Host CFO Discusses Pre-IPO Growth-Profits Balance

Ian Charles – CFO of Host Analytics – was recently featured in CFO Magazine discussing the importance of finding the right pre-IPO growth-profits balance.

Host Analytics provides a scalable, cloud-based alternative platform to Excel that automates planning, consolidation and reporting. Based in Redwood City, California, the company was founded in 2001, and whereas many start-ups keep their cards close to their chest about their exit strategies, CFO Ian Charles has a very clear plan – an IPO offering within two years provided the company achieves the right pre-IPO growth-profits balance.

“Today,“ Charles told CFO Magazine, “you have to grow the business smartly, with a focus on unit economics and customer success. You can’t just go out and spend hundreds of millions of dollars anymore.” Profitability – Charles believes – doesn’t necessarily generate a premium for valuation purposes if it’s not backed by growth. However, it would appear there are substantial opportunities for growth for the enterprise performance management (EPM) systems vendor.

Less than 5% of the EPM market has been penetrated by cloud-based providers or cloud versions of on-premises EPM software sold by market leaders SAP, IBM, and Oracle – although the product is not for everybody warns Charles. “A relatively basic business that’s not growing rapidly shouldn’t be a customer of the product,” he said. Nonetheless, Host Analytics has a 700-strong customer base including familiar names such as the Boston Red Sox, the Mayo Clinic, OpenTable, and True Value.

Avoiding Churn is Key to a Stable Pre-IPO Growth-Profits Balance

Charles considers a good portion of the company’s success to date is due to its policy of walking away from businesses not suited for the product´s complexity. Charles says: “We can find a lot of bad customers that will be set up to fail and will churn at some point, whether in one, two, or three years,” and he believes avoiding churn is key to finding the right – or at least a stable – pre-IPO growth-profits balance. The company´s success can also attributed to the use of its own product.

Host Analytics employs a finance team half the size of any comparable company, yet the team analyzes 114 separate key performance indicators on a weekly basis. “When you eliminate Excel and replace it with purpose-built financial applications, you create a workflow that takes less time, makes fewer errors, and requires fewer people to perform,” he says. The same system is also used by the company for its marketing, services, engineering, and sales teams.

Another driver of the company´s success is the fact that Charles himself uses the Host Analytics´ ERM system. For the first time in his career, Charles is the CFO of a company that uses its own product. “I find myself in front of customers much more often than I have in prior roles,” he says. “For many of the larger deals, they want that CFO-to-CFO connection.”

The CFO-to-CFO connection is also helpful in measuring the market´s appetite for growth versus profitability. What constitutes the “right” pre-IPO growth-profits balance is a moving target, and being aware of market changes is critical in the run up to an initial public offering.

Balancing the Benefits/Costs of Migrating to the Cloud

Analysts project an increase in the rate at which cloud computing is adopted but it is important to balance the benefits and costs of migrating to the cloud.

The benefits of migrating to the cloud are well chronicled. Zero hardware costs, lower management costs and the availability of platforms that adapt rapidly to competitive threats and opportunities are three of the primary motives, while many see cloud computing as a way of eliminating over-capacity and freeing up IT budget for innovation.

Such has been the rate at which businesses in the manufacturing, banking, and professional services industries have migrated to the cloud that Oracle co-CEO Mark Hurd predicts 80% of corporate data centers will disappear by 2025. Similarly, analysts from Morgan Stanley have forecast revenues for cloud service providers will increase by more than 30% per annum.

However, although cloud services have allowed many companies to scale quickly without the capital expense of building on-premise data centers, some analysts have warned the decision to shift from buying to renting compute capacity should not be taken without consideration of the costs of migrating to the cloud – both the direct costs and the, often overlooked, indirect costs.

All-or-Nothing Shifts are Not Ideal

All-or-nothing shifts to the cloud are not ideal according to Lydia Leong, a vice president at Gartner, because “Most companies starting on this journey don’t know what they don’t know”. Her advice is echoed by Edward Wustenhoff, the chief technology officer at Burstorm, who suggests it is better to move a fraction of applications to the cloud and learn the capabilities of the cloud at a modest pace.

This approach gives companies the opportunity to re-migrate applications back to the corporate infrastructure if the initial deployment fails to fit the business model. It also give companies the opportunity to evaluate whether its cloud deployment plan should be fine-tuned. “CFOs [should] periodically take the pulse of what’s happening in the market”, Wustenhoff advises.

Performance, Security and the Social Factor

Other potential concerns are performance, security and the “social factor” according to Timothy Chou, a lecturer in cloud computing at Stanford University. Chou points to a human error outage at Amazon that took several large websites – including Netflix, Reddit, Adobe, and the Associated Press – offline for eleven hours in February.

Chou also suggests companies should define their security requirements and find out if the service provider meets them. He notes that many cloud service providers have tools addressing these requirements, but companies will have to spend time familiarizing themselves with how the available tools can be built into their existing apps.

Chou also speculates that some organizations resist migrating to the cloud due to a social factor he describes as having nobody´s throat to choke when something goes wrong. He believes that a gradual migration to the cloud will help resolve these concerns over time as the C-suite sees far better pricing than the company would experience if it tried to do everything on its own.

Cybersecurity: CFOs Should Set the Tone at the Top

A recent survey of top executives in the middle market has concluded that CFOs should not assume employees are educated about cybersecurity threats.

The survey – “Cyber and Data Security in the Middle Market” – was compiled using data from 316 online survey responses and 5 in-depth interviews. Focusing on companies with annual revenues of between $25 million and $500 million, the survey first asked what percentage of respondents had their business activities disrupted by cybersecurity issues within the past two years, and then what measures were being implemented to prevent future attacks. Phishing attacks are accelerating in 2017 and the problem will only get worse.

From the responses of the senior finance leaders, it was clear that virtual intrusions are commonplace. Although only 21% of respondents said their business activities were disrupted by hackers in the past two years, 60% admitted having lost time due to dealing with cybersecurity issues, 23% reported a loss of revenue due to a security breach and 19% acknowledged a loss of credibility with customers, suppliers or the public due to an adverse cybersecurity event.

Assumptions about Employee Education Can be Dangerous

One of the key findings of the survey was that more training on recognizing and acting upon cybersecurity threats is required further down the chain of command. CFOs clearly understand the threats from virtual intrusions – 82% agreeing cybersecurity was treated with “appropriate gravity” at the top level of their businesses. However only 24% of respondents felt employees approached cybersecurity with the same level of importance.

Considering that cyberattacks can be targeted at anyone within a business, the conclusion drawn by researchers was that finance leaders should be more pro-active in educating employees, and “set the tone at the top”. That conclusion was supported by findings that only 25% of CFOs feel their employees have access to adequate training and education, and that 46% of CFOs agreed there was room for improvement in their current training regimes.

But Are CFOs Responsible for Setting the Tone?

Most CFOs agree they should have some responsibility for managing cybersecurity. After all, it is often the finance department that suffers the most when a cyberattack is successful. However, only 12% of CFOs center their business´s cybersecurity on the finance function. Most (76%) rely on the IT function to organize strategies and manage risks – although acknowledging it is important for the two departments to collaborate.

One of the most important takeaways from the survey was not to solely trust cybersecurity defenses, but to verify them as well. This is where CFOs can take responsibility and set the tone at the top by testing their business´s own cybersecurity measures, improving access to employee awareness, and reducing the finance function´s vulnerability to cyberattacks by conducting regular audits.

CFO Role Expanding into Non-Financial Challenges

Results from several recent surveys suggest the role of the CFO is changing and expanding into new challenges such as cybersecurity and event response.

Following a tumultuous end to 2016, the business world is becoming more accustomed to unpredictability. Although there is reason to be cautious about what events will hold for CFOs during the remainder of 2017, there is also reason to be optimistic. A likely cut in corporation tax should bring a welcome boost to business, while technological advancements should help business leaders be better prepared for future unpredictability.

However, technological advancements alone will not enable a business to manage its way through a changing landscape, and CFOs – having the responsibility to ensure the financial stability of their companies – are having to step up and tackle many non-financial challenges such as HIPAA compliance and GDPR compliance. Indeed, according to one study by Adaptive Insights, 76% of CFOs report their finance teams track some non-financial KPIs today, and 46% of CFOs anticipate that number will increase in the next two years.

Cybersecurity the Biggest Challenge

As CFOs control the most sensitive data within companies, it could be argued it is the CFOs responsibility to control how the sensitive data is protected. Managing cybersecurity threats is a whole-of-company challenge but, as the finance function becomes more business-centric, CFOs are drawing on their risk management know-how and becoming more involved in risks assessments, addressing vulnerabilities, and breach recovery planning.

An increasing number of CFOs have been involved in cybersecurity since the Framework for Improving Critical Infrastructure Cybersecurity Version 1.0 was released in January 2014 and, in a recent Grant Thornton survey of 912 CFOs, 38% of respondents identified the CFO as the position most often responsible for cybersecurity, while 44% of finance leaders said they felt the most significant concern for their organization today is cybersecurity. 57% said undetected breaches were what worried them the most.

Adopting to Technology for Event Response

In addition to cybersecurity governorship, CFOs are having to educate themselves about technological advancements to help them measure and monitor business performance in a timely manner, without exposing the business to risk, but enabling it to take advantage of every possible opportunity. The technology allowing data to be processed in real time can help with identifying risks at an earlier stage and better decision-making, but many CFOs are encumbered by legacy systems that do not allow reporting teams to extract forward-looking insight from large, fast-changing data sets.

This challenge, and trends towards zero-based budgets and rolling forecasts, mean that CFOs have to be more agile. No longer is it enough to put an annual plan together and crunch the numbers month by month. EY’s DNA of the CFO survey reinforced this perception of a CFOs changing role when respondents to its survey said that skills that can help inspire and generate loyalty such as empathy, innovation and imagination becoming equally important as those used to manage finance teams.

Businesses Should Use Risk Sensing to Identify Opportunities

Using risk sensing to identify strategic risks can better equip businesses for future challenges and help them take advantage of emerging opportunities.  

A recent report from Deloitte – “Facing (and Embracing) Strategic Risks” – demonstrated how much effort businesses put into identifying financial, compliance and operational risks, but how few resources are dedicated towards identifying strategic risks.

According to a survey of 155 C-level executives, most respondents could list a series of potential strategic risks that could impact their businesses over the next three years (pace of innovation, increased regulation, loss of talent or loss of reputation, etc.) but few made full use of risk-sensing tools to identify and track them.

Why So Little Focus on Sensing Strategic Risks?

The report blames human nature for the lack of focus on sensing strategic risks and identifies four “behavioral economic” factors that blinds senior executives from strategic risks that may be on the horizon and for which businesses should compile scenario plans. The four factors are:

  • Overconfidence – leading us to trust our gut feelings and overestimate the truth of what the business believes.
  • Availability – the surfeit or lack of which can cause a distorted view of the importance or likelihood of events.
  • Confirmation – paying more attention to information that fits held beliefs while discounting contradictory information.
  • Optimism – a natural human tendency that fools businesses to believe their plans will work out as intended.

This failings, the report claims, can cause a misunderstanding of the the likelihood of events that could reshape businesses or their ability to respond to the events. Furthermore, if cognitive failings were not enough to limit focus on sensing strategic risks, other failings – such as poor internal communication, an oligarchic leadership or simple bureaucracy – could prevent senior executives from expressing their concerns.

The Benefit of Using Risk Sensing to Identify Strategic Risks

Businesses able to overcome the behavioral economic factors can benefit from using risk sensing to identify strategic risks. By combining risk sensing with horizon scanning and scenario planning, businesses can course correct before significant financial issues impact the business as a result of changing competitive and regulatory landscapes.

At the same time, data gathered to prompt business-critical decision-making should be used to capitalize on new opportunities. Many business innovations have come as the result of capitalizing on strategic risks; although the report suggests a glut of data is not conducive to successful decision making. It recommends that strategic risk data should be presented in a way consistent with people’s ability to manage and navigate it.

CFOs Should Lead the Way for Strategic Risk Management

The report concludes that, as CFOs serve as strategic advisors on a host of issues, it is they who take the responsibility for strategic risk management. In their capacity, CFOs are well positioned to connect with CEOs, boards, and other senior stakeholders in the conversation about strategic risks.

Armed with the right tools, CFOs can accelerate how quickly strategic risks are discovered and fit them into their ongoing risk management processes. CFOs who achieve this will see how strategic risk – and the ability to name it, track it, and deal with it – can turn into an important organizational resource.

CFOs and CIOs Should do More to Understand, Communicate and Collaborate

A report by Deloitte has identified three ways to strengthen the CFO-CIO partnership in order to enhance the value delivered by each to the business.

The report – “Three Ways to Strengthen the CFO-CIO Partnership” – was compiled following a poll taken during a recent Deloitte webcast that revealed less than one-third of CFOs and CIOs shared a strong partnership characterized by mutual understanding. The report´s authors considered that, in an age when technology is playing a larger role in every aspect of business, it is more important than ever CFOs collaborate closely and effectively with CIOs.

The authors claim that the majority of CFOs and CIOs already acknowledge the importance of building a strong partnership because of the significant proportion of a company´s budget dedicated to IT. However, Deloitte´s own survey revealed that just 22% of CIOs reported to CFOs – prompting the authors to suggest three key areas in which CFOs and CIOs could strengthen their partnership to enhance the value delivered by each to the business.

Understand, Communicate and Collaborate

The first key area is “mutual understanding”. The authors surmised that, despite there being key differences between the two roles, there were commonalities that CFOs and CIOs can identify to achieve a mutual understanding. In order to develop the partnership, CFOs should try to understand more about IT strategy (rather than focus on IT cost management), while CIOs should provide a better explanation of IT issues in a language that CFOs will understand.

The efforts made by each to develop the partnership will evolve into “effective communication” – the second of Deloitte´s key areas. The report´s authors claim that CFOs typically speak one language – the language of finance – while CIOs can only speak in the language of technology. They argue that different perspectives and communication styles can be overcome with a little effort to help each party communicate more effectively with the other.

The third key area is “collaboration”. A 2013 survey by PwC showed that organizations reporting strong collaboration between CFOs and CIOs were four times as likely as those with less collaborative teams to be top performers. Deloitte suggests CFOs and CIOs should identify opportunities to collaborate in order to improve strategies for managing IT and for providing better data and insight in order to strengthen the tactical efforts necessary to implement, maintain and upgrade mission critical information and financial systems.

The stronger CFO-CIO partnership that results, the authors claim, will create a successful framework for analyzing current and future IT capabilities and enhance the value delivered by each to the business.