“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.”—Michael Porter
‘What do you want to do in this job?’ If asked this question in an interview, many of us might answer: ‘Work that is strategic and impactful to the business.’
The Pyramid of Knowledge Work
Most of us want to climb the pyramid of knowledge work. As quickly as we can. Spending more time on work in the higher tiers, knowing we can’t fully escape the daily grind at the bottom.
These higher level tasks offer more meaning (business impact), boost our egos (come with greater status and bigger titles), and reward our bank account (command higher salaries and larger equity grants).
First, Pick the Right Role
To get what you want, you have to be playing the right game. In this case, it requires working for a CEO who really wants to partner with a Strategic CFO.
While every CFO job is advertised as a ‘strategic partner to the CEO’, many CEOs (particularly founder CEOs) already have a strategic partner and don’t want that input from the newly hired finance leader. So ask questions about how success in CFO role is defined, what meetings you will be invited to (e.g. Board meetings, investor conversations etc.) and how much business input the CEO wants.
Reality Check: A ‘Strategic’ CFO does a Little of Everything
The CFO becomes a trusted leader through their actions and the example they set. I’ve never seen an operating company CFO role that is limited to strategy. In a high growth venture or PE-backed company, the strategic CFO works at multiple levels of the pyramid — setting goals, articulating strategies, clarifying constraints, and executing by being in the weeds.
Second, Help Set Goals
Strategic leaders start by establishing the key business goal(s). Goals identify your destination. Destinations can and should change over time as the business grows and matures. Having a clear goal is critical. Otherwise, as Yogi Berra famously said, “If you don't know where you are going, you might wind up someplace else.”
For CFOs, the primary goal is to continually “make the business better”. The task is to convert that guiding principles into more specific goals. Successful CFOs set goals that drive a positive outcome for all three constituents they serve ― customers, employees, and investors. It’s impossible to make the business better, if any one of those three constituents is unhappy.
Third, Align Incentives (particularly Internally)
Goals cannot be achieved without incentive alignment. Incentive alignment occurs when the actions CFOs mandate create value for all three constituents and only if that value is divided relatively fairly. Aligning incentives is an ongoing task. It has to be revisited and refined as the company grows, the competitive landscape changes, and economic conditions evolve.
Internal alignment starts with the Leadership Team. Strategic CFOs realize that company goals must be directly linked to success as defined for each Leadership Team member. Success includes both achieving their functional business objectives and maximizing their incentive compensation.
Only Then, Formulate Strategy
Strategy involves crafting a plan to achieve the goals. The plan should also include a list of activities to stop doing or delegate to others. By narrowing the set of goals, the strategic CFO ensures they have sufficient time to dedicate to the higher priority and higher impact tasks.
In my experience, well devised strategies can be clearly linked to things valued by each key constituent. For each key constituent, here are some examples of strategies to address their primary concerns.
Customers:
Quantify Product Value: Link product value created to the problems customers want to solve. Supply clear RoI to reduce buying friction and increase likelihood of remaining a customer as well as recommending the product to others.
Transparent Pricing: Experiment with pricing. Optimize to link between price paid and value created for customers and the company. Structure pricing so both sides have skin in the game.
Employees:
Align Incentives: Ensure employees win when customers are satisfied and shareholders see value creation.
Provide Learning and Growth Opportunities: Employee who are honing their craft and seeing progress in their careers will be more productive.
Investors:
Improve Financial Performance: Identify and implement ways to improve margins, cash flow and return on capital. Without harming your valuable customers or high performing employees.
Allocate Capital Effectively: Invest in new initiatives in marketing, product, technology to seed future growth. While cutting back in other areas.
Tell a Compelling Financial Story: Connect financial performance and company initiatives to value creation today and in the future.
Don’t Forget, Principles and Constraints
All organizations operate with guiding principles and certain constraints. Ensure that principles and constraints are clearly articulated and broadly known. Describe the rationale behind each important principle and constraint. By doing so, it becomes easier for employees to know which options are acceptable when devising tactics, and how to act when faced with a difficult choice.
Principles can relate to things like the importance of product quality or price leadership. Company culture creates principles that might dictate how employees are treated or how empowered they are to please customers (when it comes to authorizing refunds for example.)
Constraints can relate to sourcing rules mandates. Financial constraints might include minimum target margins or a rate of return on new investments.
Finally, Be Different and Take Risks
Achieving above average results requires acting differently than your competitors. If you do what everyone else is doing, your results will be average.
Being truly strategic involves taking the path less travelled. Strategic CFOs are willing to question conventional business wisdom. Figure out if metrics or tactics that most companies follow are actually applicable and useful in your situation. For example, high churn rates may not matter if acquisition costs are very low. Or in a world where everyone is optimizing cash flow timing and pushing for annual-in-advance billing, you could focus on extending payment frequency and raise prices instead.
Not following the herd will feel risky and lonely. Risk management is often cited as a key part of the CFO’s mandate. However, that does not mean trying to eliminate risk. To excel, strategic CFOs know they need to take risks and do things differently.