Founder’s Edition, by Joseph Neu
Five items for finance leaders to focus on in 2020 and beyond.
2020 is upon us and the year itself has vision and foresight in its name. Accordingly, it affords us all an opportunity to seek clarity on not just what the year will bring but also a view of what’s in store for the new decade.
For finance practice leaders, I see five issues to focus on starting this year and for the coming ten:
- Get serious about digital workers. There has been a lot of hype and fanfare, fits and starts when it comes to robotic process automation and AI in the finance function. But this is the year and decade where it starts to get real. And the finance function is a great petri dish to see how it grows because (1) much of what finance practitioners do is numbers or logic driven and (2) much of finance is seen as a cost center where productivity, scale and cost mitigation are critical, and, in the front office, speed and rapid processing of data gives machines an advantage. Starting this year, make sure you are scaling your human team and refocusing their work on where they can thrive by giving them digital assistants and co-workers to better support them.
- Be ready to phase out Libor. While you may think you have until the end of 2021 to prepare, the more important date may be when liquidity shifts from Libor-quoted instruments to those quoted in the secured overnight financing rate (SOFR) or other “ibor” replacement rates. Regulators will be deploying more stick than carrot now to ensure regulated institutions move off Libor and thereby incent the rest of the market to follow their liquidity and do the same. Corporates may see a similarity to the efforts to move derivatives to central clearing. While you won your exemption there, I still wonder about the liquidity premium you are paying to trade OTC. With Libor, I don’t think you will get an exemption beyond the ability to translate Libor references in commercial contracts to a common translation to SOFR, so you don’t need to renegotiate each one. Something like that for outstanding loan agreements made prior to a viable alternative reference rate being available might be helpful, too, but less likely. Be ready for when the market shifts.
- Think differently about bank relationships. The digital disruption of banks and financial services should accelerate this decade. With this happening, finance practitioners need to think differently about their bank relationships, the types of services they should expect from them and how they should pay for them. Different thinking about banks best starts with the credit relationship and a bank’s willingness to commit to a credit facility as the key driver of the relationship and allocation of spend (wallet). The promise of open banking and APIs to allow more seamless interoperability between providers, be they banks or non-banks, will not be fully realized until the paying for bank credit via other means fades away.
- Think differently about sources of funding. The digital disruption of funding and related corporate finance services goes hand in hand with decoupling bank relationships from credit commitments. Data and insight, plus predictive foresight about a firm’s business and resulting cash flows, current and potential, will increasingly drive credit analysis and access to funding. This will transform credit pricing and availability. How can you manage a bank wallet where the pricing and nature of credit and funding is transforming while the pricing and nature of services to pay for the credit and funding is similarly transforming at an exponential pace? You cannot do it, so don’t.
- Rethink the finance function. Considering all the above, including the replacement of a fundamental touchstone like Libor, it is hard to see how the finance function at the end of this decade should look the same as it does now. Especially if you consider all I haven’t said about digital transformation for all organizations and the finance functions to support them. Time to up the pace of change. There has been significant attention paid to reorganizing, optimizing and re-skilling the finance function in recent years, but it may be time for a clean sheet rethink of why a corporate finance function exists, what is seeks to accomplish, for whom and how best to go about this. At a minimum, many of the silos, especially between technical/specialist areas like treasury and tax, probably should be broken down. If you were to create a greenfield finance function at a start-up growing extremely fast, what would that look like? And would you let it evolve to one like a Fortune 100 company’s today or something much different?
Seeing 2020 written, it seems to me like we should be closer to the imagined future than we are in too many ways. Let’s get caught up to the future we’ve imagined.