CIO to CFO: BFF?

A long time ago, there was a rhythm and blues group known as The Contours that recorded a song with the apt title, “First I Look at the Purse.” Today, even as responsibilities merge within the enterprise, CFOs maintain that fiscal responsibility first and foremost.

“I think [CFOs] first see numbers and then it depends on how strategic they are,” says Deb Smallwood, founder of Strategy Meets Action. “If [CFOs] are operational all they see are numbers and how are they going to pay for projects versus the business value and the return on investment. There are different views of what CFOs need to do.”

The challenge is equally difficult for the CIOs, explains Frank Petersmark, a former CIO and currently CIO advocate for X by 2.

Petersmark likes to tell this story: “I developed a good relationship with my CFO and I would kid him from time to time that being a CIO for 13 years I could count at least three or four fundamental changes in my job requirement where the position of CIO meant something fundamentally different than it did the year before,” he says. “Then I would say to the CFO, as far as I know the principles of accounting haven't changed for the last 600 years or so. That was a good segue into thinking creatively about what financial services does and how they get that information out to the world.”

As CFO of Guaranty Life Insurance, Forest Mills gets involved with the IT department from the standpoint of budgeting and review, but because Guaranty is a smaller company it doesn't have the luxury of evaluating projects like the bigger carriers do.

“We do some strategic evaluation of projects but we don't get the opportunity to do much of that,” he says. “Your feet are in the fire and you're just blowin' and goin'. It amazes me how fast [technology] changes day to day.”

UNDERSTAND THE BUSINESS

Mike Anselmo, CIO of Narragansett Bay Insurance Co. (NBIC) is a believer that the financial side should have a better understanding of the insurance business.

“Without a doubt,” he says. “They tend to get stuck inside their accounting world. The CFOs need to understand the other parts of the operation.”

Anselmo feels fortunate that NBIC's CFO has made steps to get involved with and understand the insurance business, but he doesn't see enough of that with other insurance carriers.

“I've been with other companies where the CFO focuses only on finance,” he says. “Although they understand the bottom line of the business, they don't understand the unit economics or metrics behind that to get to the bottom line.”

In recent years, there has been a major initiative around getting IT departments a better understanding of the insurance business. Rod Travers, executive vice president of Robert E. Nolan Co., believes it is equally important—if not more so—for the CFO to have that knowledge of the industry as well.

“CFOs understand the financial intricacies better and more deeply than a CIO does,” he says. “That's more appropriate. The CIO needs to understand the business from a transaction standpoint and from a process and workflow standpoint—information management.”

Travers maintains the best CIOs make it possible for a CFO to avoid some of that information overload that is going on within the enterprise.

“In other words, being a great business partner,” he says.

Well-run carriers don't have trust issues, points out Travers. What they have is an ability to crystallize what's important and bring that to a discussion with the CFO. He points to issues such as infrastructure as an example.

“The arcane discussion around [infrastructure] can get boring and tedious,” says Travers. “The nuts and bolts don't matter. It's the essential nature of having an infrastructure that can support the goals of the business and the key building blocks that need to be understood. The ability of the CIO to summarize and persuade the CFO about what the key building blocks are without offering the arcane details enable the CFO to do his job.”

Travers doesn't believe the CFO should delve too deeply on the technology side.

“If they are having to do that they haven't got the right CIO,” he says. “It's the same for the CIO. They shouldn't be getting too steeped in financial discipline. That's outside their domain. In terms of the knowledge of the insurance industry, the CFO has the heavier lift there and the CIO has a very important responsibility to understand the business, but not as deeply on the financial side as the CFO has.”

Petersmark agrees the issue of learning the insurance business should be applied to the finance side as well as the IT side.

“There was always a bit of a double standard,” he says. “There was no question the CIOs were expected to understand the business well—probably as well as any business executive. At the same time, that requirement was never put on business execs, including CFOs, until lately and even then it's more around the fact technology has gotten so ubiquitous rather than some organizational imperative to understand what IT does.”

Mills feels one thing that has helped his finance people gain more understanding is the fact Guaranty has been without a controller for five months. He maintains that has helped others in finance learn more about what the business units are doing on a day-to-day basis.

“I've had my other finance people step up,” he says. “They hadn't been exposed to the insurance specifics as much. Going through this process they've started to get into it. With a small company you don't have as much backup and collaboration as you'd like, but everyone needs to know aspects of the industry and learn more details. I agree whole heartedly that everyone in the finance function needs to know the inner workings of insurance. It's even more important now as people try to do more with less.”

Because Guaranty is part of a larger enterprise that also includes radio stations, finance department workers tended to settle in one area of the organization. Today, the company is in the process of dividing up those duties so finance employees can learn a little about everything.

“We're trying to reallocate our job alignment,” says Mills. “[Employees] are excited about it because they are going to learn new things. Instead of having one person who does just one thing we are trying to break it up so we can give them the opportunity to learn different things. We're taking that in consideration as we bring in new people to take turns to do different things for an amount of time and then rotate into something else. We want people with knowledge of several things instead of one thing. I hope that creates better communication and teamwork.”

From his standpoint, Mills believes CFOs need to be aware of trends within the industry such as cloud computing and the impact it can have on the enterprise.

“There is hesitancy on the part of insurance companies to let go of responsibility of the data,” says Mills. “I've seen that in broadcasting where we already have our data on the cloud, but with privacy issues in the insurance industry there is a reluctance to do some of that. Issues are going to be coming to insurance sooner rather than later, but I think there is more hesitancy to follow innovation trends.”

FINANCIAL SOLUTIONS

NBIC has a fully integrated system, according to Anselmo. The carrier utilizes straight- through processing with a goal of getting the processing at the beginning of the chain all the way down to the general ledger with as few touches as possible.

“We're finalizing our end results with the general ledger and once that's completed in August we'll also have that integrated,” says Anselmo. “Typically, companies take files and use batch runs, extract files, and go through processes with large staffs and process the data into their payables and receivables and the general ledger. We're trying to automate the process to where we can grow the company without growing too much on the inside.”

The financial technology is one area where it and finance have a lot to do with each other and where the CFO already has a deeper understanding of the issues. The CFO has to translate the business requirements, the regulatory pressures and changes, and the financial management practices into something the CIO can take away and find automated solutions for.

“The CFO has to understand the applications—the business process—and the impact of automation on the business processes, including what needs to be automated, and in what manner,” says Travers.

If the CFO looks at his finance department and sees a bunch of spreadsheets, workarounds, and shadow systems and doesn't have a problem with that, it means the CFO doesn't have a handle on the potential of automation, explains Travers.

“Those problems are eminently solvable and are going to strengthen the financial practices of an organization,” he says. “If the CFO doesn't have a sense for that, then they don't have a deep enough understanding of the automation potential. The underlying technology, whether it is .NET or Java, to me is not something the CFO needs to be concerned with. That's the CIO's responsibility to do the right thing.”

Compliance issues—usually under the direction of the CFO—go right to the top of the to-do list for insurance carriers. But Travers also believes it is important in the current financial climate to be nimble when issues such as geographic expansion into a different market, introducing a different product, or adding a channel are broached.

“Those issues are often constrained by the inability of the financial systems to support the reporting and the aggregation of information because the system is not robust enough to do it,” he says. “There's a business impact there. If you want to expand into an adjacent state and your old financial system can't do that or there are too many workarounds, that might delay your [expansion] decision by six or eight months and the opportunity might be gone. The same thing goes with making an acquisition. Is your system strong enough to enable [an acquisition] from a financial management standpoint? And if it isn't, how much does that affect the decision?”

Financial systems don't have the glamour factor that a new claims system offers or a Web self-service capability that's more customer-facing.

“Those systems are probably prioritized in the right order,” says Travers. “But from a business standpoint, particularly in this market climate where we are emerging from a downturn and seeing the need to be nimble, if you are held hostage by an old financial system or even an old billing system, those should take on a higher priority.”

Many insurers are stuck with antiquated general ledger systems and they have built around those old systems lots of spreadsheets and custom-built applications and have their own sets of data off of their primary data sources, according to Smallwood.

“They run spreadsheets on their own series of reports to do their financials,” she says. “That's not good.”

When carriers have a list of projects that need funding and enhancements, the financial systems—especially for internal use—just get low priority, explains Smallwood.

“When you look at an IT budget, the majority of funding for projects is going to underwriting, policy, distribution and claims,” she says “They usually have a small amount of support for finance. The CFO needs to represent his or her area, but also has to look out for the enterprise.”

Petersmark points out finance departments have been doing what they do—mostly unchanged—for a long time. The key to talking to them revolves about two things. The first is integration.

“How do we make it so finance is tightly integrated with the rest of the platform stack—policy, claims, etc.?” he asks.

The second point is a reporting solution.

“How do they get on the platform or get the tools that allow them to communicate quickly and effectively so they can drill down through the details?” he asks. “Finance departments run their lives on spreadsheets—Microsoft created a monster when they created Excel. It isn't a bad thing, but it's difficult to leverage things like Excel across an enterprise.”

Whether the CFO understands the way insurance operates also depends on how they approach the position: operational or strategic.

“I think the role of the CFO is more of a facilitator and negotiator between the business and IT,” says Smallwood. “I don't think they need to understand the business, but they need to help facilitate those conversations to help drive business value and to quantify [the value]. At the end of the day, insurers have too much on their plate. Their lists of projects are overflowing. They have to figure out a way to quantify and qualify what they need to work on and what they can afford.”

THE ALLIANCE

The key to any successful CIO/CFO alliance is a need for clarity and a common vision of the business strategy, points out Smallwood.

“There has to be a common understanding of where the company is going and how to support it,” she says. “If they don't have clarity they won't necessarily be together. CIOs need to leverage their peers within the organization to help be a catalyst for change and to make the right investments in technology.”

That was Smallwood's big takeaway from her former role as a CIO. “It's great to report to the CEO, but CEOs are visionaries and strategic thinkers, they are not running the operation,” she says. “You have to align yourself with people that are running the operations and running the finances on a day-to-day basis to get the job done.”

The finance department at NBIC supports projects, but Anselmo won't go so far as to say they champion projects.

“Championing usually comes from the business side,” he says. “I'm not sure finance wants to champion things. They are like us in that they want to be a service entity and ensure that we are getting the right ROI on the cost side and we're trying to ensure IT brings value and innovation to the table. IT blends it all in. As long as you get those three quadrants, the championing can come from the business sponsors.”

NBIC works hard to track the economics of a policy and Anselmo believes the carrier does it in a way that improves the process.

“It allows us to justify things easier,” he says. “We know that if we want to do something new we'll do our typical cost benefit analysis and ROI, but we really drill down to the policy level and that helps us make the decisions we make.”

The nature of the relationship between CIOs and CFOs these days is rarely technology oriented, according to Travers.

“They aren't typically discussing the virtues of service-oriented architecture or the latest server farm,” he says. “They are discussing dollars.”

Travers believes that might put the CFO in a stronger position, but while the CFO is dealing with the business unit owners—the head of claims, the head of underwriting, etc.—the big dollar issues usually involve technology.

“If a new claims system is contemplated the CIO has a major role in it, but the business unit is going to fund it,” says Travers.

The CIO has a cost center to supervise and that's what the conversation with the CFO usually centers around.

“The CIO is talking about things like infrastructure, security, keeping pace with innovation, experiments, and things that are directly causing the CIO to spend money,” says Travers. “Although conversations between the two are typically financially oriented, they are pretty much on an even level in terms of responsibility.”

That has changed over the years as IT has broadened its focus and level of importance within the enterprise, explains Travers. 

“The evolution of the CIO role has made a big difference,” he says. “Organizations that still treat the IT function as data processing are behind the times. Those that have elevated their function to a board or management team function alongside the CFO can see the difference. That elevation of the CIO role has been beneficial to the company.”

CIOs that have been around for a decade or longer know that the relationship with the CFO—like the job itself—has evolved greatly.

“In 1998 when I was appointed CIO of Amerisure, the relationship I had with the CFO was more around IT is a black hole where investments go never to be seen again,” kids Petersmark, who left Amerisure last year to join X by 2.

Over the years, though, the two sides were drawn to each other and—painfully or less painfully—today they are joined at the hip.

“They need to be in league together,” says Petersmark. “Fifteen years ago the priorities for CIOs and CFOs looked different. Now, I think CIOs have moved closer to the CFOs and they worry about the same things.”

One item CIOs increasingly worry about is revenue growth, according to Petersmark.

“How am I going to leverage this business technology operation to grow the business?” he asks.

CIOs also worry about competitiveness and how to position the company so they are more viable in the marketplace, adds Petersmark. They also worry about the effectiveness of the technology and the capabilities the company is deploying to help the business grow in the markets they want to grow in.

“Almost all the CIOs I talk to now are saying words like revenue growth, competitiveness, marketing,” he says. “A decade ago it would have been anything but that.”

Anselmo and his IT department work closely with the business side on requirements and design and putting together ROIs.

“The CFO helps us manage those priorities,” he says. “The business sets the priorities, but it also has to be based on cost and ROI, which is where the CFO comes in. He gets involved when we need his assistance.”

ANALYTICS CHAMPIONS

Besides their core fiduciary responsibilities, finance departments have become the home for risk management in the enterprise, explains Petersmark.

“People think of financial risk first before it spreads to other areas,” he says. “We built a big analytics space for Amerisure for the ERM function to be able to analyze financial trends, market trends. We started to scratch the surface of predictive modeling. More and more I think that's going to become a core competency of financial areas.”

Many CIOs are creating alliances with the CFOs to help quantify the business value of the investments, especially in data projects, explains Smallwood.

“I have heard repeatedly the best place to start for funding for business intelligence, data, and the use of analytics is in the finance department,” she says. “They understand data. They are the primary users of data and are among the first to use BI tools. I have found that they get predictive analytics. With some of the smaller companies, they actually are the champions for using predictive analytics. I've seen them be the champions for that because they get the whole analytic piece.”

Being a CIO is a difficult job, Smallwood explains.

“You have to do strategy work, you have to build your IT organization to be efficient, and then you have to deliver on all the projects—you have to execute,” she says. One day you are at a board meeting, you are sitting with the CEO, the next day you are going over financials with the CFO. Then all of a sudden you get notified your computer room is down, or there was a hard-drive failure, or someone wants to introduce iPads into the network. It's just all over the place. It's a tough job. That's why they need the CFO as an ally.”