Finance at the Core of Tackling Digital Disruption

Q: What does a burgeoning digital economy mean for finance departments?

A: I think it’s important to first drill down into what we mean by “digitization,” because let’s face it — it has become a bit of a buzzword that’s taken on a life of its own.

Rather than thinking about digitization as a company modernizing its systems, it’s more about how companies are shaping their response to disruption in the global economy. It’s about recognizing that everything is in flux, and the urgent need to become more agile and “turn on a dime” to capitalize on opportunities in the moment they present themselves. The impact of the 4th Industrial Revolution — the shift in manufacturing as a result of new trends and technologies such as the Internet of Things (IoT) and 3D printing — is completely reinventing the supply chain in a transition to a new economy marked by disruptive innovation and fleeting business cases, as well as constant fluctuation and instability. Currency swaps, banking crises, and the blockchain technology used by digital currencies like Bitcoin are but a few of the hallmarks of this global disruption. Finance’s response to this disruption informs what is covered by the “digitization” umbrella.

Consider the role and questions asked of finance before we entered this new economy. Not so long ago, tasks such as securing capital and financing distribution — and the processes that supported them — were based on the traditional concept of a relatively static business. Fast-forward to today, and customers have become “pro-sumers,” both producing and consuming in a collaborative network that ties the business to suppliers and customers alike. This is as different from the classic economy as a horse-drawn buggy is from a self-driving Tesla summoned by Uber.

How does finance operate in this dynamic? The way to adapt to this emerging economy is to put everything into a single system of truth where transactions and analytics are in the same system and you can begin to make informed decisions based on what’s happening in the business. This is what is meant by a digital core — but it is less about technology and more about a fundamental shift in the business, regardless of industry.

Viewed in this light, digitization is not just a buzzword. Rather, it’s the development of an informed, well-thought-out response to the changing economy, recognizing that information is the raw material for all lines of business. By sheer power in numbers, finance departments of large multinationals have been able to produce detailed, granular views of product and customer profitability and cash flow — but at great expense. Today, by necessity, these capabilities have had to become affordable for every organization because every organization must operate in the changed economy.

Q: What are the implications for financial operations as disruption becomes more widespread?

A: Just look at 3D printing. You can make products anywhere on the planet in real time — think about what this capability portends for the financial impact of having to manufacture at scale. This necessitates wholesale changes to accounting rules. Or International Financial Reporting Standards (IFRS), with serious implications for statement of cash flows for a global manufacturer. Everything is happening in real time; decisions and the results of those decisions have a ripple effect throughout the supply chain, and force organizations to look at business models in a new way. Again, this is less a technology concern and more a need to prepare the business for the agility required to be ready for whatever’s coming around the next bend.

Now, while there are gains to be had making existing processes and technology faster, that is true only to a point. You can put a bigger and faster engine on a propeller plane, but at a certain point the propeller can’t spin any faster and you won’t advance, no matter how powerful the engine. The same concept holds true for the business: Making existing processes marginally faster with faster processing power won’t “fly,” so to speak, as a strategy to remain competitive. Innovation is not confined to making existing things better; the light bulb was not invented by trying to optimize the candle.

One defining element of the new economy is an onslaught of data, which makes it somewhat understandable that the first reaction of many companies is to scramble for faster technology to handle all this new information. It’s the natural reaction. The successful digital enterprise, however, recognizes that bringing this data into the business, in real time, is an invitation to change business models. It can mean, for example, making a transition from selling a product to selling a service. A construction equipment manufacturer can use sensor technology to transition from selling excavators to charging per cubic yard of earth removed, as one example. Now, if these machines are in operation 24/7 at sites all over the world, it’s not difficult to see the impact a real-time operation has from a revenue and accounting perspective. The manufacturer is much more intricately tied to the customer, and how the customer interacts with the product.

Q: How important are predictive capabilities in a digital footprint for the finance department?

A: In the example of transitioning from selling a product to a service, predictive becomes extremely important. When you’re selling a service, the successful operation of the business hinges on that service continuing uninterrupted. Avoiding downtime becomes paramount, so predicting part failure with high accuracy is essential. While this example is predictive at its most basic level, it aligns with the new nature of doing business, where decisions are based on live, transactional data, and by running transactions in the same system as analytics, you can more easily compare what’s happening in the business present day with what’s happened in the past.

Of course, the concept isn’t new; forward projections are the same type of modeling people do with spreadsheets. What’s different, however, is that running transactions and analytics together simplifies what had previously been a complex undertaking, especially for the large enterprise with a host of planning parameters. This gets to the heart of what it means to have a digital core, because a live business no longer has the luxury of waiting days or weeks to figure out what the data means. Being predictive is a logical and necessary approach to leveraging the rapid business change happening everywhere we look.

Q: What is the sticking point for organizations that have yet to adopt this mindset or take steps to become a digital enterprise?

A: Most CEOs know the digital economy will have a major impact on their company and industry, but few have an active plan in place to address digital transformation. What’s more, it’s not as if executives are hemming and hawing on devising a plan because they are under the impression they have the luxury of time on their side. Rather, digital disruption is happening this very moment in nearly every industry.

What does this mean? I think to some extent these statistics indicate that while everyone grasps the disruptive force that digitization presents, there is a barrier between accepting this at the industry level and accepting it as a force within the walls of a business. People are too close to the business processes and systems they use every day, and it’s very difficult to break out of this shell — again, it’s the propeller analogy at work.

Change is hard, especially when it turns conventional wisdom on its head. At the same time, the ripple effect is real. Changes that have come to the service industry, with Uber and Airbnb being prime examples, are beginning to happen at the physical level — think 3D printing — so it is a bit shortsighted to think disruption will come to one’s industry but end at a company’s front door.

Clayton Christensen, author of the book The Innovator’s Dilemma, is known for suggesting that if you know your business is going to be disrupted, it’s better to do it yourself than to wait for a competitor to do it. Companies that for one reason or another are hesitant to take the digital plunge, so to speak, need to adopt the mindset that the danger of inaction outweighs the risk of breaking what has worked in the past.

Q: How does finance reorganize around new processes to prepare for a digital transformation?

A: It’s important to look at the business from a value creation perspective. Change to the business structure and organization is a foregone conclusion when a transformative change is made. Going back to the example of selling a service instead of a product, I mentioned the impact that has from a financial accounting perspective. But the same holds true from a people perspective and how you allocate other resources. Do you have the bandwidth to build completely new business processes around a new business model? It’s kind of an all-hands-on-deck proposition; you have real-time information coming in about whatever service it is that you’re selling, and connecting that information with the business means putting it in the hands of your planning, marketing, and business development staff. And, of course, the most effective way to do that is to make sure the information is all in the same system so everyone is working with a single source of truth.

Typically, the data that informs value creation is financial data: production costs, distribution costs, launch costs, margins, currency fluctuations, and so on. How does this data affect the business? A digital core means you no longer have to aggregate all this data, produce a limited number of reports that are outdated before they’re sent, or struggle to make an accurate determination of what the data is saying.

This is the boots-on-the-ground view of a digital enterprise, and again it’s less about technology and more about recognizing that everyone in the business is a stakeholder. Of course, you can go to an expensive consulting company for answers, but that’s a resource usually afforded to some of the biggest companies in the world. And, as I mentioned before, companies of every size and in every industry are going to be operating in this new digital economy.

Q: How is SAP facilitating this transition for its customers?

A: The recognition that there is more than one path to a digital core informs the various deployment and technology options from the SAP value proposition. Customers can implement SAP S/4HANA on premise or in the cloud; can easily integrate with software-as-a-service (SaaS) applications such as SAP SuccessFactors, SAP Ariba, SAP Fieldglass, and Concur solutions; and can use SAP HANA Cloud Platform to build, extend, and run other cloud applications. And, with the Central Finance deployment option for SAP S/4HANA Finance, companies do not have to migrate an entire landscape to move to the next-generation platform — instead they can start extracting information from systems that are more mission-critical to the business and move to a single source of truth without having to rebuild a new system from scratch.

The point is, there are a lot of tools and approaches to building a tailor-made finance system that ties in nicely with e-commerce and purchasing and also elements of the supply chain. A next-generation finance system is an important spoke in an integrated business-to-business (B2B) network hub, and at the end of the day, this is what SAP S/4HANA is all about.

Our customers have the power to do this today. However, they must avoid falling into the trap of believing that it’s sufficient to implement a faster system to keep the business humming along. It’s about figuring out what this capability means for reinventing the business, and for taking this opportunity to innovate and lead at the forefront of the digital revolution.