The CFO and digital transformation. Accounting for business disruption! I was prompted to write this discussion because of the bewildering and often contrary information and advice appearing on my PC monitor every day. Some experts give alarming views of a future disrupted by digital revolution. Others appear content to follow a more gentle evolution along the technology roadway. Most of these prophecies are written from a technical viewpoint, and are targeted at the technical reader, who then has to make technical decisions. This is too narrow a view, particularly when exercising governance, compliance and financial controls as the CFO/FD of a major business or public organisation. And, without the active commitment and strategic direction being communicated effectively by the senior executive team, digital transformation will not happen. There is also the chicken and egg conundrum. Or maybe it’s the cart and horse. In any event, does digital transformation happen because of new technology or because of a market requirement? Does the marketplace and consumer seek out and drive the technology solution, or is some new technology looking for a business application? It may not matter which comes first in your organisation. But as CFO you need to understand both the opportunities for digital transformation and the financial consequences. Understand the business disruption – why, where, how, when, who The first step is to understand the opportunities and threats which digital transformation represents to your organisation. Will existing ways of working continue to be effective in a digital world? Are there new opportunities available in customer experience, operational processes or business models? To help us consider these questions I have chosen an example to describe digital transformation in the Retail sector. (This is a “discussion” so please share what’s happening in your market sector and/or organisation). SCANEO from BudgetBox SAS is a shopping App designed for Retail. Innovated over 10 years it now supports the true ‘OmniChannel’ strategy of the retail market. SCANEO is an award winning App that has closed the gap between online and the physical store. It meets the demand from retailers that shoppers should also be able to bring their own devices into a store, as well as have access to store devices. SCANEO enables shoppers to experience the familiarity, convenience, speed and personalisation of an online shop instore across check-in, shopping and payment. SCANEO enables the Retailers to interact with their customers in a completely new way offering a consistent shopping experience via every existing touch-point. Bringing the online shopping experience in store to create the ultimate digital shopping experience. SCANEO has been developed in addition to the self-scan experience with Tier 1 retailers and is available on iOS & Android platforms.

You can also watch SCANEO in action in the retail environment. The link is https://www.youtube.com/watch?v=PdC3_Syh7qA&feature=youtu.be . This three minute video helps to visualize the concept and the product for both the retailer and the consumer in a familiar store environment. Here is some market analysis, competitor insights and other relevant pieces of data to support the opportunities for customer centric instore apps The rise of mobile payments and the EMV mandate in the United States now makes App payment in stores relevant – Digital technology such as SCANEO solves this. Frictionless shopping is also a clear objective of OmniChannel - we can already see signs of this happening. There’s the Amazon Dash button for instance, which makes re-ordering possible with literally just a push of a button - SCANEO will enable the retailer to compete here by reducing friction in the shopping journey. According to a recent study by MasterCard, Omni-shoppers prioritise value, track record and convenience. In the coming months and years, the retailers that will win are those that offer personalised rewards, coupled with great products and convenient buying experiences. MasterCard also anticipates that retailers will leverage digital technology to make this happen. Traditional loyalty programs will be replaced by mobile-based ones that not only make it easier to redeem rewards, but also enhance the consumer experience. Retail pure-plays will disappear. The same study found that 8 out of 10 consumers now use a computer, smartphone, tablet, or in-store technology while shopping. OmniChannel is showing no signs of slowing down, and in order to keep up retailers will need to merge their physical and digital systems to serve Omni-shoppers. We’re seeing many retailers that have already bet big on OmniChannel. Online subscription service Birchbox, which opened its first physical store in 2014, established pop-up shops in various US cities to determine where it would set up its next physical stores. There’s also Nasty Gal, a former online pure-play, which has opened two new stores in Los Angeles. Meanwhile, retailers that already have both physical and e-commerce stores are working to further bridge different shopping channels. For example Macy’s, which in addition to offering typical OmniChannel services like click-and-collect, also lets customers browse the inventory at their local store on the Macy’s site. The Macy’s mobile app also lets users scan product barcodes in-store. They can view online reviews, promotions, and more. Mobile devices are just the beginning. Some retailers are looking to leverage the Internet of Things (IoT) in their locations. A study by McKinsey found that the uses of IoT in retail could have an economic impact of $410 billion to $1.2 trillion per year in 2025. This year, pioneering retailers will use connected devices to streamline in-store shopping and communicate with shoppers. As McKinsey points out, a few examples of IoT include merchants using in-store devices to automatically ring up customers, track real-time shopping behaviors and send tailored offers to customers. OmniChannel will be integrated into every aspect of retail. I think this example illustrates (a) the individual consumer desires and drivers (b) the marketplace movers and shakers (c) the technology response and (d) the business changes. Well done BudgetBox!

Formatted: Font: (Default)

Tahoma, 12 pt, Italic

Understand the financials I suggest the key financial impacts are around (a) the initial and recurring investments (b) the rewards, the revenue growth and cost impacts, and (c) resulting financial changes elsewhere in the organisation. It may be helpful to look at this using the ‘Greek Temple’ from Dr Bill Limond’s recent post.

Here’s the link to Dr Limond’s URL https://www.linkedin.com/pulse/7-digital-transformation-myths-greek-temple-corporate-dr-bill-limond

Whatever else is happening, I suggest that Corporate Governance must continue to provide the foundation stone of the organisation, and the CFO is the custodian of many of the governance policies and processes. Risk and Compliance management are similar bedfellows and the resilience of the three will make it easier to embrace and/or survive disruptive technologies and the probable upheaval in the organisation. The ‘Greek Temple’ helps the CFO to look at the transformation challenges and financial impacts in discrete yet connected areas. This helps when rapid development projects or multiple changes occur in [disruptive] Business Applications whilst changes to the Infrastructure may span several months or even years, for example, when staff skill requirements and organisation structures change. The new Business Applications can be one or many projects with discrete project management and financial controls, and managed interfaces into the Back Office environment, for example, links to financial and supply chain programs within ERP.

Ten further thoughts for the CFO and the finance leadership team –

1. The Investment numbers for the new Business Applications will likely include the costs of internal staff, external costs for technology licences, and capital expense for equipment. This is also a good time to consider the financial aspects of cloud versus on-premise options.

2. Further Investments may be required to effect changes in Back Office and

Infrastructure. For example, the physical layout in retail stores may be changed to enhance the shopping experience. Also, improvements in product storage and display may be possible to optimise floor space and delivery options. Longer term impacts could include improvements in supply chain logistics and even the elimination of wholesalers.

3. Payment options have already expanded for many purchases and

purchasers – indeed the payment process is commonly outsourced to card operators or specialist payment organisations like PayPal.

4. The Return in the ROI calculation may have many components. In my

example above, the Retailer will expect to grow sales revenues from increasing customer numbers coming into store, increasing market share, increasing customer loyalty, coupon incentives, and increasing transaction values. All measurable to monitor the impact of the new Business Application.

5. Cost savings should also figure in the Returns. In the Retail sector

reductions in check-out lanes may be possible, and larger items and ranges may not need display space in-store.

6. I am concerned about the relationship between the new Business

Application and the Back Office ERP services. Most ERP systems have been heavily customised which is an efficiency/cost/performance problem within the ERP modules and business processes – a potential show-stopper when requiring rapid connectivity with the new disruptive apps. Updating the ERP system to the latest release and optimising business processes should be on your agenda. You may have read several announcements recently about projects for installing smart meters for Utility companies’ customers. At the same time some Utility companies have suffered major customer satisfaction problems mainly due to failings in billing systems. Smart meters connected to failing billing systems are likely to be a financial and customer service disaster.

7. A good working relationship between the CFO and CIO is vital for success.

Recognising the actual maturity of the current ERP system and associated applications is essential. Knowing where you are starting from is always a good way to kick off your journey! Reflecting on the issues in #6 above, do your executive colleagues understand the starting point? The CIO’s focus may be on the ERP vendor’s roadmap and marketing hype which may or

may not deliver the desired transformation objectives - either in functionality, flexibility, competitive advantage, or in time to market. This is the chicken and egg issue – the corporate strategy for digital transformation should be driven by the vision of the Board, and the ERP system is one [important] component in delivering that strategy, not the starting point of the strategy. To review the SAP Maturity Model visit https://www.westtrax.com.

8. Having assembled and analysed all the relevant data, the Business Case(s)

can be developed and the Return On Investment calculated. There will likely be a range of outputs depending upon your assumptions for revenue growth and cost savings. Benchmarking your ROI against competitors and other similar organisations is essential.

9. All investment proposals should be examined by a SWOT analysis as part of

the Corporate Governance policy. This is a good time to consider whether the investment in new Business Applications will be funded from new money, or from cutting investment elsewhere, or needs to be self-funding from early cost savings.

10. If you have understood the new business applications and calculated the

ROI, why not present the plan to your non-executive directors and trade union representatives in line with your Corporate Governance policy. A good test!

Next Steps I know that digital transformation is a hot topic, and I hope these thought starters for CFO’s are helpful. Do please share your thoughts, challenges, and experiences! And email me if you want more information. Acknowledgments – Dr Bill Limond, BudgetBox SAS, Capgemini Consulting, MITSloan Management, West Trax International Ltd.