How can CFOs respond to the 'fourth industrial revolution?'

Hywel Ball, Ernst and Young’s Managing Partner for Assurance, explores what a 4.0 world will look look like, as advancing digital tech and globalisation change the landscape 

 We are entering the fourth industrial revolution, also known as ‘Industry 4.0’. Demographic shifts, combined with globalisation and the rapid development of digital technologies, will bring significant changes to the way each of us live and work.

In a 4.0 world, smart technologies will redefine industry and business models. Consumers will have significantly more purchasing power over what and how they buy. Automation will continue to displace manual work, whilst also creating new jobs and sectors. The ability to join up and analyse vast amounts of data will generate extraordinary insights into ourselves, our organisations and our societies.

The finance function will be no exception to these forces for change. CFO’s will need to respond, both in terms of supporting business in the face of disruption and ensuring the finance function is fit for a 4.0 world. However, with the erosion of trust in institutions and businesses we are witnessing today, purpose, trust and transparency will become central to the way organisations interact with their stakeholders.

In this increasingly complex world, particularly in reporting, how does finance stay relevant and trusted by those who rely on what it does?

Impact of new technologies

In the same way that digital technologies are disrupting many company business models, they will also present new opportunities to transform finance. Analytic technologies are already enabling some companies to extract and process huge volumes of data from both inside and outside the organisation, delivering new and better insights – including into areas such as culture, which were once though impossible to measure. These technologies will enable the CFO and the finance function to add significantly more value to the business at speeds much faster than today. This will be in real time, at a greatly reduced cost, with higher levels of automated control and lower levels of risk.

Artificial intelligence (AI) will also be a game changer. New AI systems are capable of digesting and making sense of large data sets and much more efficiently than humans. They are able to recognise patterns and to learn and adapt to new situations, whether that’s a new tax regulation or accounting rule. Blockchain too, whilst in its infancy, has the potential to challenge many of today’s accepted norms of how we do business.

These technologies, whilst at various stages of development, have already moved from the realms of science fiction to the real world. Yet much of their true potential and possible applications are still to be fully realised. What we can be certain of is that they are likely to have a transformational impact on the finance function over the coming years.

Trust and relevance

But the finance function of the future will need to do more than just respond to technological changes. It will also have a key role to play in bridging the information gap between internal and external stakeholders, helping to re-build trust between big business and the public.

One of the key issues is that financial reporting has struggled to keep pace with business evolution and doesn’t report some of the measures that are crucial to today’s businesses. ‘Intangible assets’ such as culture, human capital or intellectual property typically account for 50% of a company’s value, but are largely absent from corporate reporting.

A lack of timeliness of reporting also adds to the problem. By the time the annual report is published, it is estimated that only 5% of the information content is new to investors. External stakeholders are increasingly looking for future trends in areas such as strategy, sustainability and how risks are being managed.

New technologies are part of the solution but the finance profession will need to re-evaluate what is reported and to whom. That is why at EY, we have been collaborating with academics, investors and businesses to find a way forward and develop a model that will help businesses to better communicate the long term value they are creating for their stakeholders.

Challenge of legacy systems

These are big and complex issues and the task ahead will not be easy. Many finance functions today also inhabit a world of batch-based legacy systems, often with multiple instances, complex processes and deeply embedded, disparate sources of data. Companies have invested huge sums over a number of years in making these systems stable. Paradoxically, it is this stability that could potentially pose the greatest obstacle to change. Businesses may see greater risk from changing a system that ‘works’ for today, rather than adapting and evolving for the future.

What’s clear however, is that retaining the status quo simply isn’t an option. Disruption is impacting all industries and professions. CFOs that embrace the opportunity will be future proofing their finance function for the years to come, while also ensuring that their company is able to better communicate with its stakeholders. The size and shape of finance will change, as will its role in the business and the value it provides.

Hywel Ball is managing partner for assurance, UK & Ireland, at Ernst and Young