In an increasingly unpredictable world, Chief Financial Officers (CFOs) in South Africa are under pressure to improve the strategic responses of their organisations to the ongoing flux in external risk factors, says Deloitte.
Responses from Deloitte Africa’s latest CFO Survey, which incorporated insights from 260 CFOs across a wide spectrum of industries throughout Southern, East and West Africa, highlight that CFOs should be adopting more strategic approaches to macroeconomic shocks. A prime example is the mixed performance of South African companies in reaction to recent rand volatility.
According to Carryn Tennent, Associate Director from Deloitte Consulting, CFOs are ill-prepared for the next economic shock, as insufficient time is being spent on strategic approaches to market risks. Instead, most CFOs’ time is focused on operational demands, or applying traditional methods to risk mitigation.
“CFOs tend to be on the back foot and reactive when major macroeconomic risks, like a volatile currency, knock their operations,” says Tennent.
The results of the survey show that CFOs are currently spending the majority of their time (up to 62%) in the capacity of ‘stewards’ of company assets and ‘operators’ managing the internal requirements of their finance functions. Yet more than ever, in today’s complex and riskier marketplace, CFOs also need to assume the crucial roles of catalyst and strategist.
“CFOs in their role as strategic financial leaders need to become more agile and better prepared when a crisis happens. A continuous challenge is where time is being spent, but without focus on possible future outcomes there is a considerable chance that organisations are missing opportunities” says Tennent.
Companies should use more strategic, predictive approaches towards external factors such as currency risks. These approaches include detailed ‘scenario modelling’ and ‘risk sensing’, ‘responsive or real-time budgeting’ and an ‘integrated, centralised treasury approach’ for foreign currency positions across geographic jurisdictions.
While the means to implement the decision-making tools above are currently available, Jonathan Blignaut, a Consultant with Deloitte Consulting, says not enough South African companies are investing in these capabilities to assist them in navigating the volatile business environment. And while it needs to be acknowledged that these challenges are not specific to South Africa alone, opportunities are being lost in the local market due to slow reaction times to economic shocks and an under-estimation of their impact. Strategies to harness any opportunities on offer are then also missed.
“Today’s environment is as much about survival as opportunity and a more nuanced view of the world is needed by CFOs,” says Blignaut.
From local government elections to Brexit and the impact of a weak oil price on Africa, the risks caused by external factors continue to rise.
“Major questions are being asked of companies ahead of and during these events. For example, companies will get burnt in Africa if they don’t have a strategy in place to manage capital restrictions and dollar shortages. As such, CFOs can no longer be reactive to these large, macroeconomic risk events,” says Blignaut.
Scenario planning allows organisations to see a set of risks and opportunities more broadly, to imagine potential futures that might challenge their current strategic assumptions, and to spot potential sources of risk that may not surface using other, more traditional risk identification methods.
“Scenario planning, in the context of foreign exchange risk management, would entail incorporating a factor like rand volatility alongside a basket of other relevant business drivers, such as consumer confidence indices, geopolitical risk premiums and stakeholder expectations, in order to form a variety of scenarios,” says Blignaut.
Risk sensing technologies could also be useful in identifying and tracking potential strategic risks associated with rapid currency devaluation. The emergence of risk sensing is closely linked to recent advances in data analytics, giving companies the ability to examine huge sets of structured and unstructured data for a variety of risks.
More innovative finance functions are now using these insights from data analytics to create accurate models that examine how their organisations would perform in certain scenarios.
“An example would be a manufacturer using real-time data from machinery to analyse how a production line would react if, say, the demand for electricity spiked at an unexpected time, or if an undesirable health and safety event were to take place during peak production,” says Blignaut.
“It is clear from a local perspective that South African companies are not taking sufficient steps to adapt to this changing landscape. Seismic shifts in technology, business practices and the macroeconomy are causing the ground to fall out from under the feet of unsuspecting or unprepared CFOs,” he continues.
“Strategic standpoints towards risk that not only protect the organisation but improve performance are sorely needed. Companies are not yet doing enough to get a step ahead and it is incumbent on leaders, especially CFOs, to be more proactive in shifting leadership’s thinking to harness more agile and strategic responses to crises,” concludes Tennent.