial record and the physical record, material control is simpler and financial information is more accurate.

Twenty-seven years ago, companies were radically changing their financial processes for efficiency, and we can go further today.  We can reduce financial departments to an API and an algorithm.  The CFO is an algorithm presented as an API.

The only issue with this is that businesses cannot imagine such an operation.  This is, in part, a two-fold dilemma.  The first part of the dilemma is to imagine the complete Treasury operation moved into a digital ledger.  It can be done, but the idea of not having someone accountable for the processes of billings and receivables, payables and invoicing, just seems wrong.  That is an industrial age mentality – we need humans to manage these financial processes – but that mentality is strong.

And then, even if we can overcome our industrial era thinking that humans need to manage financial processes, we have the second issue which is mass redundancies.  A CFO today in a large company may be sitting on top of a heap of underlings that count to 100s or even 1000s.  Any CFO, when challenged, will justify having so many people by the complexity of the tasks they do.  They are necessary.

The reality is that they are not, but the CFO’s ego will not allow the CEO and executive leadership team to undermine their empire.  As a CFO, it has taken them a long time to get there.  Now they are there, they have an empire.  The empire is sizable and reinforces the stature and power of this role.  To even challenge that role’s importance and beg the question: do you really need so many underlings? will beg defiance.

So, beware when you ask the CFO to automate everything and move it along to a shared ledger that, when you challenge their empire, sometimes the empire strikes back.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • dc

    Interesting insight.

    There’s a fear that exists about how automation is coming for our jobs. It’s the same fear that came when spreadsheets were introduced. It was deemed the end of all accounting. That certainly hasn’t happened. In fact, spreadsheets today are the most indispensable tool for finance and accounting.

    Modernization will yield some turnover, particularly in lower level functions. But that’s also a group that is likely not going to be there anyway in the long run. Why not take that headcount and elevate them, promote them to focus on more strategic goals? Then you have an empire of brains.

    One last thing: Your competitors will be looking for an advantage. They’ll be looking for a faster, more accurate approach to create winning scenarios. Automation is coming whether you like it or not. The question is, do you adopt or do you drop?

  • F G

    Ultimately, I think a lot of outsourced / off-shored administration
    functions will be gone as the cost/value of automating will make the
    opportunity irresistible.

    While your insights about reducing financing administration are spot on, the role of a CFO should be far larger. The “meaty” things a CFO does cannot be so easily automated. How do you manage the cash balances of a firm and how/where to obtain financing? What’s the appropriate level of counterparty risk and under what scenarios? What level of capital expenditure can be supported and for what level of returns? Ultimately, it’s your controller who will be an algorithm.