Why radical transparency should be a CFO priority

Published : 4 years ago, on 07/12/2020

By Ilija Ugrinic, UK Market Director of Proactis

Radical transparency is slowly filtering through organisational functions. The concept, based on radically increasing the openness of organisational processes and data, is relatively novel. It received international attention in 2017 in a book by Ray Dalio but has still to become part of everyday business.

There is, however, change afoot. What began as a strategic, almost visionary, concept has now become a tangible and measurable approach to business management.

Radical transparency is most at home within procurement, sustainability and management. Its most valuable use is seen in managing supply chains, which produce 5.5 times[1] more CO2 emissions than a company’s direct operations and are encumbered with ethical challenges at every stage.

So important is getting supply chain management right, that most CPOs / Procurement Directors[2] are now more invested in transparency and sustainability than they are in seeking new partnerships or sourcing in new countries. Indeed, we have seen a shift away from global supply chains to domestic or regionally focused ones, which has the additional benefit of de-risking and simplifying at a time when complexity is unlikely to be welcome.

Ultimately, process is king. With sourcing costs rising thanks to the impact of Covid-19 on manufacturing and distribution networks as well as in-demand products such as PPE, organisations cannot risk having black holes in their supply chains.

Many aspects of radical transparency are actually shaped by the finance function. The time has come for the concept to infiltrate finance teams and to become a strategic priority of CFOs.

The most important elements of radical transparency cut across finance in two ways. On the one hand, some require long term investment – for example, digitising a traceability strategy might include adopting new technologies to label or trace products; on the other hand, some decisions require active financial management now, such as wage management, harmonising procurement standards or automating processes.

What are the risks of inaction? The entire Source-to-Pay process is a balancing act between compliance and efficiency. But if organisations cannot be certain that its suppliers meet performance and ethical standards, not to mention meet regulatory requirements or payment terms, there is a significant risk of disruption, expense and reputational damage.

By looking at the issue through a finance lens, businesses will become better equipped to understand the art of the possible.

This is also why CFO and CPO / Procurement Director must harmonise their thinking. Spend management, and supply chain management in particular, is a continuous process. From consolidating a supplier base, testing the market routinely, responding to business needs and even leveraging spend or managing budget surplus, supplier management is a constant. No other function of business has more leverage and insight into these processes than finance.

The impact of the coronavirus pandemic on supply chains is a case in point. Where globalisation once made supply chains stronger and more accessible, now they are fragile. Logistics decisions have been up ended by a lack of mobility and entire manufacturing processes have stopped or paused. It is the role of CFO to rebalance financial priorities and enable relevant departments – sourcing, audit, sustainability, even marketing – to deal with rapid change.

And central to change is digitisation. A classic case in point from within the finance function is the rise in e-invoicing since lockdown. We know from our own international customer base that there was a major pivot towards paperless invoicing in the months after lockdown. We also know that the speed with which that happened necessitated rapid on-boarding for many businesses lacking the software to either read or submit electronic documents.

There is, of course, a much longer list of examples of how digitisation can create financial savings and resource efficiencies in the supply chain. CFOs must be alive to this and work hand-in-hand with those managing suppliers to understand where the best returns may lie. From distribution and shipment tracking to quality control, compliance and even risk assessment, many tasks can now be automated to some extent.

The most common pain points in supply chains are found when manual processes are in place. Quite frequently, unexpected outcomes can be explained by this fundamental point. It can explain why purchased items fail to meet actual needs, how off-contract buying becomes an expensive problem, and why unwanted contracts renew automatically when they should have been cancelled or renegotiated.

In practice, when these tasks are manual and ad-hoc, the results can cost a business money and resources. However, these are often deep-rooted issues lurking within finance or procurement teams, which can be very hard to spot.

Beyond the financial savings and the management of supply chains specifically, there are also reputational and strategic benefits to radical transparency in the finance function. There is a growing expectation from consumers and shareholders to deliver profits with purpose. So being able to openly demonstrate how active financial management supports your business strategy is likely to reap rewards. Explaining why and how your profit distribution works, or what your investment strategy is, or how you are tackling your gender pay gap, are just three examples of how to bring important stakeholders with you.

Radical transparency bears the hallmarks of modern, open business. But it is much more than that: when applied within the finance function, it can open up resources, save money and modernise a business for the better. The time for CFOs to adopt its principles is now.