CFOs can embrace a more innovative approach to budgeting without committing to the entire ZBB process.

“Regrets. I’ve had a few …”

Much like Frank Sinatra, financial executives who have just wrapped the laborious budgeting process are also likely to have a list of unmentioned regrets. If they were inclined to articulate them, no doubt zero-based budgeting (ZBB) would land atop the heap.

Because it’s a concept so often misunderstood or misused, let’s avoid our own regret and pause for clarification: ZBB, first introduced in the ’70s, is a process of budgeting that requires managers to build their budgets from zero on an annual basis. It employs a complex methodology wherein finance breaks costs into decision packages, assigns each package to two owners with differing perspectives, and requires decision-makers to force-rank priorities.

ZBB’s focus on exposing and eliminating unproductive costs and understanding cost drivers has earned it a renaissance of late, particularly among executives seeking more sophisticated value-creation tools.

The aforementioned “unmentioned” regret tends to fall into two distinct camps: the “Just Dids” and the “Never Wills.”

The Just Dids

This clan is comprised of those CFOs who, given fund sponsor or stakeholder pressure, undertook a ZBB approach to budgeting, only to find its sullied reputation true: It was indeed not only prohibitively complex, but it also positioned the office of the CFO as a burdensome antagonist to the business.

More regretful was the fact that it just didn’t work. The Just Dids fall into the 65% of companies that employed ZBB but failed to meet budgeting goals.

A deeper dive into ZBB user survey stats shows even more reason for regret: 41% who have employed ZBB point to poor design and understanding as a reason for goal failure; 47% point to the poor business case for its use in the first place.

The Never Wills

Of course, the flip side to those who just went through a failed ZBB pilot are the executives who never will. These are the CFOs who have either heard the ZBB horror stories (see above) or who simply elect a more traditional approach to budgeting.

Why the regret then? Because, these are also the (mostly private equity-backed) CFOs who have substantial cost cutting-targets to meet and now, on the backend of budgeting season, realize the traditional approach won’t get them there. These are the CFOs who know that post-deal, PE investors retain the existing CFO only 25% of the time. In addition, they are concerned about their level of “replaceability” with an executive more amenable to unorthodox budgeting philosophies and more confident about meeting aggressive value creation targets.

ZBB-Light

With apologies to Sinatra, what neither the Just Dids nor the Never Wills seem to understand is that there is a “my way” approach to ZBB that avoids the pitfalls of going all-in, while still embracing a more innovative approach to budgeting.

We call it ZBB-light. This edited approach borrows many of the ZBB principles and applies them to certain costs within specific business departments and functions. (It’s particularly applicable to costs that are not directly related to revenue).

Leveraging some of ZBB’s core concepts (like decision units and decision packages) can force the organization to think about alternative ways to perform functions without burdening the business with some of ZBB’s labor-adding exercises.

Sound too good to be true? That’s because in some ways it is.

Yes, ZBB-light strips some of the risks from the unabridged approach. But implementing the light approach effectively still requires the meticulous up-front planning of its Full Monty cousin. In fact, one might argue that because ZBB-light targets only certain, applicable units of the business, the upfront diligence required to identify those units must be even more meticulous.

It raises the question: Given the heavy lifting required for even an abridged ZBB approach, why do it at all?

Putting aside the “not getting fired” incentive, smart CFOs recognize that the benefits of ZBB, particularly in a PE-environment, are plentiful and meaningful:

• A well-justified budget aligned to strategy rather than history
• The avoidance of ‘”automatic” budgetary increases
• The improvement of operational efficiency via rigorous challenge of assumptions

But First, We Cleanse

But, doing ZBB-light and doing it right are two different things entirely. For the latter to occur, the planning phase for year-end budgeting has to happen, well, now. And that planning must take the form of a three-step robust data hygiene exercise, the purpose of which is to create a single source of financial truth to inform cost cutting targets.

Step 1: Diagnostic. The diagnostic phase helps identify the lowest hanging fruit for ZBB-light applicability. CFOs must create a matrix of corporate financials, by functional area, department, and cost category (e.g., travel and expenses) focusing on selling, general and administrative expenses versus gross margin. This data diagnostic exercise will enable the corporation to target the right functions/departments and will provide an accurate assessment of the total scope of potential margin improvement.

Step 2: Benchmarking. Now that the data are clean, the CFO has an accurate point of departure for comparison. That comparative exercise must take place both internally and externally: Finance must take a full inventory of what the company has done historically by function and department. Those internal benchmarks need to assess specific costs as a percentage of revenue over, say, a previous five-year period in order to paint a clear picture of company-specific investment/outcome ratios. The exercise must then contrast that against industry norms and best-in-class numbers. Those two comparative measures, when combined, will allow for informed target setting and achievable, yet still aggressive, goals.

Step 3: Defining Success. This final step must take a very granular approach toward defining success per department/function. For example: in human resources, what does success look like? Low recruiting costs? Decreased attrition rates? In sales, is success reduced sales cycle times? A larger customer base? Increased share of wallet? Defining targets requires an understanding (via the data hygiene exercise) of the drivers of success and their correlation with spend.

Only when that three-step data hygiene and analytics exercise is complete can companies effectively begin any strategic ZBB implementation, light or otherwise. It’s an undertaking, to be sure, but one that can pay significant dividends in the form of potential margin improvements upwards of 1,000 points.

With margin improvements like that, maybe Sinatra was on to something: CFOs embarking on a meticulously planned ZBB-light implementation may, in fact, wind up with too few regrets to mention.

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With the advent of robo-advisors, artificial intelligence (AI), and virtual assistants, the next wave of the financial technology revolution could arrive sooner than anticipated.

A report by EY, “Unleashing the Potential of Fintech in Banking,” highlights that collaborating, instead of competing, with startups can provide fresh tech solutions for banks. Shared services and knowledge will improve product offerings through data analytics tools like predictive analytics, offering deeper engagements with customers.

How are banks currently leveraging fintech?

Albeit independently, banks are building in-house technology in response to the growing fintech challenge.

In 2017, JP Morgan appointed a new team for the automation of legal work. In the past, agreements consumed over 360,000 hours of work each year by lawyers and loan officers. Using a program named Contract Intelligence (COIN), hours of reading would be automated, finished in seconds, and will have fewer errors.

Further, JP Morgan invested over US$9.5 billion in technology in 2016, of which $3 billion is “dedicated toward new initiatives” and a $600 million fraction lined up for “emerging fintech solutions.”

In February 2017, Wells Fargo created its own AI team to provide more personalized services and strengthen digital offerings. Recently, four early-stage fintech startups, Edquity, Hurdlr, Redrock Biometrics, and SimSpace joined Wells Fargo Startups Accelerator, a program intended to create solutions for enterprise customers. Launched three years ago, the program aims to explore emerging technologies in analytics, cybersecurity, payments, AI, mixed reality, and other areas in pursuit of breakthroughs for financial services.

But the current level of engagement has done little to exploit the full potential of technology. In an analysis of 45 global banks, the EY report reveals that only 25% of the surveyed banks extensively engaged with fintech firms.

Through collaborations, fintech startups and banks can have access to broader markets, along with a number of other benefits. According to Matt Hatch, partner and Americas FinTech Leader at EY:

“Last year [2016], the average return on equity (ROE) for the largest 200 global banks was just over 7.1%. Banks can increase their ROE by collaborating with fintech [companies], which has the joint benefit of driving down cost while accelerating innovation,” he said.

“Taking the first step is often difficult because of a general reluctance to change – even when there is an appetite to be a part of an innovative, cutting-edge organization. Before embarking on this journey, make sure your ducks are in a row. First, look internally at current systems and offerings. Then ask – how can we use fintech partnerships to enhance what we currently have in place? Over time, integrate innovation as a central part of your growth strategy.”

Why collaborate?

1. Growing fintech innovation

Due to a plethora of data, fintech startups have gained significant traction. By introducing innovative ways, they are successfully offering products and distinctive solutions for consumer demand.

In the third quarter of 2017, global VC-backed fintech startups raised as much as $4 billion across 278 deals. In 2012, for the same quarter, fintech startups had attracted only $759 million across 105 deals. Their growing popularity is a big reason why banks need to enter sooner for a timely adoption of technology.

2. Increasing awareness in customers

Collaborations will provide the perfect opportunity to leverage the full potential of the technology and will allow them to meet the demand of digitally savvy users.

EY FinTech Adoption Index 2017 released in June 2017 indicates that the appetite of digitally active consumers has risen considerably, from just one in seven digitally active consumers in 2015 to one in three in 2017. The report also shows that in 2017, there are 84% consumers aware of the fintech facilities in comparison to just 62% in 2015. The same reports show that the fintech adoption rate is expected to reach an average of 52% globally from the current rate of 33% in 2017.

The maximum usage of fintech is happening along the lines of payments and money transfers, with 50% of consumers choosing such services in 2017, in comparison to just 18% in 2015. Such growth in numbers could soon blur the boundaries between different financial services, laying down new standards for the industry during the process. To stay ahead of the curve, financial firms would benefit from the technical assistance from the fintech startups.

3. Win-win situation

For startups, partnerships with financial institutions will provide access to funds for future growth. With joint efforts, their businesses will more likely be scalable and sustainable in the long run.

For banks, such partnerships would mean a data-driven approach with lesser costs, low redundancy, solid technical know-how, and increased efficiency. Banks can significantly reduce structural costs, provide employees more time for value-added tasks, and enable enhanced regulatory compliance.

Unified efforts can create a solid financial system that works for all. Such engagements should work with the highest integrity, strong level of security, and greater transparency to reap the full benefits of the next wave of tech innovation.

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There’s an old proverb that says if you chase two rabbits, both will escape. But what’s not so obvious is the (often) needed balance between the twin objectives of growth and optimization. This need for balance is becoming increasingly amplified as organizations grow and move to digitize. Thanks largely to Big Data, CFO priorities have shifted to a strategic, more value-based, future focus.

It’s easy to get swept up in innovation and digital transformation around growth and the art of what’s now possible for the business. Seeing a vision come to life and helping to drive sweeping change is exciting and engaging. Who wouldn’t want to be part of that?

But growth is often in direct competition with optimization. And digital transformation is an accelerant. While both growth and optimization are good for business, managing the balance of when to say yes and when to block change isn’t always a popular role. And sometimes rationalizing the change is exactly the right thing to do.

Now that we’re acting as business partner to different lines of business, CFOs are pulled in many directions. Supporting strategic decisions; keeping one eye on financial stewardship, compliance, and optimization; and reining in colleagues when they become overambitious, requires a foot in both camps. But that’s easier said than done. So what’s the solution?

Three things. First, a recognition of the different mind set required for each. A tactical finance mindset must reflect on the implications much earlier than a strategic one. Enthusiastic salespeople and senior management are always excited about top-line growth, but it’s our job to bring the focus back to the P&L. That’s not always easy, but if you have a good team of C-suite colleagues, you’ll all be aware of the dangers of groupthink, and will bring your own assessment to the situation.

Second, have strong analysis tools in place to help you reach better decisions faster. By way of a tactical example, we’ve started to use an SAP tool around travel and expense management. Thanks to the insights we get from the reports, we can now see where we need to close the loop on flights and hotels to get a much better edge on negotiations. Strong analysis tools will totally change the game internally and externally, and let you make the right decision, regardless of how attractive a deal looks or how enthusiastic your colleagues are.

And lastly, a CFO must maintain steadfast independence at all times. It is our responsibility to remain financially agnostic. It’s all well and good wearing two hats, but as CFOs continue to acquire more commercial responsibilities, we must recognize where these competing objectives lie and when they occur.

Of course, there are huge benefits to having the CFO role become more rounded. Focusing more on bigger picture business growth is great, but only if it doesn’t sacrifice the steady influence of fiduciary control.

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The financial technology field is rapidly expanding, but remains in flux and continues to be unpredictable. Fintech’s use of AI, algorithms, and modern technologies can transform traditional banking, but still faces some resistance.

Some fintech companies are finding billion-dollar markets in the gaps left by outmoded banking services. Nevertheless, there are still many obstacles in the road before a complementary system is created that makes room for them both.

Should Banks be Scared?

Banks are slow to come around to innovation, but with a little effort they can remain more competitive than ever. Newer digital standards and transparency laws even the playing field, and the institutions quicker embrace of new technology can position themselves better for success. Not all fintech startups are out to hurt banks, and in fact, many services use legacy platforms to bring them more customers.

One such example is ezbob, a new platform that has partnered with multiple leading banks, including the Royal Bank of Scotland. Ezbob’s platform sorts through data from over 25 sources in real time to create a seamless, automatic lending process for banks’ customers. The platform is not the first to streamline an old process using new tech, but it seems to be positioned to lead the Lending-as-a-Service (LaaS) industry.

Tomer Guriel, ezbob’s CEO, believes that LaaS is the future as bank need not be the only lender in town.

“Working with the banks is no easy task. I can tell you that we were trying for 4 or 5 years to partner with banks and luckily enough we decided to lend money ourselves using our platform. The company wouldn’t have been able to survive if we sat around waiting for a contract with a bank.”

LaaS is one of the many ways that banking has been transformed very recently, and should show banks that all partners can benefit when efficiency is improved. Making real-time decisions can cut overhead and help bankers to focus on the big picture while technology runs the show. In terms of LaaS specifically, some new startups are looking to use their peers’ modern lending services to enter the space without sacrificing equity to investors.

Swimming Against the Current

New fintech startups must be wary. Even as they aim to disrupt existing industries, new firms must be wary of regulations. Companies still need to be compliant with advertising, reporting, and product rules or risk potentially catastrophic fines and sanctions. Traditionally, the regulatory system has little to no patience for those who skirt the rules. Thus, it is vital to build transparency and methods for ensuring that the data is infallible. Startups that consider these compliance issues from the outset have a big advantage in a fast-changing ecosystem.

Fintech companies that deemphasize this focus on regulations could face serious repercussions down the line. Founders must budget long waiting periods as regulators handle paperwork, spend time cultivating relationships with industry players, and prepare to exercise patience. The iconic, my-way-or-the-highway founder with tunnel vision on their ‘idea’, is hardly suited to fintech. Instead, the fintechpreneur is halfway between radical and traditional. A solid ability to navigate the currents of the conventional system is a must for new financial moguls.

Though technology is quickly moving to decentralize and disrupt the institutional banking industry, fintech startup founders should remain patient with regulation while the market embraces this evolution. Banks are still reluctant to embrace these startups, but fail to realize they can gain much more from adopting these technologies. Recent legislation in the European Union has shown that at least some countries have started to come around to fintech’s potential for innovation.

The Changing Horizon

In the wake of the 2008 financial crisis, new banking regulations have been steadily adopted in the EU and abroad. The mistrust that the financial crisis fostered in the public made strict, equitable guidelines necessary in order to repair the damage done to the industry’s reputation. These rules have made it easier for fintech companies to be compliant, and for existing banks to become more accountable.

One of the newest regulations involves e-invoicing and requires that all corporations sending digital invoices commence using a common system. This will purportedly help save billions for businesses and governments alike and is just a single step among the many that companies must take.

Others reforms that have passed in recent years include the PSD2, which standardizes mobile and internet payments, and the AMLD (Anti Money Laundering Directive), which hurts those who would avoid reporting income for tax avoidance, or worse, terrorism.

These rules are tough on old banks that had previously relied on a closed-ecosystem model for complying with lawmakers and maintaining decades or centuries’ worth of files.

The new laws that force them to open their books and processes make this information available to fintech firms, for use with APIs and other accessibility tools. However, it also puts new fintech businesses at the mercy of state government. Without a body of sensible legislators to reform old decrees, entrepreneurs and fintech startups must maneuver a narrow space.

Moving On

Whether their employer is slow or fast to pivot, ex-bankers who know the way the wind is blowing are flocking from big banks in droves. Some are intrigued by the technology, and some just want a piece of the venture capital flooding the fintech industry. All of them have one thing in common: knowledge of the old systems is priceless for a new contender.

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Finance chiefs and their bosses who don’t help their employers avoid enough tax are more likely to be forced out.

Because CFOs are often held accountable for the corporate tax function, they’re more likely to be fired when the company’s tax rate is significantly higher than those of their peers, according to a new study of the relationship between corporate tax rates and their job risks for chief executive officers and CFOs.

Scholars have long theorized that C-suite turnover is more likely to happen when company tax rates are comparatively too low – indicating the possibility that tax avoidance schemes are in play. In that case, regulators and investors might end up calling for the heads of CEOs and CFOs.

While the authors of the paper find evidence for that assumption, the link between low tax rates and top-executive firings tends to hold up only during periods when regulators are on the prowl for corporate tax cheats – periods like that following the enactment of the Sarbanes-Oxley Act of 2002. Their data “suggests that the relation between paying relatively too little tax and CEO turnover obtains only in periods with high regulatory scrutiny on tax aggressiveness,” they write.

On the other hand, they find ongoing evidence that over the long haul, boards tend to reward CFOs and CEOs who deliver lower tax rates. Perhaps that’s because efficient tax management is a sign that the company’s doing a good job of producing cash flow and managing its finances overall. Even though “paying too little tax potentially increases reputational costs and scrutiny from regulators and taxing authorities, after-tax cash flows for these firms are likely to be higher relative to firms paying too much tax,” according to the paper.

In summing up their argument, professors James A. Chyz of the University of Tennessee and Fabio B. Gaertner of the University of Wisconsin-Madison, write: “Specifically CEOs who do not avoid enough tax are more likely to be forced out. Unlike the effect of avoiding too much tax, the … result of avoiding too little tax holds throughout our sample period.”

The authors base their findings on a sample of about 5,000 companies that had “CEO turnover events” and compares it with effective corporate tax rates for the sample group. They also looked at a much smaller sample of CFO turnover data, and found the results for the finance chiefs “somewhat consistent with our CEO results.”

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Like computer aided design software meant the end of Draughtsmen, many are asking if the advent of the of blockchain technology means the end of the accounting profession. The fear is that in a world ruled by irrefutable digital ledgers there may no longer be a need for those whose profession is built on confirming financial data. The answer may be that the blockchain may not eliminate the accounting profession but it is certainly going to change how things are done and the sort of skills that accountants will need to remain relevant.

In many ways the blockchain can be considered an evolution of accounting, much as double entry accounting changed the way that people managed financial data and opened up much more information and insight into the internal financial processes of a business. The blockchain promises to be just as revolutionary and to open up levels of complexity to analysis that was never considered practical or possible. Just as double entry accounting allowed people to see deeper into the financial process and see the interplay between both sides of the leger within a company, The blockchain, which in its essence is simply a distributed ledger in which all the transactions are linked together in a permanent record, will allow the interplay to be seen across companies and across countries.

Since the data on the blockchain is unchallengeable and absolute it will mean a great deal of time and money will be saved in auditing those transactions. Through the use of artificial intelligence and the blockchain future auditors will be able to crunch through huge volumes of data and since the transactions themselves are already confirmed by the blockchain they will concentrate their auditing resources on detecting fraud and internal and external collusion. It will certainly change how the auditing profession works and the skills that will be required, it is easy to think that in a business world where ethereum contracts underpin the transactions that you will not be able to sign off on the books if you can’t actually read the code of those contracts.

Blockchain will also open up incredible opportunities for those Accountants that are comfortable with the emergent technology as there is growing demand from business to implement the blockchain into their internal financial processes. The ways in which the blockchain can help businesses reduce costs are almost endless. From simplifying the procurement process to providing vast amounts of linked financial data for analysts to devise more efficient business model, the opportunities to sell high value added services as part of the blockchain implementation process are unprecedented.

Even the most mundane areas will be affected as we see the blockchain is affecting all areas from how small businesses prove their worthiness for a working capital loan to how accounting software is designed. The effects will be wide and far reaching but for those ready to embrace the challenge there is also great opportunity. There has probably never been a better time to be an Accountant.

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Our data shows that there’s still a big gap between the expected impact of digital transformation and finance’s level of readiness. But top-performing finance organizations are not waiting around until all the statistics look good; they are pushing ahead with exploration and testing of new tools.

Digital transformation has long been a big issue for the finance organization, and finance executives expect it to have a significant impact on finance performance and service delivery. A full 100% of top-performing finance organizations in our 2017 Digital Transformation Study believe digital transformation will drive improved finance business contribution.

But while 89% of top-performing organizations (vs. 43% of peers) have a digital strategy, finance lags in the ability to execute it. Only 24% of peers say they’re ready, versus 67% of top performers. In our survey, respondents pointed to lack of resources and inadequate internal IT support as key hurdles to closing the execution gap.

Forging ahead

While finance has a lot of work to do to up its digital competencies, it’s not sitting idle. Most top performers in our study are already exploring and piloting new technologies across process areas. Where’s the most activity taking place? In digitizing repetitive processes and leveraging digital tools to improve analytics.

Many finance organizations are putting an emphasis on the digitalization of repetitive processes like cash disbursement and general accounting. Using robotics and artificial intelligence (AI), these finance organizations save time and money and cut down on errors. Repetitive processes are the most popular candidates for digitalization, as finance organizations look to make their account-to-report and customer-to cash processes more efficient.

Right on the heels is the next wave of digital projects, in planning, performance management and forecasting, and business analysis. Of top-performing finance organizations, 73% are exploring, piloting, or have completed projects in business analysis; 76% are doing the same in planning and performance management. This trend reflects the growing pressure on finance to deliver insight and decision support to business leadership. Finance is beginning to use solutions like Big Data and predictive analytics to show management not just how the business is doing, but how it’s likely to perform in the future, and also coming up with ideas on how to prepare.

Blazing a trail versus playing catch-up

While finance may lag in matching what’s important and what’s possible, it’s certainly trying to catch up. Peers are quite behind and will have to play quick catch-up to match top performers on everything from developing a digital strategy to trying out new tools. Still, that top performers are ahead is good news. They are blazing a trail for peers to follow. They realize the effectiveness and efficiency promise of digital transformation.

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How much do you know about FASB’s new rules on revenue recognition? Take our quiz to find out.

This month, the converged standard on revenue recognition from the Financial Accounting Standards Board and the International Accounting Standards Board finally takes effect for publicly held companies. The standard, called ASC 606 in the United States and IFRS 15 elsewhere, will be a headache for many issuers. How much do you know about ASC 606?

1. Following their converged guidance on recognizing revenue in contracts with customers, how much time did FASB and the IASB allow companies to adopt the standards?
A. 1.5 years
B. 2 years
C. 3.5 years
D. 4 years

2. For privately held companies, the standards take effect for reporting periods beginning after what date?
A. December 31, 2017
B. December 31, 2018
C. December 15, 2019
D. December 15, 2018

3. ASC 606 strengthens disclosure requirements, focusing on three key areas. Which of these is not included?
A. Contracts with customers
B. Contracts with vendors
C. Significant judgments
D. Assets recorded for the costs to obtain or fulfill a contract

4. Which industry, according to experts, will be most affected by ASC 606?
A. Telecommunications
B. Transportation
C. Technology
D. Consumer goods

5. There is a five-step process for recognizing revenue under ASC 606. Which of these is not one of the steps?
A. Identify the customer contract, its performance obligations, and the transaction price
B. Allocate the transaction price
C. Recognize revenue
D. Issue a new customer contract

6. ASC 606 allows for two different transition methods: the modified-retrospective method and the full-retrospective method. The latter requires which of these:
A. Recasting all prior years’ data on comparative financial statements
B. Additional GAAP disclosures
C. Evaluating revenue under ASC 605
D. An adjustment to beginning retained earnings in the year of initial application

7. Since September 2016, how many times have the revenue-recognition rule changes been mentioned in earnings-call transcripts?
A. 131
B. 313
C. 249
D. 185

Answers: 1–C; 2–D; 3–B; 4–C; 5–D; 6–A; 7–A

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Quantum FBI is a professional services firm that brings together finance, technology and talent to offer clients functional support and strategic insight through expertise, data and analytics. We help early-stage and middle market companies improve their operating performance and accelerate growth by employing cloud-based solutions and business intelligence.

The finance function has always been at the forefront of advances in computing

This was the case with the advent of ERP (allowing greater oversight of a company’s finances), Big Data (most notably in the context of risk management), and recently Blockchain tech (enabling a raft of new online financial transactions hitherto impossible). The burgeoning potential of Artificial Intelligence (AI) looks set to continue this trend.

The reason for this is that the nature of finance is quantitative, and advances in computing readily lend themselves to number crunching and data analysis, more so than in other business domains. As such, any time there is a leap in the capabilities of what computers can handle, the practical use-cases in finance are never far behind this expanding frontier. Raw data is the fundamental resource of both finance and computer science – while the more eye-catching applications in AI (like autonomous military agents) are a long way from being practical, AI applications in finance will have a substantial impact in the next 1-3 years.

The Promise of AI

Before looking at how AI will change finance, it is worth reviewing where these possibilities have come from. In the past decade, major advances in computing fields (most notably machine learning) have been brought to maturation as well as made more practicable for developers. These advances revolve around bridging the gap between the clunky manner in which computers “think” (compared to humans) – self-awareness, learning, self-iteration, and the ability to process opaque data sets are the core characteristics of these new programs.

These solutions leverage advanced algorithms that in essence make programs closer to the human conception of self-aware intelligence versus the blind static input-output processing of traditional computing.

AI offers both quantitative and qualitative advances for financial services. On the more basic level, companies can reduce the cost of their workforces by automating lower-level functions (like customer service) with chatbots among other things. With computer being able to do more and more tasks that humans were required for before, this leads to direct and obvious savings.

But in terms of revenue generation, AI will also offer qualitative advances in what the finance function can achieve. For example, AI can make auditing of financial transaction much more precise, detecting errors or fraud that humans would struggle to spot. The volume of documentation involved in financial deals and research will also benefit from AI, with tools using Natural Language Processing enabling a new level of efficiency and detail in analysis.

And of course, the holy grail of fintech – a program that will pick the right stocks for you – is also on the radar, with firms such as Sentient Investment Management and Cerebellum Capital developing their own solutions that look promising in this regard.

This highlights another way in which AI will impact the finance – not only will it be used standalone, but especially in the near future it will be used to “augment” human decision making (known as Intelligence Amplification (IA)).

AI at Work

One of the most tangible advances in AI is the advent of Chatbots. Unlike previous incarnations of bots that interact with humans (e.g. the beginning of Apple’s Siri), the algorithm’s used in the next generation of Chatbots will be sufficiently advanced to handle a great majority of consumer queries. With this technology, banks can dramatically reduce the size of their customer service departments while still offering a high standard of service – picture a customer looking for information on what credit card to apply for, simple If>Then logic combined with a program that can learn from previous encounters could completely automate this activity.

One area in which AI will make a large impact is the nascent field of Regulation Technology (RegTech). There are different ways that companies will use AI to keep in line with increasing regulation. One way is by using AI to develop complex algorithm-based programs capable of detecting non-compliant behaviour of employees before it becomes too much of a problem. Another use-case is for auditing and the documentation to be sent to authorities – AI can trawl through vast quantities of data and identify irregularities that a human would miss. And there is also the use of AI for smart psychological profiling of employees to evaluate their risk-aversion, among other traits.

Insurance is similarly quantitative, which of course makes it a fruitful area for AI. The industry suffers from the lengthy but necessary steps involved in fraud prevention and risk calculation, both of which can be alleviated by smart programs. Even simple efficiency gains in sorting between which claims are likely to be fraudulent vs which should be fast-tracked will enable a significant amount of cost savings.

Not just among financial professionals, the advent of AI will change how consumers manage their own finances. Straightforward use-cases are being uncovered in the form of Robo Advisors. Programs could procatively give advice to private investors based on their portfolio, which could dramatically reduce the need for external advisors.

Obviously, the rise of computers making more and more decisions in finance is a concern for regulators. While finding the right use cases is the major barrier to AI adoption, many companies also list regulatory hurdles or lack of clarity as a reason to be tentative about AI adoption. As with blockchain technology, the EU and China have places emphasis on clarifying regulations in this space, and the U.S. seems set on loosening barriers also.

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Six CFOs from diverse industries reveal their top business objectives for 2018.

Next year promises to be an exciting (and, possibly, very critical) year for many companies. Interest rates may finally head higher, workers may be tougher to find, valuations pricier, and consumer spending more robust. Or, as CFOs know all too well, none of that may happen. Unforeseeable events and market conditions will intervene, as they always do. Excessive leverage may finally get the better of the credit markets. An asset bubble could pop. Or populist politics could cause a Western nation’s economy to seize.

But, overall, despite the risks, it is a good time to be a chief financial officer. A potential corporate tax cut in the United States could boost many companies’ bottom lines. Technology will continue to slowly enable greater productivity in the finance department. And federal regulators may loosen some of the red tape that businesses think is choking growth.

Overall, it looks like, finance chiefs will have an abundance of “levers” they can pull to influence business outcomes next year. But which ones will they use? The choice is highly dependent, of course, on the businesses they run. But it is also dependent, in part, on the swirl of macroeconomic factors mentioned above. In 2008, for example, hardly any CFO of a financial institution would have stated “market share growth through aggressive M&A” as their number one goal for that year.

What do CFOs have at the top of their to-do lists for 2018? What are their primary missions? To find out, we interviewed the finance chiefs of six mid-size to large U.S. organizations. Their choices, which are probably shared by many organizations, reflect the kind of year we are headed into: one full of promise for many sectors, but also one heavy with uncertainty.

The following stories describe the top priorities for the CFOs of companies in a diverse set of industries: retail, freight logistics, recreational equipment, computer peripherals, chemicals, and real estate. On the surface, to a layperson, their goals might sound simple, but fellow CFOs know the following six objectives are anything but easy to execute on, and achieve, in any year.

Survive Disruption

Asked to characterize how he sees 2018 playing out, Scott Settersten, the CFO of retailer Ulta Beauty, uses the words “dynamic” and “exciting.” But Settersten chooses more measured terms to describe the essence of his job in the forthcoming year: “It’s a question of being able to balance the growth levers of the business versus the core of keeping the lights on.”

Both descriptions are true. On the one hand, Settersten will be closely watching the dynamic and disruptive effects of Amazon’s powerful online strategy, which emphasizes ever-shrinking product delivery times, lower overhead, and tightening margins. “Retail is just going through this crazy cycle … with the Amazon effect” and Walmart’s effort to keep up by growing its online presence, he says.

Ulta, whose stores offer cosmetics, fragrances, skincare, haircare, and salon styling tools, is trying to maintain a foothold in online merchandising even as it seeks to expand its core bricks-and-mortar business. Settersten continues to focus on the company’s investment in what he calls “normal growth drivers” — building new stores, developing the company’s loyalty programs, and offering seasonal discounts. But “there are also a lot of other things that are churning in the background,” he says. Those include new investments in artificial intelligence, web applications, and digitalization.

“The question is … what [technologies] work best for our particular business model,” Settersten says. “There are a lot of [technologies] you can invest in — take chances on, place bets on — but you need to be as sure as you can be of what really might benefit your customers in the long-term.”

A more immediate focus will be maintaining the company’s sales and profit growth. During the first six months of its 2017 fiscal year, Ulta’s net sales increased about 22% and its net income surged 33%.

To keep the company growing at that pace, Ulta needs to continue expanding its number of stores and their total square footage, as well as getting customers to stroll into them. Therefore, a prime concern of Settersten’s in 2018 will be the real estate market. Adding to the 1,010 or so stores Ulta had at the end of August 2017, the company is committed to opening one hundred each year until it reaches between 1,400 and 1,700 total.

During a conference presentation in December 2016, Settersten told investors that “real estate is one of our core competencies.” Although the company hasn’t typically built many of its stores in malls — the higher per-square-foot costs can be a deterrent — the finance chief is seriously looking at “a lot of mall opportunities people are presenting to us.”

In deciding on whether to set up a store in a mall — or any other location, for that matter — the cost per space is a big part of the calculation. But the financial health and competitiveness of other tenants in the mall is also crucial, especially “how Amazon may impact them and the traffic flow in those centers over the long-term,” Settersten says.

With the changes triggered by online commerce that are sweeping through retail, “we don’t want to be left [in a mall] by ourselves” the finance chief adds. “Even though we do a good job driving our own traffic, we need to have the combined strength of multiple retailers in one.” — David M. Katz

Raise Prices

Freight logistics provider YRC Worldwide has experienced increased volume for its 14,000-truck fleet over the past few quarters and is expecting more of the same for 2018. And after some paydowns, the company’s outstanding debt is below $1 billion. Welcome trends? Sure, considering that the company is six years into an epic turnaround effort and has been at the brink of bankruptcy several times. But they’re not the needle-movers YRC is looking for.

From a financial standpoint, what the $4.7 billion shipper wants most in 2018 is to continue boosting its yield through price increases. It also aims to achieve a satisfactory resolution to collective bargaining negotiations with its union, says CFO Stephanie Fisher. And the outlook is good for both of those outcomes, she adds.

The company’s yield was up in 2017, and capacity constraints throughout the trucking industry indicate that 2018 may be even more fruitful. A years-long driver shortage is forecast to get worse, although that’s not a bad thing if a trucking company wants to raise prices, because it essentially functions as a limit on supply. Also, new safety devices that record truckers’ hours of service, mandated by Congress to be installed in commercial trucks by December 18, 2017, may force out smaller shippers that rely on drivers working long shifts.

“Our focus in 2018 is going to be on price, which always outweighs volume, because price goes straight to the bottom line, whereas with volume you have to add labor to make it work,” says Fisher. As part of the effort, YRC will look to cull volume from unprofitable shipping lines. “It doesn’t make sense to deliver freight we’re not making money on, especially when there’s a driver shortage,” she notes. Fisher adds that “customers will have no choice but to accept price increases, because our competitors are doing the same thing.”

On the collective bargaining front, YRC is in a holding pattern. The company’s agreement with the International Brotherhood of Teamsters expires in March 2019, but for all practical purposes there’s little Fisher can do to prepare until she’s able to assess the results of labor negotiations by key competitors.

“The good news for us is that we have a better relationship with the IBT leadership than we’ve had in a long time,” Fisher says. “The union’s new freight director came into the position earlier this year, and we’ve had more meetings with him than we’d had in the previous three or four years.”

The IBT freight director worked with YRC to establish, for the first time, wage differentials for union members based on regional costs of living, the CFO notes. He also cooperated with YRC to address operational changes related to December’s opening of eight new distribution centers, which YRC expects will dramatically reduce shipment bottlenecks.

Crucial to the company in 2018 are the investments it’s making in “revenue equipment” — tractors and trailers — and software that optimizes the routes drivers take to pick up and deliver freight. They offer greater bang for the buck than debt paydowns, despite heavy interest payments on the loans. “Someone at our investor conference asked us, ‘If someone gave you $500 million, what would you do with it?’ We immediately said we’d invest in revenue equipment,” says Fisher. — David McCann

Drive a ‘Culture of Data’

Consider a large, global company that allows its business units to run their own affairs without an eye toward consistency in operations or branding. There is no long-term strategy in place and e-commerce is an afterthought. Little effort is expended on capturing data, let alone analyzing and making decisions based on it. Unsurprisingly, this company isn’t growing.

That’s a snapshot of Specialized Bicycle Components, a maker and distributor of bikes and related products, as it existed roughly three years ago. That was around the time Nik Rupp joined the company as global controller, following 11 years in various divisional finance roles at Nike. Things have changed at Specialized in the interim, especially in the structure of the 43-year-old company, which currently has about 1,600 employees and $1.2 billion in annual sales.

“We’ve put in place true regions, true regional leadership, new functional leadership, and within the last 12 months, for the first time, a long-term strategic plan,” says Rupp, who moved up to the CFO chair in March 2016. “This year, we’re finally back on track with growth.”

The strategic plan, largely focused on leveraging data to build a robust e-commerce operation, will dominate the finance chief’s agenda for 2018. In November, the company launched an e-commerce platform, including a new website. Rupp will be aiming to maximize the platform’s value. However, a number of elements, like the ability to order a bike online and pick it up at a Specialized dealer location, are not yet built.

Concurrently, Rupp is overseeing the creation of a dedicated data team that will be looking not just at financial data, but point-of-sale data, data from website visits, retailer inventory data, and other information. But the goal is not data analysis per se.

“What I’m trying to put in place is not just a tier of folks embedded within financial planning to do additional reporting on what’s going on with e-commerce,” says Rupp. “I’m building a separate structure that sits outside financial planning, so as to drive a culture of data and an understanding of that throughout the organization.”

That, he says, is “subtly different even from what we had at Nike, which looked at a lot of data within traditional planning functions. That, I think, limited the scope of the [analyses]. Financial planning looks at certain fixed elements and by its nature doesn’t think bigger about all that can really be done with data.”

The strategy has generated some early wins that, while relatively modest, provide a taste of what could be accomplished as the effort matures. For example, Specialized had been paying Google more than $1 million a year for search-engine-optimization services without really knowing if it was getting its money’s worth. The data team took a close look and figured out that the company could get the same reach and impact for much less.

While leaders at the company’s Morgan Hill, Calif., headquarters are on board with the need for the data initiatives, convincing some of the regional leaders has been more of a challenge, according to Rupp. “Most of those individuals have owned a traditional distribution or retail business, and they don’t necessarily see the value in it,” he says. “But I’ve been sending some of the data-team members to work with those leaders, and they’re starting to see the impact on generating new ideas and understanding not just the traditional finance data but what’s happening in the broader marketplace.” — D.M.

Execute Crisply

What more can DuPont performance chemicals spinoff Chemours accomplish in 2018? Since its spin in July 2015, the $5.9 billion revenue company has already raised capital through asset sales, cut net debt, and delivered on 60% of the cost savings it proposed to stakeholders. The company’s shares marched up steadily in 2017, reaching a price-to-earnings ratio of 34.4 in November.

For Chemours CFO Mark Newman, the priorities in 2018 will be execution and dialing up the company’s performance. Part of that will be improving the regular operating and business reviews with the company’s three unit presidents, keeping them focused on adjusted EBITDA, free cash flow, and return on invested capital.

Not that growth isn’t a priority, too — the company’s businesses are what Newman calls “highly investable,” and Chemours is forecasting greater capital expenditures in them over the next couple of years. But inside the organization, Chemours is still throwing off the shackles of the highly matrixed, bureaucratic DuPont. Instead of relying on numerous corporate staffs to interact with operations, Newman and other top management are forcing decision-making down to the business units and driving individual accountability, a keystone of the company’s transformation.

“We have moved [on] from an organization that wants to get every fact and figure before making a decision,” Newman says. “We want not only crisp execution but also timely decision-making. There has been a huge emphasis on the need for speed.”

Related to the idea of casting off the skin of the old DuPont is driving broader employee engagement in 2018. “One of the things that has surprised us is the level to which all employees can bring forth ideas,” says Newman. Chemours has established a framework to post employee ideas on a centralized platform, so they can be exposed and vetted and, if they have merit, executed quickly. “Now that we have the infrastructure in place, our next goal is getting more ideas through the pipelines,” Newman says.

Transformation is also underway in the finance department. Chemours has moved off of a legacy consolidation management reporting system. It is also changing its service delivery model to include some business process outsourcing. And Newman is trying to “refresh” the retained organization so that it is much more focused on high-value decision-support activities and less on transaction processing.

Newman has big ambitions for finance: he wants nothing less than a “top quartile” finance organization in terms of efficiency and overhead costs: “one of, if not the best” finance functions in chemicals, he says.

The finance and operations teams already have made great strides when it comes to cash flow. Chemours has cut its cash conversion cycle significantly, after, among other steps, making a concerted effort to determine what level of materials and finished goods the company really needs to stockpile in order to support customers.

“Today our business unit leaders understand that when we talk about capital invested, it’s not just the fixed assets; it’s also working capital,” Newman says.

The markets for titanium technologies, fluoroproducts, and chemical solutions are headed for growth in 2018. Chemours is also slated to take out an additional $150 million in costs. On paper, the company looks to enjoy a profitable 2018 — as long as it executes. — Vincent Ryan

Increase Margins

There can be little doubt that the housing market has remained red hot, with September marking the 67th straight month of year-over-year price gains. Yet while people looking to sell their homes might be able to claim high prices for them, they also could find themselves in a bind. Once they sell their homes, they might have trouble buying new ones to live in. Numbers from the National Association of Retailers tell that story, too: by the end of September, total housing inventory had fallen year-over-year for 28 consecutive months.

To Kathleen Philips, the CFO of Zillow Group, a web and mobile nexus for homebuyers and renters fueled by ads sold to real estate agents, those numbers are important ones to consider as she looks for ways to fatten her company’s margins for 2018.

Commenting on what she considers the “historically low” number of houses on the market, Philips says “it’s challenging for buyers to find homes, and it’s challenging for agents because they often have to go with their clients into an offer situation [with the home they are selling] before the client can actually purchase a [new] home.”

Asked how those challenges will affect Zillow, Philips doesn’t hesitate. “We view it as an opportunity,” she says. One facet of the opportunity is that new features on its websites will tighten “the agent-buyer partnership as they try to make a purchase in the hot market.”

By doing that, Zillow could boost agent membership in its “Premier Agent” ad sponsorship program, which brought in about 70% of the company’s $282 million in third-quarter revenue. One example of a tech innovation that the company hopes could boost ad sales is the “My Agent” feature it launched this year.

After a potential buyer makes frequent visits to a premier agent’s website, Zillow automatically replaces a list of agents with a contact box that features only that agent. “This two-way contact module,” said CEO Spencer Rascoff on the company’s third quarter earnings call in November, “will help agents convert more leads into transactions by keeping that agent in front of the consumer throughout their search.”

In her quest to widen Zillow’s 2018 margins, Philips will also be looking at R&D investments aimed at luring traffic to the company’s web and mobile platforms. “One of the things we are testing right now is an instant-access platform where a potential home seller can connect with a real estate agent and talk to that agent about listing their home,” the finance chief notes.

Another major potential outlay on the CFO’s mind is sales force growth. “During 2017, we were a little conservative with the expansion of our sales force, so as we move into 2018 we’re evaluating [spending more on it],” Philips says.

Besides focusing on possible R&D and headcount increases in 2018, Philips will contemplate ways to build upon the company’s $100 million advertising spend in 2017. But a CFO’s focus can’t only be on spending. True to form, the finance chief points out that, along with mulling future outlays, she and her colleagues will “think about how we’re going to pay for all of that.” — D.M.K.

Invest for Growth

If Vincent Pilette, CFO of Logitech, has a mantra, it is “spend less, grow faster.” But a ruthless cost-cutter Pilette is not. Along with Logitech CEO Darrell Bracken, Pillette has spent five years restoring the computer device maker’s credibility, improving its cost structure, and trimming its product portfolio. That’s all in service of delivering sustainable top-line growth in its five big markets: gaming, video collaboration, music, smart home, and creativity & productivity.

But it’s what enables that growth that is the real priority in 2018: a focus on expanding what Pilette and the leadership team call “pure margin,” the margin before reinvestment. In a company with no outstanding debt, that gross profit is continually plowed back into the business to create a virtuous circle of growth.

Logitech, a $2.2 billion revenue company, aims long-term to deliver non-GAAP gross margins in the range of 35% to 37% and raise non-GAAP operating margins toward the high-end of its target of 10% to 12%. To expand margins, Logitech has “a broad set of levers, all the way from pricing to product costs across [a] diversified portfolio,” Pilette says.

Higher margins allow Logitech to invest in its five core capabilities — engineering, design, operations, go-to-market, and marketing. Reinvestment in any year can consist of things like “expanding the sales force to capture the large growth opportunities in video collaboration [webcams, headsets, meeting room solutions], redesigning the retail presence to drive incremental growth in PC peripherals, or training point-of-sales staff to better understand the products,” says Pilette.

Of course, funds go to products that are well-positioned in growing markets and where market share can be gained. Logitech also invests to “build up adjacent categories” or acquire “where it makes sense,” says Pilette. In its last two quarters, Logitech bought Jaybird (audio devices) and ASTRO Gaming (gaming headsets).

As with any tech company, margin goals are enabled by automation. Previous information technology investments enabled the company to lower costs in finance, operations, and other functions. Going into 2018, though, the investments will be about “adjusting [Logitech’s] processes and tools to continue to make better decisions and improve performance,” Pilette says.

For example, recent improvements to the channel revenue management module of the company’s Oracle12 business suite give management quick and accurate information on contribution margin by customer account. Because growth is so important to Logitech, another aim for automation is to “create flexible processes that can scale to absorb business growth without increasing the infrastructure operating costs,” according to Pilette.

Technology is also enabling research and development of software-rich Logitech devices, like the FLOW-enabled PC mice and keyboards that can be connected across multiple devices. Likewise, machine learning and data analytics capabilities are an integral part of the company’s Circle 2 home security cameras.

The growth investment formula is working for Logitech. Revenue grew 15% in fiscal year 2017 and the company projects 10% to 12% growth for the current fiscal year, which ends March 31, 2018. Investors aren’t missing out: the company’s second and third preferred uses of cash are growing the dividend and buying back stock.

But Logitech is clear about its first priority: “So long as our margins are within our targeted range, we believe the best use of our capital is to reinvest in our capabilities,” says Pilette. — V.R.

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