With advances in AI and machine learning, even tasks that were once considered doable only by highly skilled workers – like the production of quarterly company commentary by sell-side and buy-side analysts, for instance – can now be partially automated

How the CFO role in China needs to change

Sep 29, 2017
China-based IROs aiming for CFO positions should focus on four areas of transformation

A poor nation with an economy based largely on heavy manufacturing and agriculture just a few decades ago, China today is one of the most digitized countries in the world.

Recent research conducted by my colleagues at the McKinsey Global Institute highlights just how far China has come in such a short space of time: it is now the world’s largest e-commerce market, accounting for more than 40 percent of the value of worldwide e-commerce transactions, up from less than 1 percent about a decade ago.

China has also become a major global force in mobile payments with 11 times the transaction value of the US. And China is in the top three in the world for venture capital investment in key types of digital technology, including virtual reality, autonomous vehicles, 3D printing, robotics, drones and artificial intelligence (AI).

But if you were to go into most Chinese companies, whether state-owned behemoths or smaller and faster-growing privately owned firms, you would find most are still running on the same inefficient, labor-intensive and largely undigitized processes they’ve been relying on for years.

Modernizing the finance function

This is particularly true in the finance and accounting departments, which can employ hundreds or even thousands of people at some companies.

The CFO ends up spending a disproportionate amount of time on managing essential but nonetheless low-value-added activities such as basic bookkeeping functions. As a result, he or she spends less time on higher-value-adding activities such as budgeting, pricing and performance management, tasks that enable him or her to serve as a counselor to the CEO on critical strategic business issues.

If Chinese companies hope to heed the government’s call to innovate and move up the value chain, they will need to have a finance function that enables the CFO and the CEO to make better decisions more swiftly.

Modernizing the finance function at Chinese companies will require making substantial changes, some of which will require the deployment of new technology, while others will require a radical redesign of core business processes.

Four action steps

Here are four areas CFOs in China should focus on as they kick off their transformation:

Manage for value. In the finance departments of many Chinese companies, we often find that too many resources have been allocated to transactional and standardized activities such as accounting and expense reimbursement. Too little attention is paid to providing ‘consultation activities’ that allow the CFO and his team to manage for value, which include activities like business analytics, planning and budgeting, investment analytics and M&A support.

Consultation activities provide decision support to CEOs, are closely aligned with business activities, and offer the highest opportunity to create value among all types of activities conducted by the finance function.

Data analytics, for example, can help the CFO conduct a wide range of value-added activities, including advanced scenario planning, project selection and prioritization, inventory planning, dynamic cash flow simulation, performance drivers analysis and capital allocation optimization.

Instill process excellence. Shifting resources to focus on higher-value-added activities requires the finance function to develop the processes needed to support them. In our work with clients in China, we have identified a number of end-to-end processes that offer high potential for automation and digital enablement.

In fact, when we look at which processes have the potential to be automated, we find almost 70 percent of all processes are either fully or mostly automatable, 20 percent are somewhat automatable, and around 10 percent are difficult to automate. Today, low-value repetitive activities and simple queries are on track to be fully automated.

With advances in AI and machine learning, even tasks that were once considered doable only by highly skilled workers – like the production of quarterly company commentary by sell-side and buy-side analysts, for instance – can now be partially automated.

Design an organization and company culture that attracts and retains great people. Focusing on higher-value-added activities and developing more efficient processes can only go so far. To attract, retain and motivate the people needed to take on new roles that require new skills and mind-sets, companies in China will need to cultivate an organizational structure and culture that welcomes new ideas and new styles of working.

Some of the ways companies can accomplish this goal include designing a collaborative workplace and work culture (for example, offering an open workspace and creating an ‘ideocracy’ where the best ideas win), offering the chance to work on initiatives that can have a social or environmental impact and providing more autonomy – for example, working from home, allowing more casual dress in the office and offering flexible working hours.

Get the right tools and technology. And, of course, finance organizations need to make sure they are adept at using innovative technology to drive automation, collaboration and decision-making. Three types of technologies – robotic process automation, machine learning and natural language generation – as well as a range of Software-as-a-Service solutions are particularly useful in automating back-office functions like finance and accounting.

These technologies enable not only the automation of repeatable tasks, but also the identification of patterns in data through supervised and unsupervised learning and the creation of natural language text. And they have the potential to transform all but the most judgment-driven tasks, tasks that require deep domain understanding and analytical skills.

One message is clear: the nature of work is changing. Technologies such as advanced robotics and knowledge-work automation tools will move companies to a future of leaner, more productive, but also far more technologically advanced operations.

CFOs in China who are conscious of these trends and start reorienting their organizations today will have a much higher chance of winning.

Winston Yung is managing partner at McKinsey & Company Hong Kong.

This article first appeared on LinkedIn’s Influencer blog.

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