The CFO Dive Outlook on 2021

CFOs this year can probably refocus some of their energy away from coping with the pandemic and toward the challenges and opportunities posed by changes in technology, regulation and other trends.

Some changes are outside a CFO's control, such as the economic outlook or shifts in oversight and tax policy under the incoming Biden administration. 

Other trends are within CFOs' wheelhouse, and are easier to control. Here's a look at five of these trends. 

1. Increased pressure to adopt ESG metrics

Companies should consider preparing for greater scrutiny on environmental, social and governance (ESG) sustainability metrics from investors, regulators and the public.

"With ESG disclosure becoming mainstream, CFOs, particularly those of large listed companies, will have to field an increasing number of questions from their stakeholders relating to their respective organization's ESG performance," Shailendra Gupta, CFO of Acuity Knowledge Partners, a provider of research and analysis to financial services firms, said.

ESG metric usage is growing. The proportion of companies reporting on their operational sustainability rose to 80% in 2020 from 75% in 2019, according to a KPMG survey.

The pandemic, economic uncertainty and social and racial injustice have prompted companies to accelerate changes to their ESG priorities, according to a Willis Towers Watson survey of boards of directors in North America, Europe, Asia, Africa and the Middle East.

Among the respondents at 168 organizations, 78% plan to alter their use of ESG in executive incentive plans during the next three years, and 41% plan to introduce ESG measures into their long-term incentive plans during the same period.

Nearly three quarters of North American respondents have implemented at least one initiative to promote inclusion and diversity at their organizations, with another quarter planning or considering doing so. 

Depending on their business, companies may need to consider providing performance metrics on topics ranging from climate change and human rights to data privacy and board competence, Gupta said in a written response to questions. 

Several groups are pushing for the adoption of different ESG reporting standards, complicating efforts by companies to achieve uniformity and ensure buy-in by stakeholders. The organizations include the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD).

Two-thirds of the top 100 companies and three-fourths of other large companies use GRI's reporting framework, while 20% of companies follow the system recommended by TCFD. 

While a consensus gels on a common standard, companies should focus on building robust systems for collecting ESG data similar to their current mechanisms for gathering financial data, Gupta said.

2. The countdown to LIBOR's end will grow louder

Many CFOs this year may need to give a higher priority to the shift away from the London Interbank Offered Rate (LIBOR), the benchmark for trillions of dollars in business loans, derivatives and other financial contracts worldwide.

The clock is ticking — regulators have set Dec. 31 as the deadline for using alternative reference rates in new contracts, and June 30, 2023, for the transition away from LIBOR in existing contracts.

The stakes of the phase-out of LIBOR are high. At many companies, LIBOR is woven into an array of financial contracts and core operations such as valuation, accounting, tax and debt management. Some debt instruments are held by hundreds of investors who will need to agree on any modifications.

"Given consumer protection, litigation, and reputation risks, the agencies believe entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks," the Federal Reserve and other U.S. regulators said in a Nov. 30 statement.

To avoid disruption, financial executives need to play a central role in identifying their company's vulnerabilities and switching to alternative rates.

Adoption of the alternative rate favored by US regulators — the Secured Overnight Financing Rate (SOFR) — has accelerated during the past several months but, because of some disadvantages, is far from eclipsing LIBOR.

SOFR is based on overnight repurchase agreements secured by Treasuries and, unlike LIBOR, does not enable treasurers to make forward-looking rate calculations. LIBOR is based on London banks' estimates of what they would be charged when borrowing from other banks. The LIBOR rate can be forecast three, six and 12 months into the future. 

Financial executives should ensure their entire organizations understand the impact on risk and funding from the adoption of alternative reference rates, Pieter van Vredenburch, principal at Market Alpha Advisors, said.

"CFOs need to make sure that their IT and risk management departments are keeping up with the transition timelines," van Vredenburch said. "If a firm is unprepared, it could create major problems." 

3. Targeted, AI-assisted zero-based budgeting will outlast the pandemic

When COVID-19 blindsided CFOs last year, many of them seized on zero-based budgeting (ZBB) as a time-tested tool for cutting costs.

In a Gartner survey in April of 300 global finance leaders, 26% anticipated using ZBB in response to the pandemic. CFOs scored budgetary "quick wins" by shrinking planned spending for time and entertainment, leadership events and off-sites, capital expenditures, and hiring, Gartner said.

But today, ZBB is not your grandfather's blank-sheet budgeting procedure, circa 1977. Financial professionals are deploying AI and cloud platforms in efficient, surgical scrutiny of company spending.

By using digital tools, CFOs parse vast amounts of business unit data based on cost category or cost center, identifying opportunities for streamlining and achieving strategic, targeted savings. Analytics tools show how budget changes would alter company performance depending on various economic or business scenarios. Workflow apps speed review and approval. 

The upshot: financial professionals avoid the vast amounts of time and effort needed for gathering, organizing and analyzing data that ZBB previously entailed. They can more easily realize ZBB's goal to, according to Gartner, "rightsize budgets and shift resources toward value-added activities aligned to reprioritized business outcomes." 

ZBB "is the best type of financial planning, as long as the annual ramifications are not compounding — meaning, if you don't spend what you planned, you aren't losing future opportunities," Catherine Dahl, CEO of accounts payable SaaS provider Beanworks, said.

But ZBB can backfire and risk causing a downward spiral in performance if CFOs lose sight of its primary objective. "The way many organizations apply ZBB to cost often misses the realization of business value," Gartner said. "Without value, cuts must continue." 

Budgets should adapt to new circumstances, especially in uncertain times like now, Dahl said. "At some point in 2021, the economy will likely pick up; static budgets will crush organizations in these conditions." 

4. CFOs will try to expand use of real-time data

The pandemic underscored the importance of credible real-time data for fast decision making. CFOs will likely spend part of 2021 upgrading their preparation for the next out-of-the-blue crisis.

They apparently have a lot of work to do.

Ninety-nine percent of CFOs want to use real-time data when making decisions but only 16% believe they are fully capable of doing so, an Accenture survey found. They are channeling, on average, 33% of their department budgets toward building real-time operations and processes, Accenture found.

Financial professionals are most concerned this year about the potential impact of rising interest rates, disruption from the pandemic, an economic downturn and the hiring and retention of talent, according to Accenture. Only 11% of survey respondents expressed confidence in their preparedness for a recession.

Sixty-eight percent of the CFOs surveyed believe AI, machine learning algorithms and a range of real-time data sets are essential for improving data accuracy and refining forecasting models, Accenture said. It surveyed 450 CFOs and other financial leaders at companies in the U.S. and Europe with at least $1 billion in annual revenue.

Gaining capabilities such as real-time scenario planning "enables finance leaders to optimize cash flow, forecast with greater accuracy and integrate planning across the business," according to Accenture.

5. CFOs will try to find the best post-pandemic balance of remote and in-office work

Financial professionals will be core decision-makers in what is shaping up to be an especially complex, high-stakes challenge in 2021: determining the timing and pace for a return to the office.

CFOs will need to huddle with C-suite colleagues and track a range of hard and soft metrics beyond the baseline savings gained by shuttering facilities. When eying potential cost cuts and spending, CFOs would do well to:

• Compare the productivity levels of remote and in-office work;
• Reduce the higher costs of IT support for remote work and minimize cybersecurity risks;
• Determine the gains from a remote work policy when expanding the pool of potential employees beyond a company's usual geography;
• Measure employee anxiety and feelings of isolation and, if necessary, strengthen programs to ensure well-being;
• Gauge the risks from a return to the office and the budget needed for safeguarding employee health.

Facing a broad range of complex issues, financial professionals can't seize on a one-size-fits-all solution, according to interviews with CFOs. They will need to prepare for different public health scenarios and adjust their plans throughout 2021.

"We are in new terrain," Shane Hansen, CFO at FP&A SaaS company Planful told CFO Dive. "We talk a lot about continuous planning, and I think this is one of those areas where we're going to have to be agile in our approach."

A CFO will need to closely collaborate with the chief human resource officer and others on the executive leadership team, Hansen said. "It's really important to get everybody on the same page when making a decision based on a holistic set of data as opposed to just the financial metrics."

Many financial executives will probably prefer a mix of remote and in-office work, Steven Springsteel, CFO at human capital management SaaS company Betterworks, said. This could mean shrinking office space and having employees work primarily from home while occasionally "hoteling" at the office for team or client meetings, he said.

So far, Betterworks has taken a hybrid approach, Springsteel said. It decided last year not to renew the lease on its headquarters in Redwood City, CA, while keeping open its New York City office, which is dedicated primarily to sales and customer service.

Some CFOs may favor winding down their permanent work space altogether, he said.

"Going back to the office is not a true black-or-white question," Springsteel said. A CFO needs to ask, "do people feel comfortable, do they feel safe?"

Many CFOs can credit cloud computing for helping them weather COVD-19 by cutting fixed costs, moving to remote work and adapting to a surge in online demand.

Yet when reviewing their cloud spending, some financial executives may discover they've bought too much of a good thing.

The typical company wastes as much as 35% of its cloud budget, according to some estimates. Small- and medium-sized companies are especially prone to excessive spending. Many of them were slow to shift to the cloud and, when the virus struck, rushed their transition without close attention to cost, Randy Armknecht, managing director and global cloud practice leader at Protiviti, said.

"It was a case of, 'How do we serve our clients, how do we serve our customers without ceasing to exist?" he said. Now the companies "have put on the docket for 2021 efforts to go back and say, 'Ok, we responded to the emergency and now let's go and see if we can tighten things up.'"

Spending has gotten out of hand in part because cloud adoption recasts a company's IT cost structure. Technology spending that was once an on-site capital expenditure requiring several approvals and allotted by financial executives is now often an operational expenditure incurred by mid-level engineers and developers.

Staff can quickly spin up a new service or innovation into the cloud. Ease of use, while spurring creativity and experimentation across a company, can also blow a hole in a CFO's budget.

Cloud costs can quickly soar, Scott Grossman, CFO at Ensono, a hybrid IT service provider, said. Prior to hiring Ensono to manage public cloud services, some Ensono clients "went from spending $100,00 a month to $200,000 or $500,000 a month," he said. "A lot of waste is generated because it's so easy."

Cloud computing may be one of the most high-impact, "new, new things" in recent decades, but it poses a business challenge as old as the CFO role itself — how to spark innovation at the lower levels of a company without giving up the central financial controls essential to long-term viability.

"The further away from center you push the decision-making and give the autonomy, the more at risk you are of losing control of your spend," said Brendan Dolan, CFO at CloudCheckr, a cloud cost management and governance company. "You open yourself up to uncontrolled spending." (CloudCheckr tells companies it can cut their cloud costs by 30%.)

Many companies have identified lax budgeting as their No. 1 problem when using the cloud. Before the pandemic, 73% of firms said cost savings was their top cloud initiative, ahead of moving workloads off of in-house computers, according to Flexera.

Without tighter budgetary discipline, the amount of wasted dollars could grow along with a surge in spending on the cloud. Worldwide expenditures on public cloud services will balloon to $362.2 billion in 2022 from $257.5 billion last year — a 41% increase, according to estimates by Gartner.

Money channeled to the cloud will represent 14.2% of total IT spending by 2024 compared with 9.1% in 2020, Gartner said.

Companies waste money in several ways, including by storing useless or obsolete data, overestimating needed capabilities, or paying for services that sit idle for hours on end.

A better way

CFOs and consultants identified best practices and organizational structures that help financial executives ensure that every dollar spent on the cloud counts.

Make customer service, business strategy and revenue growth the focus of cloud budgeting

Rather than pursue a generic, category-by-category effort at minimizing costs, financial executives should collaborate with engineers and other stakeholders in tagging each type of cloud spending based on how it serves customers and boosts revenue.

"More of my clients have embraced tagging in the cloud" and can now see how every cloud system links to a source of revenue, Armknecht said. "They can analyze and say, 'Hey, every system involved in this revenue stream cost X and our revenue was Y.'"

By taking a granular approach, a CFO can get a clear, immediate grasp of cloud spending and make quick, well-informed spending decisions, Dolan said.

"It's all real-time data, so you're not waiting for the end of the month to get a bill from Amazon or Microsoft or Google" in order to understand your spending, he said. "You're constantly, constantly optimizing."

Financial executives with a detailed understanding of how cloud spending generates revenue will sooner recognize a jump in cloud spending as a signal of opportunity from greater customer demand rather than an indication of inefficiency or waste. They can budget with confidence and more accurately calibrate future cloud use.

"The better tagging you have, the more accurate forecasting you can do," Armknecht said.

Set up a center of cloud excellence

Company structure and complex billing can undermine efforts to get a complete understanding of spending. Cloud services often bill business units separately. Also, many companies use more than one cloud provider, each with different pricing models and discounts. 

By creating a core team of software developers, DevOps engineers and other stakeholders, a CFO can identify potential savings, build cross-company consensus and refine the tools for monitoring spending — and potential savings — in real time.

"The engineers want to go out and build cool stuff, and they may not understand the implications of their spending" if they don't have regular contact with financial executives, Grossman said.

In many cases, the center of excellence meets monthly, oversees cross-functional working groups that collaborate in real time, and reports to an executive committee at least quarterly, Armknecht said.

"The cloud center of excellence is a structure that I think has worked really well at a wide swath of companies," he said. 

Before the onset of COVID-19, 69% of organizations relied on a central cloud team, according to Flexera.

Get a grip on cloud concepts

Given the growing reliance on cloud computing, financial executives should understand the technology's structures and language, as well as its advantages and risks.

"I don't know that you've got to match with the engineers and the DevOps guys, but you do need to know the terminology that drives buying decisions," Dolan said. "Do your own research and training and learning."

Challenge software developers, DevOps engineers and other cloud users to find wasted spending

Rather than punitively trimming fat, CFOs should encourage staff to identify potential savings. Financial executives can make headway by creating incentives for removing waste among employees at the front lines of engineering and innovation, CFOs said. 

Dolan said he presents a challenge to his head of DevOps, asking, "How do you get my costs down 15%?"

With the right approach, CFOs can view cloud computing as a tool for understanding and optimizing spending rather than as a budgetary threat, financial executives said.

"The cloud provides unprecedented granularity and visibility into technology spend," Armknecht said.

One of many 2021 imperatives for CFOs: preparing their organizations for increased scrutiny on environmental, social and governance (ESG) metrics from investors, regulators and the public. 

Many CFOs, across industries, have long recognized the benefit and importance of standardized, audited ESG reporting. The social activism of last year has only reinforced that. But how will ESG requirements and expectations challenge CFOs going forward?

2021 is the year of ESG capitulation, according to Blaine Townsend, director of sustainable investing at wealth management firm Bailard. "A lot of that comes from basic points we've argued for 50 years: companies who treat their employees and the environment better and are more transparent with stakeholders might make for better long-term investments."

Townsend, who's focused on ESG for 30 years, said at the beginning of his career, if you tried approaching a company you were interested in investing in about a sustainability issue in their supply chain, they'd direct you to their PR department.

No longer. 

"There's been an incredible evolution in the c-suite on how to approach these issues," he said. "It's become a PR issue. There's an understanding in the c-suite that someone must be able to answer for ESG." 

In many ways, the CFO should be the "main cheerleader" for sustainability issues, he said. 

"Some of the acceptance of [ESG comes from] the ability to internalize the cost savings from better performance around energy issues," he said. "The CFO stands to benefit from better environmental practice. Long-term planning is a critical part of business success, and it lines up well with sustainability issues."

Businesses that emerge from COVID-19 should get out of survival mode and set themselves up for long-term success. Doing so requires being proactive towards ESG. 

"Regulatory issues are coming," he said, referring to the possibility of the Securities and Exchange Commission (SEC) formalizing ESG reporting. "For that alone, getting ahead will pay off. The smart companies are always ahead and not playing catch-up."

CFOs can, in many ways, demonstrate the benefits of ESG prioritization. The cost of capital drops for companies with better ESG performance, Townsend says, whether that's due to retaining or hiring the best talent, or seeing the benefits flow through to the bottom line. 

"You want to avoid creating roadblocks that don't actually exist," he said. "The markets have spoken in 2020; investors are interested in good ESG performance, so if CFOs are still seeing roadblocks, they're probably self created. It's clear the markets are interested in good ESG performance."

CFOs' best practices

"There's a huge opportunity for CFOs to be ESG leaders," Michael Stanton, CFO of modern governance SaaS company Diligent, said. "The CFO is not just the financial leader, but, when it comes to communications, and translation of those financial results of any other metric or KPI, the CFO has the default leadership perspective and the accountability for reporting to investors."

When it comes to best practices, Stanton says it's all about ensuring the company has the requisite infrastructure in place, the proper framework, top-to-bottom understanding, and the necessary systematic reporting and accountability so they can objectively measure, longitudinally, where it's starting, where it's heading, and what its gaps are. 

Bernard Borghei, co-founder and EVP of operations at communications infrastructure company Vertical Bridge, agrees. 

Borghei leans heavily on organization — detailed financial systems that give him access to all the various parameters and line items he needs to accurately calculate his company's carbon footprint.

"The financial systems we use came into play big-time," Borghei said. "The fact that every line item was very clearly outlined helped a lot, because the process is complicated to begin with. I'd strongly recommend CFOs keep a consistent system throughout the year to capture these kinds of expenses."

"With ESG disclosure becoming mainstream, CFOs [must] field an increasing number of questions from their stakeholders relating to their respective organization's ESG performance," Shailendra Gupta, CFO of Acuity Knowledge Partners, which provides research and analysis to financial services firms, said.

Companies should focus on building robust systems for collecting ESG data similar to their current mechanisms for gathering financial data, Gupta added.

Managing the process

At Diligent, Stanton regularly asks his team what it's doing to measure its progress from the social governance perspective. "That governance side is the part of ESG that's most classically owned by the CFO," he added. "The others can be split across the c-suite."

"There's a lot coming at us; there's a pretty significant tailwind behind ESG," Stanton said. "Define what ESG success and compliance looks like for your organization; that's first and foremost."

These things take time and need to be unpacked, particularly for more nascent organizations, Stanton acknowledged. "Don't boil the ocean," he said. "Define your requirements, know what success looks like, have the tools that let you track it over time, and then build upon that."

Stanton also encourages partnering with the CEO, chief human resources officer (CHRO) and chief information officer (CIO) to the extent solutions are being deployed. 

"There's no better time to start improving ESG than now," he said. "It's an opportunity for the CFO to step up and take that opportunity and lead. There's an angle that the CFO is just a scorekeeper, but this is the best kind of scorekeeping, where the CFO has the opportunity not just on the pure financial metrics, but to step forward and demonstrate that leadership to all stakeholders and employees."

The bigger picture

"Philosophically, I prefer to focus on perfecting the process derived from ESG reporting rather than the outcome itself," Rene Ho, CFO at supply chain management and financing software company Taulia, said. "This not only produces the outcomes an organization wants and needs, but also changes the culture from within, generating positive, long-lasting change." 

Taulia employs around 300, Ho said. Its footprint in terms of physical goods and services is small. 

"Our biggest focus in ESG reporting is people analytics," Ho said. "While developing our analytics and data management capability we focused on removing bias from our people processes, such as hiring or compensation, rather than specific quotas or targets."

Ho's biggest challenge in implementing Taulia's ESG analytics is ensuring that once the legally-required anonymity is applied to the data, the company can still produce insights that allow it to improve.

Companies often fall short on their ESG goals because, when it comes to implementation, they don't establish the necessary capital allocation models and governance structures, Vincent Manier, CFO of ENGIE Impact, a sustainable business consultancy, said.

According to Manier, the finance team must be brought into the ESG planning process at the onset to ensure the project design makes financial sense and can be effectively presented to corporate decision makers and stakeholders. 

They also must update current criteria to address the benefits of sustainability strategies. "This will lead finance leaders to invest in meaningful short- and long-term financial sustainability strategies that create enhanced industry reputation and reduced climate risk," he said. 

"Without shared, quantifiable success metrics, teams lack the incentive to innovate and collaborate across departments," he added.

Prime KPIs

Additionally, the current industry reporting system can't accurately capture the data needed to measure the financial benefits of environmental sustainability programs. 

This gap minimizes the opportunity for finance leaders to report on metrics like energy price volatility, water scarcity risks, water and waste regulations, and their supply chains' carbon footprint, he said. "Businesses must increase their long-term visibility into these metrics in order to drive ESG programs and make informed decisions."

Since measuring ESG-related performance can be overwhelming, it is helpful to approach financial communication and reporting by breaking it down into four distinct categories of KPIs.

1. Investments in sustainability projects (both in terms of the total dollars spent as well as as a percentage of overall corporate investments)

2. Financing indicators, such as the use of sustainable corporate finance instruments including green/sustainable/social bonds and loans

3. Governance indicators, such as board composition

4. Operational metrics, such as reduction in exposure to climate-related financial risks.

"Finance leaders should not get caught up in the absolute values of ESG-related KPIs," Manier added. "They don't necessarily indicate success." 

Instead, CFOs should focus on evolution and momentum throughout the year, as most ESG and sustainability goals are long-term, making it challenging to quantify specific benchmarks.

Eyes on compliance

When it comes to compliance, Borgei says Vertical Bridge reviews and publishes ongoing ESG-centric KPIs, including the percent of minority-background employees, how many employees of each gender, and executive representation. "We're very focused on that, so we report on it on a quarterly basis," he said.

"When you look around the industry, there are no published KPIs or guidelines," he explained. "So, if I tell you we're a company of 225 people, can you tell me what's the appropriate breakdown of minorities? There really isn't a guideline; that's where the industry still has room to grow." 

Depending on the industry, there's a chance that with every new presidential administration, new ESG rules and regulations follow. 

"As CFO, you've already budgeted for 2021, and don't know when the rules may change," he said. "For a company like us, whose ESG focus is truly voluntary, we have room to maneuver and be flexible and adjust."

Everything Vertical Bridge has done under the banner of ESG since its founding, Borghei said, is less about money and more about social responsibility. 

"I know CFOs are under pressure to perform, and they always should look at numbers, but, truly, for a successful ESG program, it has to be part of the company culture," he said. "When everyone buys into it, it's much more meaningful. Don't consider it an obligation; endorse and understand the benefits will impact everyone in the company. Once you see it that way, it becomes much easier to work on a sustainable program."