For a group of Silicon Valley CFOs who meet about once a quarter to discuss the challenges they’re facing, the notion that they exemplify a “new breed” of finance chief is an underlying theme.
These folks tend to spend less than half of their time on traditional finance functions like reporting, treasury, tax and investor relations. Instead, they engage in minutely detailed data analysis, drive the sales process and act as lead executors of the company’s business model and overall strategic direction.
The redefinition of responsibilities has been percolating across the CFO population for some time, in a majority of industries and throughout the world. But it may be most developed and vibrant in the technology sector, especially at up-and-coming players in the exploding cloud-based software and services arena.
CFOs of such companies comprise the Silicon Valley group, which has about five core members and a handful of others that make some of the meetings. “We pretty much open the kimono about our businesses and talk about anything we want to,” says Tyler Sloat, who heads finance for Zuora, seller of a platform for managing subscription-based businesses. (The group includes at least two close competitors: Ned Sizer and Dylan Smith, respectively of Hightail and Box.com, both providers of file-sharing services.)
Down in the Dirt
Unlike the majority of CFOs in the prior generation who came up through the accounting or treasury track, most of the group members specialized in financial planning and analysis. FP&A may be the most important skill set for finance leaders at pre-IPO cloud companies. It’s not just that companies are realizing FP&A is vital and therefore hiring more analysts, raising their status and paying them more. It’s that these people are now bagging CFO jobs.
“Thinking about the ‘new breed’ of CFO, the analytical piece is a big differentiator and a reason I was chosen for this role over other candidates,” says Hightail’s Sizer, 47. “Folks like me are in high demand today to solve a data problem.” That is, most companies, but especially online technology companies, have massive amounts of data and must figure out how to use it to drive business performance improvements.
Sizer has “a ton” of experience in data warehousing, running analytics groups and driving product testing and optimization through online marketplaces. He spent the 1990s at Ford Motor Co. perfecting a then-emerging craft: data-driven analysis of profitability by product line and geographic market. That experience led to a series of senior FP&A jobs at well-known technology companies: Siebel Systems, Macromedia, Omniture and Ancestry.com.
In particular, running FP&A at Ancestry, a job that ended after Sizer helped take the company private late last year, clinched his first CFO opportunity at Hightail.
During the two-and-a-half years after he joined Ancestry in 2010, the company’s customer database grew from 20 terabytes to about 50 terabytes, so the analyses were necessarily robust. Sizer was charged with reducing customer churn by analyzing users’ engagement with Ancestry’s products to understand what drove some to renew their subscriptions and some to cancel.
“We spent a lot of time building algorithms for that analysis,” says Sizer, referring to a 12-person team that reported to him. “And we connected the results to our marketing, reaching out to at-risk customers. We also did a lot of work around pricing and packaging, figuring out how to offer customers the right duration of subscription at the right price.”
Such analysis is a core value driver for cloud vendors. Although Sizer says he hasn’t been at Hightail long enough to fully understand the nature of its data challenge, customer churn is a big issue there too.
In fact, Sizer expects to spend the biggest chunk of his time, 40 percent, on data analysis designed to drive competitive advantage. He’ll allocate 35 percent of his time to traditional finance activities and 25 percent toward acting as chief information officer for the company’s internal IT needs, a role he also performed at Ancestry.
In many cases, CFOs at such companies, most of them far smaller than Ancestry (a $500 million enterprise before it went private), perform data analyses themselves instead of or in addition to supervising others’ work. “It depends on the company’s size, but the most successful CFOs I know have no inhibitions against rolling up their sleeves,” says 40-year-old Sloat.
Adds Howie Shohet, CFO of Lattice Engine, which itself offers a highly data-driven sales-and-marketing application, “When I’m drilling down myself, and asking myself quick questions and then answering them by analysis without going to a team of 10, I feel like I’m more symbiotic with what’s going on.”
It’s the Buyer, Stupid
Driven by improving technology and technique, data analytics has allowed a closer and closer look over the past few years into customers’ behavior and the profitability they drive.
“In the old days I would construct a P&L to look at profitability on some sort of geographic or segment basis,” says Shohet, 42, a former co-worker of both Sizer and Sloat on the FP&A team at Siebel Systems in the early 2000s. “Now I’m effectively doing a P&L for every single one of my customers, every month.” It’s a “fairly precise” measurement of how much revenue each one generated and the company’s costs to service that customer, he says. That allows for a precise funds allocation in place of the so-called “peanut-butter” approach of spreading funds evenly across customer segments and markets.
For Sizer, an important component of customer value is virality. “If a customer sends a file to four people who hadn’t heard of Hightail, now they’ve heard of us. They might sign up for a free subscription and we might convert them into paying customers over time.”
Data analysis has proven to Sloat that small deals with new customers can be more valuable than larger ones. A small deal might enable Zuora to offer a lower discount to win the business while getting the customer hooked on the product. That might mean a much greater likelihood of upselling that customer in the future.
“How do you manage the board’s and investors’ expectations about sales ramp-up?” Sloat says. “By showing them data proving that if we don’t give the product away at the beginning, we will get paid more in the end.”
Sales-data analysis also can further CFOs’ increasing involvement in other activities once outside their spheres. “How do you design sales-compensation plans that motivate that kind of selling? That is traditionally a job for sales leaders, but every CFO in our group owns that function,” says Sloat.
Owning the Model
Indeed, driving sales is one of the hallmarks of the new CFO breed, according to Adriel Lares, finance chief at mobile-device security firm Lookout.
“It used to be that the CFO passively accepted the sales guys saying how much they were going to sell or, say, what the ratio of account executives to engineers should be,” says Lares, who’s 40. “The new CFOs are taking initiative to inform those decisions. For example, maybe if we had more engineers and fewer executives, we could save money and be more effective.”
Lookout has improved its sales results, Lares says, through less reliance on sales staff and by turning the focus to distributing mobile applications through app stores, which is very inexpensive. The company is also leveraging carrier partners like T-Mobile and Deutsche Telekom as distribution channels. “Today’s CFO works to tweak the business model,” he says. That happens more easily at growth companies, where there are fewer layers of bureaucracy, Lares notes.
Sloat characterizes a new-breed CFO’s mission more as owning the business model. Zuora, which sells subscriptions to its tools, pays close attention to its acquisition costs for new business as well as the potential future value of that business. It might be OK to spend $1.50 to acquire $1 of new business, based on the average customer lifetime. But it may not be OK if that $1 is coming from a new geographical market that needs significant investment to assure future growth.
“You need to understand things like that about your business model and make sure the rest of the executive staff, the board and investors completely understand why you’re doing what you’re doing,” Sloat says. They need to know that they can’t see the value of a growing subscription-based business in a traditional P&L, because during the growth stage at such a business there’s not going to be any operating profit – if there is, it’s an indicator that the company won’t be able to grow to the desired size.
“It’s the CFO’s job to understand the entire cycle from the beginning of a customer engagement all the way through to the end, and from there driving the optimum business model,” Sloat says. “And by ‘business model’ I don’t mean a historic operating plan that finance would partner with business owners to execute against. It is a broader understanding of the business, its markets, and the strategic goals and levers available to the company to execute near-term and long-term objectives.”
The group of new-breed CFOs, meanwhile, recently raised its ante. Their meetings had been informal and casual, usually over dinner. But this May they gathered for a day-and-a-half, out-of-the-office retreat organized by Sloat. Each of the nine participants selected a topic to present on. They paid for the outing themselves, even though it was all about business.
Some of the sessions addressed traditional finance tasks: What do you need to know about going public? How do you pick a banker? But most were more about business strategies and how to structure companies to achieve them: How do you construct a business model? How do you decide if it’s a good idea to target a new vertical or geographic market where costs will be higher than in your other markets? How do you rationalize acquiring a business with high customer churn?
“That kind of stuff got everybody jazzed,” Sloat says. “It’s a really smart group and I learned a ton.”
The Sky’s the Limit
There may be virtually no end to CFOs’ ability to add value, particularly because data-analytics capabilities promise to keep growing more sophisticated. “In my view we are at the infancy of infancy stage,” says Shohet. “Even in the technology industry, we’re just scratching the iceberg.”
There’s not just a new breed of CFO, Shohet observes. There are also new breeds of CEOs and investors who are looking at the world through a data-analytics lens.
Perhaps, a reporter muses, analytics will keep progressing until every person on Earth has a chip in the brain that instantaneously records every action and thought of every other person. “Some of the smart people I’ve worked with seem like they’ve almost got that already,” offers Shohet.
Photo courtesy of Brent Ozar.