Industry Stories

Crisis and the Evolving CFO

No member of the C-suite has been insulated from the recent turmoil, whether that turmoil is accelerated digital transformation, changing regulations, or, most recently, the global pandemic.

All these challenges have pushed the boundaries of what is expected from the chief financial officer (CFO) and added further layers of complexity to an already complex business landscape. In a recent CFO Fireside Chat, I had an interesting discussion with Chalhoub Group CFO Paolo Lo Monaco about the office’s challenges and opportunities.

The Dubai-based Chalhoub Group is a leading luxury retail, distribution, and marketing firm serving the Middle East. It has a workforce of more than 12,000 in 14 countries and operates 600-plus retail stores. The 66-year-old company sells some of the world’s best-known brands (Louis Vuitton, Parfums Christian Dior, Tag Heuer) as well as creates its own brands and concept stores.

There are always valuable lessons that we can learn from other great companies, even those in different industries. The underlying currents are the same, whether it’s emphasizing agility, accelerating transformation, or discovering new business models, and all flow from a spirit of continuous learning.

Our chat touched on subjects that ranged from the impacts of the COVID-19 pandemic to the evolving role of the CFO.

Jayesh Sanghrajka: How did you react to COVID-19, and what changes did you make to your operating or business models to emerge stronger?

Lo Monaco: Predictably, the Chalhoub Group was hit hard by the pandemic and the lockdowns that resulted. The company was forced to temporarily close all its stores, including space in the world’s busiest retail center.

“You think about the Dubai Mall — which is the highest-traffic mall in the world, with 80 million visitors a year — and suddenly, the traffic is evaporating in weeks. We had to stop that machine and reinvent ourselves very rapidly to cope with a different world.”

With mall footfalls halting suddenly, our entire supply chain engine stopped dead in its tracks. That immediately created liquidity concerns, as pressure increased from seemingly every direction. We had a perfect storm of dropping volumes, dropping EBITDA, excess stock, customers not paying, and other challenges.

Chalhoub immediately set up task forces to take point on liquidity and ensure the health and safety of employees — when they were able to return. Meanwhile, the company also had to make sure it didn’t lose touch with its customers, who most commonly interacted with Chalhoub businesses in person.

Sanghrajka: I could totally relate to what you said. As a service provider, we closely monitored the challenges faced by our clients, spread across various industries. Our own industry faced all kinds of issues — people’s safety, business continuity, completely ambiguous forecasts, clients holding on to their purse strings, among others. We too created what our CFO christened the “cash office,” with a mandate to work with a three-pronged strategy: first, to reduce the infrastructure and other related spend; second, to work with our vendors to optimize our cash cycle on the payment side; and third, to work with our clients to do the same on the receivables side.

Our client services group was tasked with remaining in constant touch with clients, even at the risk of overcommunication. How did you manage to maintain that contact with customers in a world where everyone was practicing social distancing?

Lo Monaco: We had to reinvent ourselves very quickly by activating distance sales, which allowed us to reoccupy our brick-and-mortar sales staff. The online channels were the only means to maintain sales. We saw an exponential growth in our e-commerce business during the lockdown.

It wasn’t easy. What saved us was the earlier and timely investments made in our digital transformation program, which started in 2017. The effort was already advanced by the time COVID-19 was declared a pandemic in March 2020. By then, Chalhoub had already started implementing customer relationship management, data analytics, and e-commerce, and improving last-mile delivery.

“COVID has forced us to accelerate certain decision-making. Because of the disaster, we will still be 20% below last year in terms of sales. Without putting in place certain measures — specifically, organizing our supply chain and e-commerce sales — we could not have recovered a good chunk of those sales and would have been in a much worse situation.”

Sanghrajka: Our own experience has been very similar. The reason we were able to pivot to close to a 100% work-from-home model more quickly than our industry peers was because we had invested in technology ahead of time. We already had clearly defined remote working protocols, which we were able to scale up overnight, thanks to the foresight Infosys had while designing the technology landscape.

Each business needs to have their digital strategy sorted out as of yesterday to be able to face such black swan events. In the past nine months, this pandemic has significantly accelerated digital transformation for many organizations. Businesses that have managed this transformation well are the ones that have emerged stronger from this crisis.

Looking in hindsight, it is a relief that such decisions were made in time. What have you learned from the crisis that could apply to future black swan events?

Lo Monaco: Honestly, I think the pandemic can be compared to an earthquake. And nobody can be 100% prepared for such an event in the future.

However, the most critical takeaway — at least for retail — is the importance of timely decisions and speed of response. Companies should not postpone their digital transformation; instead, they should speed up the execution of their strategies.

“Certain trends were very clear before the pandemic, specifically the acceleration of e-commerce sales,” Lo Monaco said. However, the pandemic underscored the necessity of omnichannel retail and other foundational shifts.

Although many luxury brands have been slower to embrace e-commerce and lagged other industries, Chalhoub started a partnership with luxury retail platform Farfetch in 2018.

“To prepare for future events, you need to invest time and money to understand and delight your customers. In a business like retail, you really are the middle man ... offering the right product in the right place at the right time.”

At the same time, retail has to deal with competition from large online, price-oriented marketplaces and even the brands themselves.

Sanghrajka: That’s a fact. As a transformation partner to a variety of industries, we are observing this increased focus on digital transformation. No doubt the pandemic has underlined the importance of this shift. Do you think this is a short-term reaction, or will it be a long-term shift in strategy?

Lo Monaco: The pandemic has been a cruel reminder to every organization that digital transformation can no longer be treated as discretionary. There is a risk that retail could become commoditized and then irrelevant. The utilization of technology has only become more important, so you can survey the data on customers and customer preferences. Basically, you can know your customer better than anybody else. You just cannot rely on human interaction alone to manage this. While that might sound elementary, it is the paramount lesson for retailers.

Sanghrajka: Paolo, this is true, not just for the retail industry but also for every business. Adopting digital technology is no longer an option. It is critical to become digital-first. This pandemic has squeezed a decade’s worth of digital transformation into nine months.

Switching to the role of CFOs in managing the digital transformation of their organizations, in your view, how do you see the role of a CFO transforming?

Lo Monaco: The role of the CFO — outside the pure finance function — is very much ensuring there is an appropriate governance over the tech spend. There is an incredible acceleration, a skyrocketing of tech investments across all areas: customer-facing, back office, and supply chain.

CFOs need to create teams that help prioritize those investments and carefully examine the return on investment. At Chalhoub, the approach started about two years ago as the company accelerated its digital transformation.

The other important way technology interacts with the CFO is the actual transformation of that office. The same sort of automation that has revolutionized other industries or departments is rapidly becoming part of the “DNA of finance.”

The three most important CFO tech trends are:

  • The finance factory — Tech is taking over the transactional part of finance and augmenting its workforce. Repetitive tasks previously handled by the accounting team are now managed by robotic process automation. This reduces costs, optimizes cash, and leads to greater operational resilience.
  • New finance cycles — CFOs are reworking their traditional reporting cycles, which are getting shorter. Eventually the traditional reporting cycles will disappear, replaced by real-time tracking of sales, cash, margins, and other important financial data. That provides more flexible forecasting and budget processes, such as zero-based budgeting.
  • Self-service finance — Reporting by the finance team is increasingly automated and available to other departments via intuitive dashboards with a simple touch of a button.

Sanghrajka: Infosys Finance is also running a focused transformation for itself. Being an IT company ourselves, it was essential for us to practice what we preach. At Infosys Finance, we have a dedicated team of experts who are leading this transformation for us.

We have put together a clear strategy that has four pillars — effort efficiency, process efficiency, intelligent analytics, and compliance (the bedrock of finance). In the absence of a clearly defined strategy, one may end up taking initiatives that are focused on effort efficiency or process efficiency because these are usually the more tangible and pressing needs.

A disciplined and balanced execution of the four-pronged strategy has helped us tremendously in the overall effectiveness and efficiency of our function. The guiding principle has been to use technology to amplify people’s potential by freeing them of mundane, manual effort and enabling them with better capabilities for their core competencies.

Lo Monaco: A change of such scale is never without its share of problems. The biggest impediment that we faced at Chalhoub was the insecurity of our teams. They were worried that technology might take away their jobs. So, we had to spend significant time and energy explaining to them that technology was not their competition but an aid to help them become more effective.

Sanghrajka: This resonates completely with our own experience. However, being part of a technology company, our associates were a little more open to experimenting. Still, we had to clearly show them the benefits of technology adoption and showcase early successes, apart from repeatedly explaining how technology could amplify their capabilities.

Good thing is, once people start to see the benefits, it creates a snowball effect that keeps getting bigger and bigger until it envelops everyone.

For me, two things stood out throughout this chat. First, when you strip things down to the basics, all businesses have similar challenges and similar solutions that can help them. And second, the CFO’s office is going to be more and more prominent in the near future.

But it’ll be a new office — a digital one that leverages technology, that focuses on predictive analytics, and that is powered by techno-functional finance professionals. Welcome to the finance of the future.