TECH COMPANIES to WATCH 2018 20 Vendors Making the Digital Enterprise a Reality

APRIL/MAY 2018 | CFO.COM

CFO TECH COMPANIES TO WATCH 2018 20 vendors making the digital enterprise a reality

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29 COVER STORY Tech Companies to Watch 2018 Digital Remedies These 20 vendors offer compelling products that address longstanding points of pain for enterprises. By Keith Button, Bob Violino, and the Editors of CFO

• Pymetrics • Catalant • Prattle Technologies • Tipalti • Signifyd • UiPath • Host Analytics • Exabeam • Spoke • x.ai • FloQast • Emagia • RapidMiner • Adaptive • Nextiva Insights • Acumatica • Duo Security • Paycor 29 • Symbiont • Medallia 40 40 Special Report: Cyber Risk Thunder In The Cloud Migration to the cloud is causing a buildup of cyber risks that could leave customers financially exposed. By David M. Katz

Cover: Colin Anderson/Getty Images; this page: Thinkstock (2) April/May 2018 | CFO 1 IN THIS ISSUE

April/May 2018 Volume 34, No. 2

14 | HUMAN CAPITAL 46 | FIELD NOTES 10 Habits of Highly Effective CFOs Perspectives from CFO Research By David McCann THE REVOLUTION WILL BE DIGITIZED Driven by intense competition and 18 | STRATEGY heightened customer expectations, Searching for the Right Price CFOs are making a serious long-term By David McCann committment to digital transformation. | By Josh Hyatt 22 | CAPITAL MARKETS The Seven Deadly Sins For 26 Private Equity CFOs By Nick Leopard, Rishi Jain, 48 | THE QUIZ and Neel Bhatia Hire Learning Sustained low employment means 24 | TECHNOLOGY the fight for talent will dominate RPA Still “Scratching the Surface” 2018. How much do you know about By David McCann the latest job search and hiring trends? Take our quiz. 26 | ACCOUNTING Justifying Judgment When Recognizing Revenue By Eric Knachel

Help with Non-GAAP By David McCann

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◗ FINANCE Embrace The CFOs on the West coast, and others, will want to check out the 2018 Fi- Whistleblower nancial Leadership Fo- rum on May 22 in Los Angeles. The speaker Providing ethical leadership is among the lineup includes execu- most important characteristics of a highly tives from 20th Century effective CFO, according to Deputy Editor Fox, Northrop Grum- man, MGM Resorts, and David McCann’s story on page 14, “10 Habits of Highly Effective Brightstar. See the Ar- CFOs.” And, unfortunately, organizations sorely need that lead- gyle Executive Forum ership. ¶ A recent report by the Ethics and Compliance Initiative website for more details. found that “more employees than ever be- “The way society treats whistleblowers ◗ STRATEGY fore feel pressure to cut corners.” What’s is schizophrenic at best … When they’re While C-suite execu- more, 40% of employees believe that their revealed along with the secrets they un- tives often talk “strat- company has a weak or weak-leaning eth- cover, they often end up marginalized, egy,” they’re typically ical culture, the ECI found. And the most shamed, or, worse, threatened. People confused about what it common ethical violations whistleblow- love the betrayal, not the betrayer.” means, writes consultant ers are reporting to authorities are seri- To help combat this trend, organiza- Graham Kenny in “Your ous: misuse of confidential information, tions need to reinforce the importance Strategic Plans Prob- the acceptance of bribes or kickbacks, of employee reporting, says ECI. And, to ably Aren’t Strategic, stealing, and sexual harassment. attach an addendum, management has to or Even Plans.” Much of What may be most disconcerting is be clear that whistleblowers won’t face what passes for strategy that while more employees are blowing reprisals (and, if possible, have policies in are really actions, activi- the whistle on fellow employees, or their place to prevent it). ties, or objectives, says managers, or executive management, Embracing the whistleblower may Kenny. Read more on the instances of retaliation against whistle- sound like a tough task to some finance Harvard Business Review blowers are rising. Of employees who re- chiefs. Really, though, it just flows from website. ported misconduct last year, according to the CFO’s obligation to be always evaluat- ECI’s survey of 5,000 workers, 44% said ing the needs of all constituents. ◗ CAREERS they experienced retaliation by their com- Shareholders, investors, customers, Captain Fantastic is “the panies. And companies generally brought employees, suppliers—in the long run, guy with the sharp el- down the hammer on whistleblowers protecting whistleblowers is in the inter- bows who bruises you quickly: 72% of respondents said the re- est of all of them. on his quest for the Holy taliation occurred within three weeks of Grail of the corner of- their first report. Vincent Ryan fice.” You may recog- The retaliation numbers aren’t that Editor-in-Chief nize him and some of the surprising. As two German journalists other office archetypes recently wrote in The Los Angeles Times, described in “How to Stop Sabotaging Your Career,” a podcast Q&A with Northwestern Uni- CFO, Vol. 34, No. 2 (ISSN 8756-7113) is published six times a year and distributed to qualified chief financial officers by CFO Publishing LLC, 50 Broad St., 1st Floor, New York, NY 10004 (editorial office). Copyright ©2018, CFO Publishing LLC. All rights reserved. Neither this versty professor Carter publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of CFO Publishing LLC. Direct requests for reprints Cast. Access the pod- and permissions to (800) 428-3340 x149 or [email protected]. Periodicals postage paid at New York, NY, and additional mailing cast on the Knowledge@ offices. POSTMASTER: Send address changes to CFO, 50 Broad Street, 1st Floor, New York, NY 10004. CFO is a registered trademark of CFO Publishing LLC. SUBSCRIBER SERVICES: To subscribe to CFO magazine, visit www.cfo.com/subscribe; to update your address or cancel Wharton website. a subscription, please email [email protected]. To order back issues, email [email protected]. Back issues are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms.

4 CFO | April/May 2018 Mark Bennington JUST BECAUSE FINANCE IS COMPLICATED DOESN’T MEAN YOUR NETWORK HAS TO BE.

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There was much consternation That reader wrapped up by suggesting that the rev- ◗ to be heard in the run-up to the enue recognition standard has swung too far to the effective date of the new revenue- principles-based side: “Rules should still be included as recognition rules, and the agitation well. Otherwise we would face another stream of cor- is continuing afterward. porate scandals like the ones that triggered the Sar- On CFO.com, contributor Eric banes-Oxley Act.” Knachel of Deloitte & Touche offered some sound advice for managing the new freedom to “Most Companies Have No CFO Succession Plan” also exercise judgment in making revenue-recognition de- ◗ struck a chord among readers. “This issue is much cisions. He also pointed out that “such judgments can deeper than just the CFO,” wrote one. “Most companies vary widely, raising the possibility that different com- do not have a comprehensive emergency continuation panies will report different accounting results when plan. While they jump on the latest idea, such as that presented with a similar set of facts.” cloud computing will eliminate any IT problems, they Stormed one reader in response: “This ‘judgment- do not have a plan in case they lose the cloud. based’ approach is absurd on its face. It pits the judg- “It gets even worse with personnel replacement. The ment of one company against that of a competitor. In- idea that an executive could no longer perform because vestors already have enough trouble trying to get truly of illness or an accident is just not accounted for.” comparative data. Can you imagine how much more Agreed another audience member, “Organizations vagary this will introduce? Not good.” get lulled into a sense of security when senior staff Another audience member had some pointed ques- have been employed for a long time. Then a tragic tions: “If the external auditors disagree with manage- event happens with no succession plan in place and ment, whose judgment should prevail? In the case of company leadership is forced to make a quick decision, prior treatments for the same type of transaction, does which may not necessarily be the right decision. Just the entity need to readjust its prior judgments based on like the budget process, it’s important to discuss suc- the new judgment calls?” cession planning on an annual basis.”

CFO Publishing LLC CFO MARKETING SERVICES SUBSCRIBER SERVICES is a wholly owned DIRECTOR, To subscribe to CFO subsidiary of Argyle MARKETING SERVICES magazine, visit Executive Forum LLC, Chris Schmidt cfo.com/subscribe 50 Broad St., 1st Floor, EDITORIAL DIRECTORS, To update or cancel a CFO WELCOMES New York, NY 10004 subscription, e-mail argyleforum.com CUSTOM CONTENT YOUR FEEDBACK & RESEARCH [email protected] E-mail us at PRESIDENT Joe Fleischer [email protected]. Scott Kenerly REPRINTS & PERMISSIONS Kim Zimmermann Please include VP, AUDIENCE & CONTENT To order reprints of content your full name, Luke Bilton from CFO magazine or title, and company ADVERTISING SALES CFO.com, e-mail name. Comments Brian Kleve, (646) 973-5114 [email protected] CFO MAGAZINE/CFO.COM are subject to Haley Moore, (646) 973-5111 or call (800) 428-3340 x149 EDITOR-IN-CHIEF editing for clarity Vincent Ryan Matt Moore, (646) 973-5112 and length. BACK ISSUES [email protected] To order back issues of EDITORIAL OFFICES MANAGING EDITOR CFO magazine, email Deana Colucci 50 Broad St., 1st Floor [email protected] New York, NY 10004 DEPUTY EDITOR (646) 839-0012 David McCann [email protected]

6 CFO | April/May 2018 Thinkstock “First Republic is a respected fi nancial institution with an entrepreneurial spirit.”

RICK CARUSO Chief Executive Offi cer, Caruso

(855) 886-4824 | fi rstrepublic.com | New York Stock Exchange symbol: FRC MEMBER FDIC AND EQUAL HOUSING LENDER STATS TOPLINE OF THE

MONTH AUTOMATION Revolutionary, But a Big Business Risk The risks to companies posed by the frenzied development of artificial intelligence tools seem nearly limitless. By David McCann

Artificial intelligence surely will change 2.9% the world. But will it be for better or Increase in U.S. worse? A new report from Allianz, the hourly wages, world’s largest insurer, offers a stark por- 2017 trayal of how the development of AI could go spectacularly wrong. Some of the potential eventualities would 7.9% be societally calamitous on a global scale. Increase in But even looking strictly at business risks, median CEO pay, there are hefty concerns. The paper cites a Fortune 500 2017 survey by PricewaterhouseCoopers in which 67% of CEOs said they believed AI and automation would have a negative im- $10.9 pact on stakeholder trust over the next five years. million And, according to the Allianz Risk Ba- Median CEO pay, rometer 2018, the impact of AI and other S&P 500 new technologies already ranks as the sev- market, it’s difficult to identify what exactly enth-top business risk—ahead of political might go wrong before damages take place, 57% risk and climate change. “AI exposes busi- Allianz says. Labor’s share of nesses to threats that could easily counter- “AI decisions that are not directly related business income balance the huge benefits of a revolutionary to design or manufacturing, but are taken by technology,” Allianz writes. an AI agent because of its interpretation of Signs are evident already. Look, for ex- reality, would have no explicit liable parties 65% ample, at Microsoft’s 2016 AI experiment, in under current law,” the paper states. “Leav- Labor’s share which a bot named Tay was kicked off Twit- ing the decision to courts may be expensive of business ter the same day it launched for becoming “a and inefficient.” income, 1975 sexist, racist monster,” as TechRepublic put Further, AI is unable, at least currently, to it. Indeed, one of the leading current uses of comprehend abstract concepts such as loyal- AI is powering customer-service chatbots. ty, happiness, hurt, or values. That could lead “Autonomous chatbots trained on language an AI agent to act against human interests. texts are prone to learn and perpetuate hu- For example, say an AI robotic agent man prejudices and unfairness,” observes is trained to minimize risky situations for Allianz. elder-care patients with Parkinson’s disease. Note: all figures for 2017, except as indicated The specter of AI agents that get smart- In order to reduce the risk of falls, the agent Sources: Mercer, Bureau er on their own also presents confounding starts controlling a patient’s opportunities to of Labor Statistics, Harvard Business Review implications for legal liability. Even after leave their living quarters. That would re- AI products have been tested and are in the duce social contact and potentially lead to a

8 CFO | April/May 2018 Thinkstock spiral of depression. dential information.” “The challenge when Such scenarios may pose bewil- Even a slight, unintentional AI error developing AI agents is dering hurdles for companies devel- in an internal system could quickly es- oping AI technology. “The challenge calate into a major problem that dam- to instill [them] with a when developing AI agents is to in- ages a company’s reputation and bot- distinction between still [them] with a distinction between tom line, with the error replicated on good and bad.” good and bad,” Allianz says. any number of machines. —Allianz, “The Rise of Artificial Intelligence: There are also frightening implica- Meanwhile, AI is already help- Future Outlook and Emerging Risks” tions for information security. While ing to combat climate change by re- AI can be used to detect and prevent ducing emissions through the use of ers using AI themselves are positive. cyber-attacks, the opposite is also smart technology and sensors. How- “AI applications will improve the possible. ever, the paper points out, AI is also “a insurance transaction process, with “AI could facilitate serious incidents key component in the development of many benefits already apparent,” Al- by lowering the cost of devising new nanobots, which could have danger- lianz writes. “Customer needs can be tools and weapons to launch attacks,” ous environmental impacts by invisibly better identified. Policies can be is- the paper points out. “AI could [also be modifying substances at nanoscale.” sued, and claims processed, faster and used] to weaken cyber defense mecha- Of course, as an insurance company, more cheaply. Large corporate risks, nisms by utilizing social engineering to Allianz profits from risks faced by busi- such as business interruptions, cyber- psychologically manipulate people into nesses and individuals. But judging by security threats, or macroeconomic performing actions or divulging confi- the paper, all the ramifications of insur- crises can be better predicted.” CFO

SUPPLY CHAIN debt until the company repays it the full amount the company owed the supplier, enabling the company to stretch its credit terms to extreme lengths. Flaws Seen in Trade However, in the absence of a specific accounting requirement under International Financial Reporting Stan- Finance Disclosure dards, says Moody’s, few companies make explicit disclosure of these financing agreements with suppliers Lax accounting requirements for reverse and banks. “The possible existence of these arrange- factoring help mask a U.K. firm’s worsening ments can often only be uncovered by scrutiny of the finances: Moody’s. amounts reported as trade payables and other credi- tors,” Moody’s says. The collapse of a construction firm in the United In Carillion’s case, “the scale of the liability to banks Kingdom has exposed shortcomings in the account- was not evident from the balance sheet, and a key ing for reverse factoring arrange- source of the cash generated by the ments, says Moody’s Investors Ser- business was not clear from the cash- vice. The trade payable financing flow statement,” says Trevor Pijper, a tactic, also called supply chain fi- senior credit officer at Moody’s. nance, allowed the firm, Carillion, Moody’s says Carillion’s 2016 bal- to hide nearly 500 million pounds ance sheet indicated that the group’s sterling ($704 million) in liabilities, bank loans and overdrafts amounted Moody’s claims. to 148 million pounds sterling ($208 The sudden downfall of Caril- million). But as much as 498 million lion, which was a major supplier to pounds sterling ($701 million) was the British government, has sparked owed under the reverse factoring ar- much discussion and hand-wringing rangement, which started in 2013. in the United Kingdom over how the Carillion’s cash-flow woes were a company managed to conceal its poor financial condi- key issue in its collapse. To help with cash flow, Carillion tion. (It entered compulsory liquidation in January.) had quadrupled payment terms on its subcontractors to Under reverse factoring, a bank or other provider 4 months from 30 days. In the meantime, Carillion was pays a company’s suppliers faster than the set credit carrying a debt load of 1.5 billion pounds sterling ($2.1 terms in exchange for a discount. The bank carries the billion). | VINCENT RYAN

Thinkstock April/May 2018 | CFO 9 TOPLINE for the betterment of “Main Street.” On top of workers’ 6% share, 3% was CAPITAL ALLOCATION for communities (including charitable giving and volunteering); 7% for product improvements; and 22% for “jobs” Workers Get (commitments to job creation or capital investment tabbed for job-creating Tax-Savings activities). Another bright spot: 4% of the Crumbs gains were passed to customers. For example, 12 investor-owned utilities Once 2018 began, it became the announced they would apply their tax single biggest question the wider firms are pledging to do with their savings to lower prices. Five of them public wanted to know: How did large nearly $150 billion in found money. pledged to direct all such savings (a U.S. corporations plan to spend the What has it discovered so far? For combined $23.1 million) to customers. windfall bestowed on them by the Tax one thing, workers aren’t at the head of Among the industry’s bigger fish, Ex- Cuts and Jobs Act? the line. Through March 19, only 6% of elon pledged to return 93% of its $302 A few months and more than 120 the cash for which allocation plans had million in tax savings to consumers. company announcements later, the dis- been announced was assigned to work- Regarding the 6% going to workers, cussion hasn’t died down. Indeed, firms ers. More than half of that was for one- some companies did much better than like JUST Capital, a nonprofit that time bonuses, not permanent raises. that, including Darden Restaurants ranks companies “based on the issues On the other hand, while 57% of the (79%), Boeing (67%), FedEx (48%), As- Americans care about most,” won’t let total windfall was earmarked for share- sociated Banc-corp (44%), and CVS it. JUST is tracking what Russell 1000 holders, a fair chunk of the rest was Health (40%). | V.R.

BUDGETING baseline (usually, spending in the previous year). They most often redirected the savings into growth initiatives (52%), digital technologies (31%), and the bottom Zero-based Plans Get line (15%). The companies pursued ZBB for different reasons: More Entrenched 96% of the survey participants got started to improve profitability; 48% were influenced by competition; and Zero-based budgeting, where an organization 40% cited slow growth as a catalyst. formulates a budget from scratch each year instead However, there were two surprises in the respons- of basing it on the previous year, has been around as a es to that question, according to Accenture. First, only concept since the 1970s. However, adoption was limited 14% said M&A was a driver. “That flies in the face of until the past few years, says Accenture Strategy. common, but flawed, wisdom that says companies typ- The firm talked to 85 of the largest ically pursue ZBB in crisis mode in an companies that have switched to M&A scenario.” The second surprise: zero-based budgeting. Only two of “The media is fixated on the pressure them initiated ZBB before 2011. “Under- coming from private equity funds and standing and momentum started build- activist investors to implement pro- ing” between 2011 and 2013. And from grams like ZBB. But only 8% of compa- 2014 through 2017, the proportion of the nies said this was a factor.” participating companies adopting ZBB The surveyed companies don’t grew an average of 57% per year. necessarily apply ZBB across the full And why not? The companies re- range of budgeting scenarios. About ported, on average, a 15% cumulative 92% of them use it for general and ad- annual cost reduction during their ZBB ministrative expenses, 52% for sales project implementation period (typi- and marketing, and 43% for direct and cally about 2.5 years), compared with a indirect labor. | D.M.

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FORECASTING Tech CFOs Eye Revenue Boom

Finance chiefs at U.S. technology companies are highly optimistic about prospects for 2018, projecting an average 12% revenue gain over last year. That’s the most enthusiastic forecast tech CFOs have issued since BDO began conducting its TECHNOLOGY annual outlook survey in 2008. “Quantum leaps” in technological progress have led to new business opportunities, behav- iors, and ways of thinking, according to BDO’s survey report. Digital Overhaul Not that there aren’t challenges in store. “U.S. technology companies can expect an even greater barrage of compet- On a Budget ing demands this year, as the full impact of last year’s policy changes—from changing trade agreements to shifts in immi- Finance departments won’t be getting a gration policy to sweeping tax reform—comes to light,” says budget boost from the windfall generat- Aftab Jamil, global leader of BDO’s technology practice. ed by U.S. corporate tax cuts, according to a “Nevertheless, the industry’s resilience is not to be under- study by The Hackett Group. In fact, finance estimated, nor is [its] ability to transform setbacks into oppor- budgets will again be cut, continuing a long- tunities,” Jamil added. A vast majority (84%) of the surveyed term trend, said respondents to Hackett’s sur- CFOs expected higher revenue in 2018—good news, since al- vey. It polled finance leaders of global com- most two-thirds of participants cited revenue growth as their panies with more than $1 billion in revenue. top business priority. On average respondents expected a 1.3% On the IPO front, the finance leaders expected another boun- lower allocation, despite forecast revenue tiful year, with 60% of them predicting stock performance for growth of 3.6%. That 1.3% is better than the new offerings will improve. Only 11% foresaw a decline. Asked past two years (cuts of 4% in 2016 and 2% in to name the greatest threat factors to tech IPOs, 35% of those 2017), but it’s also larger than predicted cuts surveyed pointed to domestic and global political uncertainty. to both human resources and procurement Next were performance of recent new issues (29%), concerns departments in 2018. about valuations (20%), and global market volatility (16%). A key difference this year, however, is A similarly robust year was envisioned for mergers and that cutting finance budgets was not listed acquisitions, with 72% expecting tech deal volume to in- as finance’s top objective. In its place was crease. | D.M. “supporting enterprise information/analytics needs,” closely followed by “supportingC Unbridled Enthusiasm enterprise digital transformation.” M Analytics, of course, will enable financeY to One-hundred tech CFOs projected a 12% average revenue “more effectively provide insight so manage- CM gain over 2017, the largest forecasted increase since 2011. ment can make smarter decisions about in-

MY 12% vestments and capital allocation.” But it is the 10% 10% 12% broader objective of digital transformationCY 10 9% 9% that finance leaders hope “will radically CMYre- 8 9% shape their ability to add value to the enter- K 6 7% prise and reduce cost,” according to Hackett. The survey found that 56% of finance 4 leaders have a digital strategy in place, up 2 3% from 44% last year. Unfortunately, only 35% 0% “believe they have the resources and compe- 2011 2012 2013 2014 2015 2016 2017 2018 2019 tencies to execute on their digital transfor- Source: BDO mation strategy.” | V.R.

12 CFO | April/May 2018 Thinkstock (2) HUMAN CAPITAL The authors of the paper, “Promotions and the Peter Principle,” find that a doubling of sales credits for a particular sales person increases the probability that he or Don’t Promote she will be promoted by 14.3% relative to the base probability of promotion. Top Sales Reps? However, doubling a new manager’s pre-promotion sales corresponds to a 7.5% decline in For those who thought the Peter subordinates’ sales performance. The Principle was an old wives’ tale, the reverse is also true: relatively poor National Bureau of Economic Research prior sales performance by newly begs to differ. A new NBER paper counter- promoted managers correlates with intuitively finds that, after high-perform- significant improvements in subordi- ing sales reps are promoted, they tend, nates’ performance. on average, to be poorer managers than The reason given for those seem- are lower sales performers. ingly bizarre results: “If firms’ promo- That creates a conundrum for employ- tion policies ‘discriminate’ against ers. “If firms promote workers based on poor sales performers, then poor current performance, they may end up sales performers who are neverthe- with worse managers,” states the paper. less promoted should be better managers.” The research relies on transaction-level data provid- The authors caution against interpreting the re- ed by a vendor of sales performance management soft- search as evidence that companies have mistaken be- ware. The data includes standardized measures of sales liefs or behave inefficiently. Rather, “firms may heavily update.flattened.april.2018.CFO.mag.half.page.pdftransactions and organizational 1 4/2/2018 hierarchy 11:48:40 AM for a panel weight current job performance in promotion decisions of 53,035 workers—1,531 of whom were promoted into to encourage workers to exert effort in their current job managerial positions—at 214 U.S.–based companies. roles and to maintain norms of fairness.” | D.M. HUMAN CAPITAL 10 Habits of Highly Effective CFOs Would you believe that striking a healthy work-life balance is one of them? By David McCann

For many CFOs, the idea of achieving a satisfying work-life to find out which characteristics they consider to be drivers of their success. balance is something of a fantasy. The hours are long, and With regard to continuous learning, the pressure to excel—making certain every big-picture most CFOs he spoke with are “very strategy is sound, virtually every detail precisely right—is intellectually curious,” he said. For example, a majority of them have MBA extreme. One could point to almost any finance chief at a big degrees, which finance professionals company, or a struggling one, or one that’s growing fast or often obtain after their careers have begun. And all of them starting up, and say with a fair are readers. degree of confidence, “that per- Many of them high- son is a workaholic.” ly value mentors, Mc- But is that a good thing? Cullough added. To Not according to someone who find a mentor, he noted, should know: Jack McCullough, speaking with board who served as finance chief for members is a good no fewer than 26 startup com- strategy, as most of panies. “Being a workaholic them have many high- is a mistake,” he said during a level contacts. He ad- webinar. “Workaholics are not vised that CFOs, or the best long-term performers. those aspiring to the There are times in all of our ca- job, seek mentors out- reers when we have to work 80 side their organizations. or 90 hours a week and forgo It can be awkward, he other things. But it’s not a wise pointed out, to tell your long-term strategy.” it for yourself or your family, then do boss that you need mentoring because In McCullough’s view, a good for- it for your company, because you’ll be you don’t understand some things or mula for a successful CFO includes a better at your job,” he said. need professional polishing. lot of “other things”: family, friends, Also on the list was “continuous Most of the effective “habits” on physical exercise, reading (and not just learning,” and the way McCullough the list are no surprise—for example, business books), hobbies, and com- prepared for the presentation offered “thinking strategically.” Noting that munity service. And “if your boss asks a perfect example of it. As founder old-school CFOs were known as the you to skip your vacation, skip your and chief executive of the CFO Lead- people who said “no” to spending on vacation but also start a job search and ership Council, he knows hundreds of new initiatives, McCullough said, “Be make it up to your family.” finance chiefs. But with the webinar a CF-GO, not a CF-NO. You want to be So important is striking a healthy coming up, McCullough didn’t rely on involved in making it happen, not put- work-life balance that McCullough in- his past conversations with them, nor ting on the brakes.” cluded it in a list of 10 “Habits of High- on his own long experience as a CFO. Other habits on the list included: ly Effective CFOs,” which was the title Instead, he painstakingly interviewed Providing ethical leadership. of the webinar. “If you don’t want to do dozens of finance chiefs, specifically Overall, the finance chiefs McCullough

14 CFO | April/May 2018 Thinkstock

HUMAN CAPITAL

“CFOs seldom Communicating proac- he made the effort,” McCullough said. lie—it’s not in tively. Effective CFOs are “The CFO gave the guy an hour of his forthright in their communi- time, and he was flattered. It was about their DNA. But cation style, he said. If there’s trust: again, there was no spin. It was, there’s more to bad news, they don’t spin it, this is why we need you and this is the ethics than that.” hide it, or delay it. Their com- direction we’re going in.” munications are “timely, clear, Mastering deal-making. The —Jack McCullough, CEO, CFO Leadership Council brief, truthful, and once in a key here is an ability to identify op- while they need to be com- portunities and risks, not just to ne- interviewed identified this as the most pelling, although the other four are gotiate deals. Several of the CFOs important characteristic. “CFOs sel- more important.” McCullough interviewed spoke of a dom lie—it’s not in their DNA,” he said. Performing cross-functionally. mind-shift they experienced at some “But there’s more to ethics than that.” Most of the CFOs McCullough inter- point in their careers, when they be- CFOs are expected to be the most viewed said they liked working out- gan to focus on creating opportunities ethical person in the company, he side finance more than within it. “A lot rather than simply solving problems. noted. They need to “fully and accu- of them told me that they’re the best That’s not to diminish the importance rately disclose all relevant info to all person in the company at selling, the of solving problems, he said, but their relevant parties. And [they] always best recruiter, the best fund-raiser, the “world suddenly changed” when they need to be evaluating the needs of all best deal-maker. They didn’t say this began thinking of their purpose as cre- constituents, be they stockholders, in- in a cocky way. A lot of it is the trust ating an opportunity for growth, for vestors, customers, employees, suppli- factor.” example. ers, and, every once in a while, society One CFO in San Francisco told him Building elite teams. McCullough as a whole.” that while it’s virtually impossible to often heard from the CFOs about the Serving as a trusted adviser. As hire a lead engineer in the area, he was need to “build a team for where you a trusted adviser, the CFO provides able to do so. “The reason is because want [the company] to go, not where counsel to the CEO, his or her imme- you are today. Think three to five years diate boss. But, McCullough stressed, Drivers of a CFO’s Success ahead.” Team-building skill is espe- it’s even more important to be a cially vital today, he added, given the trusted adviser to the board of direc- 1 Think strategically shortage of talent “in places where the tors, which represents the interests of 2 Communicate proactively innovation economy dominates” and shareholders. He offered an anecdote the proclivity of “20-somethings” to to drive the point home. 3 Master deal making switch jobs every couple of years. At one of his career stops, the 4 Build elite teams Maintaining financial expertise. company was experiencing revenue- McCullough noted that, recently, each 5 Learn continuously recognition issues. The CEO told him year there have been more financial not to tell “Bob,” the audit commit- 6 Serve as a trusted adviser restatements than the previous year. tee chair, about it. “If he wanted to be “Sometimes there is a lack of focus on 7 Perform cross-functionally 100% sure that I was going to call Bob, the financial accuracy part of the job,” that’s the one thing he should have 8 Maintain financial he said. “It’s less sexy than all the won- said,” McCullough noted. “He’d now expertise derful strategic, cross-functional, and obligated me to call Bob, because my 9 Provide ethical leadership operational responsibilities. But while fiduciary duty is to the stockholders. ‘GAAP may be crap,’ as a former boss And I told him that’s what I was going 10 Maintain a work/life of mine used to say, never forget that balance to do, and I did it.” the F in CFO is for financial.” CFO

Editor’s Choice

C-SUITE CHURN Move over, chief legal officers and operational heads. Senior sales leaders at U.S. issuers are increasingly among the top five highest-paid employees, says Equilar. Their number hit 218 in fiscal 2016, up 77% from four years earlier. Equilar suggests the trend is a result of companies “putting greater emphasis on sales expertise and revenue growth.”

16 CFO | April/May 2018 Top: courtesy Jack McCullough, bottom: Thinkstock 10,300 units produced daily.

11 production line managers.

8 critical quality control measures.

1 well-oiled manufacturing plant.

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At large companies, many CFOs are only peripherally in- “If you put a square hole in the mid- dle of a piece of aluminum, the cost volved in pricing decisions. At smaller firms, finance chiefs might be five to seven times what it tend to wear more hats. But even there, it’s probably quite would be if you drilled a round hole,” rare for pricing to be the CFO’s primary focus, as it is at Zuriff notes. “The distance of a hole from the edge of a piece of metal has a Xometry. In fact, the opportunity to instill more rational cost impact, too.” pricing into a market niche was a key formative element for The scientists also perform computational geometry, the company. breaking down the ele- A few years ago, Xometry’s two ments of parts’ physical co-founders, chief executive Randy structures, another im- Altschuler and CFO Laurence Zuriff, portant determinant of were investigating business opportuni- the pricing equations. ties in the on-demand manufacturing arena. They were attracted by the high The Great Unknown level of technological innovation, par- Based on those and other ticularly with respect to 3D printing factors, Xometry quotes (also called additive manufacturing). a price for the order— The pair visited many machine say, $100 per unit. Then shops and additive manufacturing it distributes the order to service bureaus. “They were largely those network partners mom-and-pop–type operations where deemed to be a good fit a rollup of any kind would not make About 65% of the parts delivered to customers from for the job, listing a pre- sense,” Zuriff says. “There was [also] Xometry’s network of machine shops are manufactured ferred price for the man- with 3D printing. incredible price opacity.” ufacturing, perhaps $80 They observed extreme pricing focus on handling low-volume or- per unit. The spread between the two differentials for very similar manu- ders—10,000 or fewer units—for spe- prices represents Xometry’s profit. factured parts in different geographic cialized parts. The first partner to accept the job locations, as well as variances weekly Commercial operations began in gets it; the speed with which a job is and even daily. That, of course, posed February 2014. Engineers at custom- accepted is crucial because the cus- problems for the manufacturers’ cus- er organizations upload to Xometry’s tomer, seeking to control its costs, is tomers. Pricing “could change over- website computer-aided design files almost surely investigating other man- night, depending on shifts in supply detailing the specs for the parts they ufacturing options. However, the net- and demand in very localized markets,” need. This is where pricing comes into work partner may quote a higher price says Zuriff. “While that was probably play. Xometry has a team of data sci- for the manufacturing. The $80 figure pretty efficient on a local basis, it was entists that create and, using machine- that Xometry established was merely inefficient on a national basis.” learning technology, continually revise the mean point in a probabilistic dis- The founders set about build- algorithms that govern price quotes. tribution of expected quotes from the ing a network of machine shops and The algorithms take into account myri- partners, also determined by a ma- 3D service bureaus. At present, it in- ad factors, including materials, shapes, chine learning-based algorithm. cludes 700-plus businesses. The com- tolerance levels, and design features Xometry thereby assumes pricing mon denominator among them is their such as holes. risk. It has already provided its price

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Call 781.356.5152 or learn more at xcmsolutions.com today. STRATEGY quote to the customer and has no con- But lower-quality shops are also al- day terms. “The local machine shop trol over what price the manufacturer lowed into the network, because some can’t wait 160 days,” Zuriff notes. “It’s will quote. If the latter price is above orders don’t, for example, specify high already bought the materials and made a certain per-unit threshold, Xometry tolerance levels. the parts, which probably took at least will take a loss on the job. one payroll cycle. Another 160 days af- “Imagine being a CFO when you First Priority ter it delivers the parts would be many don’t know what the cost of what you’re Zuriff says he spends more of his time more payroll cycles.” selling is going to be,” says Zuriff. “You working with the data scientists than The receivables-based credit lines probably have a general idea, but it’s doing everything else. He provides from the banks are low cost because of not like you’re taking a SKU off the receivables’ high quality. In the shelf that you bought for $1 “Imagine being a addition to GE, customers in- and selling it for $2.” CFO when you don't clude BMW, the Department of Xometry also may choose to Defense, and NASA. keep a job in-house. Its internal know what the cost manufacturing operation gener- of what you're selling Big Customers, ates about 15% of revenue. is going to be.” Small Jobs Xometry isn’t acting like a —Laurence Zuriff, CFO, Xometry While Xometry’s customers broker, taking fixed commis- are large, they generate various sions on business it distributes to a them with feedback on actual produc- small jobs that are appropriate for the roster of providers. Instead it’s acting tion costs compared with the expecta- manufacturers in its network. For ex- more like an options trader, whose risk tions embedded in the algorithms, al- ample, an airplane may have millions has a fixed upside and a theoretical- lowing continued improvement of the of parts, but an aircraft manufacturer ly unlimited downside. In fact, Zuriff algorithms. might only need, say, 2,000 units of any says, in its number-crunching Xometry The data scientists closely watch individual part, depending on the num- uses math similar to that employed in three variables that impact gross prof- ber of planes it’s building in a particu- the Black-Scholes model, which is used it: “win rate,” the percentage of quotes lar line. A mobile-device maker may to determine the fair value of call and to customers that result in orders; make millions of devices but need only put options. “take rate,” the margin achieved on a couple of thousand fixture units that Customers that use Xometry’s ser- jobs placed in the partner network; hold them in place during the manu- vices multiple times may gain trust and “acceptance rate,” the percentage facturing process. that similar types of jobs will be priced of jobs accepted by a partner within a Xometry also serves the medical similarly. And the pricing will, on aver- preset amount of time after the job is devices field, where 3D printing al- age, be lower than what they’d typical- distributed to the network. lows customization of things like tita- ly get by dealing with manufacturers Zuriff and the team conduct pricing nium inserts for knee replacements. individually, according to Zuriff. experiments, adjusting prices to gauge About 65% of the parts delivered to the Small manufacturers often reject both the elasticity of customer de- customers are manufactured with 3D jobs they could do profitably out of mand and the manufacturers’ sensitiv- printing. However, because 3D manu- fear that they’ll end up with a loss, ity to prices for particular categories of facturing is much less expensive than he says. “What we say to them is yes, parts. All of the resulting data is used traditional computer numerical con- you’re going to make lower profit on to further refine the algorithms. trol (CNC) machining, the latter ac- some individual jobs—but you’re going Another aspect of Zuriff’s job is counts for 65% of Xometry’s revenue. to get many more jobs that [your com- managing relationships with banks to 3D parts are also easier to price, and petitors] are unwilling to take because which Xometry offloads receivables Zuriff expects that over time, with ad- they don’t understand the risk.” risk. The up-front cash Xometry gets ditional innovation, they will comprise The manufacturers are vetted for in exchange for paying the banks a more and more of the company’s busi- quality in a couple of different ways. sliver of the receivables’ value is im- ness and allow it to scale. First, they take a test; Xometry sends portant to the manufacturing partners, The pricing complexity, he says, “is them specs for a part that is fairly dif- who can’t wait several payroll cycles to what makes the business interesting for ficult to make. Second, a new vendor receive payment. a CFO. It’s not just plugging in num- gets easier jobs for a while and must Most of the company’s customers bers and getting an answer. It’s think- ship the parts to Xometry for quality are large organizations that can negoti- ing about how all the various changes screening. The quality scores are then ate payment terms favorable to them. you can make in the pricing might af- factored into the pricing algorithms. General Electric, for example, has 160- fect your gross profit and margin.” CFO

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The Seven Deadly Sins For Private Equity CFOs Avoid these key mistakes to keep a finance-chief job after a PE firm acquires your company. By Nick Leopard, Rishi Jain, and Neel Bhatia

Meet Bob. He’s the CFO of TechX, a growing SaaS rules of the new game, and the new (expanded) dimensions of the field. platform-based company. Bob has been its CFO for seven For example, the fund sponsor will years, having grown into the role from his roots in account- demand a new type of financial modeling. The good news: TechX was just purchased by a private ing, often at an accelerated pace. The PE-backed CFO not only needs to be equity firm, and Bob is eagerly anticipating the enhance- informed and agile enough to build ment that will bring to both his résumé and his wallet (the those models, he or she needs to be an effective spokesperson latter via a successful exit). The bad for them. news: Bob will be fired. At least, that’s That requires the what the statistics say. Post-deal, PE CFO to be fluent in the investors retain the existing CFO only art of managing up, serv- 25% of the time. ing as a departmental Bob—married with two kids, a dog, ambassador (and some- and a substantial mortgage—has al- times translator) to the ways been considered a competent board and fund sponsor. CFO. He’s well-liked by his peers and Those skills are rarely his junior reports. Perhaps most con- honed outside of a PE- founding, Bob has been credited with backed environment. In playing an important part in building fact, even when the CFO TechX into a company that warranted has experience with pri- pursuit by at least five different PE vate institutional fund- firms. And yet, Bob will still be fired. ing via venture capital, When Bob finds out, he is under- ment. They excel at bookkeeping and he or she will find that the reporting standably apoplectic. He shouldn’t be. accounting but have neither the expe- rigors of the new PE owner change the The writing has been on the wall since rience nor the awareness to recognize landscape dramatically. the inception of the deal. You see, the many other hats private equity Untalented with Talent | On the Bob had already committed one of the CFOs need to wear (and wear well). flip side, some finance chiefs can’t seven deadly PE sins: he functions as a Bookkeeper CFOs lack the strategic manage down. They are equally ill- capable controller, not a strategic CFO. sensibility to help scale the business. suited to a PE environment. The tran- We’ll explore that original sin and They don’t have the necessary window sition to PE-backed CFO comes with the six others that lead fund sponsors into funding, nor do they have the op- a significantly expanded portfolio of to fire existing CFOs. We’ll also ex- erational insights to effectively manage initiatives. He or she is responsible for plore some of the solutions for those lenders. not only the traditional functions of fi- sins—some of which are easier to rec- Batting from Half Court | From nance but also for reporting on a doz- tify than others. the moment a PE fund purchases a en or so financial-reengineering and Just Keeping the Books | The company, the entire game changes. value-creation programs. CFOs who commit this sin have grown You can’t play baseball on a basketball Make no mistake, we’re not talking up in a controller-style finance depart- court. Bob will need to adapt to the about delegation—that’s table stakes.

22 CFO | April/May 2018 Thinkstock We’re talking about the importance of having a critical and unbiased eye toward talent, the ability to anticipate the next phase in the company’s evolution, and the willingness to make changes to the team accordingly. Those who can’t build and mentor the right talent to manage multiple work streams will be invited to make an early exit. Losing the Versus Vote | As with every function, there are tradeoffs and compromises to be made when finding : Rishi Jain : Neel Bhatia : Nick Leopard the right executive to fill the PE-backed CFO chair. The fund sponsor will need seeking significant growth, but it’s do- More often than not, sin is unavoid- to make a series of skill-set choices, or ing so by making explicit trade-offs for able—you can’t invent experience “versus votes,” as we refer to them. every investment and recognizing the you don’t have. For such CFOs, there Two that we think are worth flag- return on every dollar spent. are two critical solutions for avoiding ging are: (1) rearview vs. windshield, While all private capital is categori- Bob’s fate: and (2) industry acumen vs. PE ex- cally similar, the processes of running The Security Equation | There’s perience. With respect to the former, VC-backed versus PE-backed compa- an inverse relationship between execu- the inherited CFO often comes to the nies are fundamentally different. So tive insecurity and willingness to ac- table with significant institutional too is the CFO skillset that needs to be cept support. Bob refused much of the knowledge and an unparalleled ability brought to bear. For many VC CFOs, assistance the PE fund offered, fearing to relate current corporate trends to that’s not an easy transition. it underscored his inexperience. But re- Not Ready for Prime Time | Per- luctance to accept help doesn’t expose From the moment a PE haps the softest skill set to measure deficiencies; it exposes insecurity. And fund purchases a company, and the most difficult to assess is the that is the first and most important red “CFO X factor.” Does the inherited flag for the fund sponsor. the entire game changes. CFO have the polish to represent the CFOs lacking skillsets or experi- You can’t play baseball on company externally? The gravitas to ence must know what they don’t know a basketball court. lead a road show and be the ambas- and embrace the opportunity to learn sador for a firm trading on the public (and adapt) on the fly. They must pro- historical patterns. But the role of the record? actively and confidently seek a net- PE-backed CFO is much more about Perhaps more important, if the fi- work of resources (whether internal making calculated forward-looking as- nance chief doesn’t come to the table or external) that can supplement their sessments than allowing past to serve with those instincts, can he or she knowledge gaps. That is best done be- as precedent. learn and adapt? For far too many, the fore a deal is on the horizon. As for the latter, while there are answer is a firm no. For that reason, Call Me Irreplaceable | Before some sector-specific exceptions, fund the existing CFO is often exchanged demonstrating a willingness to accept sponsors tend to reward executives for an executive with public-company help, CFOs must give themselves the with PE-backed experience at the ex- experience. breathing room to prove their adapt- pense of acute industry knowledge. Of Being Expendable | Finally, let’s ability and value to the fund sponsor. course, if an executive possesses both, get back to Bob. He was fired because Surprisingly, it is the relationships that’s the PE unicorn. he committed the worst of all CFO outside the organization, most notably Undisciplined Dreamer | While sins: he was expendable. But Bob is with the board and financial lenders, many inherited CFOs struggle with the not alone. Of all the C-suite positions, that can prove most valuable. CFO shift to a growth mindset, those who CFOs are the least irreplaceable. Other come from a venture-backed company functions tend to be more plugged into Nick Leopard is the CEO and founder, struggle to adopt disciplined limita- an external network and more rooted and Rishi Jain the managing director tions. The “go big or go home” ethos in the organization’s wiring. The PE and Western region head, at Accordion, of venture capital is antithetical to the firm was looking for a change, and it a private equity financial consulting “at the margins” investment thesis of was easy to fire Bob. firm. Neel Bhatia is a longtime human private equity. Yes, the PE company is Bottom line: Don’t be like Bob. capital consultant.

Courtesy the authors April/May 2018 | CFO 23 TECHNOLOGY RPA Still ‘Scratching the Surface’ More companies are looking into robotic process automation as the technology matures, says an ex-GE finance executive turned RPA evangelist. By David McCann

A year and a half after CFO took an in-depth look at robotic great role, and a great life. It’s like my family there. But I was at a career point process automation (RPA), where does the still-youthful where some new interests were devel- technology stand today? To find out, we turned to a career oping. Also, the company moving to General Electric finance and technology executive who in Boston [from Connecticut last Octo- ber] was a turning point. February cut the cord and signed on for a key role with RPA vendor UiPath. ¶ GE had been Ashim Gupta’s only employer Why is someone with a finance background a good fit since he graduated from Rutgers for the role you are University in 2000. By 2013 he was taking on? finance chief of the company’s water Finance and account- and process technologies unit—where, ing is a big space for he says, he “implemented a lot of cool RPA. And in my finance digital tools.” roles at GE, I very much Then-CFO Jeffrey Bornstein took operated as a COO. My note and, in 2016, asked Gupta to move understanding of how to headquarters and implement such various processes con- change “at scale,” across the company. nect is an asset for com- Gupta became chief information of- panies that are starting ficer of finance and global operations, to look at RPA technol- which included GE’s shared services ogy and thinking about organization. The marching orders how to use it to drive were, “Don’t go for incremental im- returns. provements. Figure out ‘the art of the possible.’” cated. This year, UiPath hired him as How does the usage of RPA break In that role Gupta took ownership of chief customer success officer. (For down between finance-related pro- the company’s big-data program for fi- more on UiPath, see “Digital Reme- cesses and those outside of finance? nance and shared services and the com- dies,” page 29.) I’d say about 40% is in finance and ac- pany’s ERP functionality. He also took Gupta sat down with CFO to pro- counting. The rest is spread across var- over GE’s RPA program, shortly after a vide a new look at where RPA stands ious other processes. Attendant bots supply deal was struck with UiPath. in early 2018. An edited version of the within call centers, to record customer Over the next two years Gupta be- discussion follows. information and process forms, are a came intimately acquainted with the large piece of the pie as well. subtleties of RPA technology, which in In coming to UiPath, were you its basic form is designed to automate motivated most by the new job, How would you characterize the repeatable processes by mimicking or the opportunity to flee GE? current extent of RPA’s penetration computer keystrokes made by humans Oh, it’s a new adventure. It was really into companies? that perform the processes. He saw the hard for me to leave GE, despite all the Even with the strong growth it has ex- technology becoming more sophisti- chaos there. I had a good network, a perienced over the past two years, I’d

24 CFO | April/May 2018 Thinkstock say it’s still in the early stages. Compa- tools like IBM’s Watson. Companies that started using [RPA] nies that started using it two years ago But integrating AI with two years ago have picked off some have picked off some low-hanging fruit your own data to help and gotten proofs of concept. Midsize bots make better deci- low-hanging fruit and gotten proofs and smaller companies are now look- sions, even in a crude of concept. Midsize and smaller ing at it. way, is becoming more companies are now looking at it. At GE, we started by using bots common. It’s within the for five processes. The goal for 2018 grasp of a lot of businesses. teracting with desktop applications. is more than 200 processes, and we UiPath, for example, doesn’t just still felt we were just scratching the It seems that almost every software mimic application interfaces. For many surface. When you’re talking about vendor is touting AI capabilities. applications we use the actual user a shared services organization with Might AI have the potential to swamp interfaces. The subtle difference there more than 12,000 [full time–equivalent RPA out of existence with turnkey is that it’s easier for an accounts pay- employees, or FTEs] crunching mil- products that incorporate both AI able clerk, for example, to grasp. There lions of transactions daily, it’s at a very and RPA? are also differences in the scalability of low penetration rate still. It’s a risk. But the first rounds of RPA interaction with software and adapting [Increasing usage] is as much about are about developing muscle, and the to security requirements. getting the overall organization’s head AI companies I’ve worked with are around the idea that RPA is a tool for more interested How much of what RPA vendors everyone as it is about figuring out in trying to add provide is product versus service— how to apply it at scale. brainpower than working with customers to optimally replicating the deploy bots? What are some of the most sophis- muscle-building. Most of it is product, because we’re ticated processes that existing RPA Who will inte- dealing with customers at scale. That’s technology can handle if a company grate the brain why we work closely with distribution wanted to use it for that? and the muscle is partners [like technology consulting My favorite example is export controls. a larger question firms and professional services firms]. GE sends a lot of equipment to a lot of than worrying RPA companies have different outlooks countries. That requires dealing with : Ashim Gupta about AI vendors. on how to spread that distribution of parts classifications for export con- products and services. Some exclusive- trols requirements and creating cus- You mentioned that even small ly do product sales and leave all the tom forms so the parts can get through companies are looking into RPA. What implementation work to partners. countries’ customs agents quickly and is the opportunity for them? We do play a part in helping com- efficiently. Small companies do of course have a panies succeed in driving implementa- We’ve applied RPA for that, togeth- lesser FTE opportunity than do big tions, but we do it very selectively. In er with applying some light artificial ones. But I’ll give you a small example. those cases we ask what kinds of use intelligence. It’s sophisticated because A friend who has a doctor’s office is cases they’re looking at and talk about you need to integrate with a lot of ap- starting to explore RPA; it can make what the roadblocks might be. plications. The benefits go beyond processing insurance claims easier. So reducing FTEs, to fewer customs pen- even on a small scale, where you don’t Is RPA usually a corporate alties and better on-time delivery to take out any FTEs but you get more ac- procurement, or is it more driven customers. curacy and efficiency and make a bet- by individual business units? RPA can also be applied to complex ter environment for employees, small At GE we generally did more central- processes like services accounting and businesses can definitely use RPA. ized purchasing, for two reasons. First, classifying contractual risks. Those are a proliferation of applications creates things we’re experimenting with, with Is RPA a commodity, with the various a lot of complexity in terms of infra- success. vendors essentially selling the same structure and security requirements. technology? Second was GE’s big shared-services Are RPA vendors themselves develop- Yes and no. Can companies mimic RPA shop, which highly targeted RPA for a ing and providing AI tools, or do you technology more easily than they can number of processes. interface with outside tools? mimic a big-data platform or an ERP? But I’m seeing both approaches; it’s The latter. We’re at the early stages of The answer is yes. But developing bots probably a 50-50 mix. Both have their figuring out how to integrate with AI involves some subtle things about in- merits. CFO

Courtesy UiPath April/May 2018 | CFO 25 ACCOUNTING Justifying Judgment When Recognizing Revenue Here’s how to address challenges when applying FASB’s new principles-based model for revenue recognition. By Eric Knachel

The Financial Accounting Standards Board’s new revenue ect’s progress, deciding how to measure progress is also a judgment call. recognition standard aims to improve the accuracy and One company might use a physical relevance of financial results by shifting from a rules-based site assessment to estimate how close model to a principles-based model. That is generally viewed the project is to completion. Another might calculate progress based on costs as a positive development, since it gives a company more incurred. For example, if a company latitude to reflect the real-world complexities and nuances had purchased the required materials and the cost of those ma- of its business. However, one signifi- terials represented 40% cant challenge that arises is the issue of of the total estimated judgment versus consistency. costs, the project would Under a principles-based model, be considered 40% com- companies may use more judgment plete—and the associat- when deciding how to account for varied revenue would be rec- ous types of transactions, instead of be- ognized—even if limited ing forced to apply hard-and-fast rules construction activity had that might not fit the actual economics yet to occur. Depending of the situation. However, such judg- on the situation, either of ments can vary widely, raising the pos- the approaches might be sibility that different companies will re- acceptable. port different accounting results when Alternative use. presented with a similar set of facts. Similarly, when a manu- Although some level of variation facturer is custom-build- may be considered acceptable under recognizes revenue for a book when ing something for a specific customer, the new accounting standard, compa- the retailer accepts delivery. However, the timing of revenue recognition may nies need to tread carefully, making publishers often restrict a book from hinge on the concept of “alternative sure their judgments can be justified. being sold until its official release date, use.” If the item being manufactured which raises the question of when the could be readily resold to a different Real-World Examples transfer of control actually occurs. Is customer (for example, if the first cus- There are myriad situations where it on the delivery date, when the re- tomer backed out of the contract), then judgment can influence how a compa- tailer takes physical custody? Or is it it is considered to have an alternative ny accounts for revenue under the new the release date, when the retailer is use, and revenue would be recognized standard. Specific examples include allowed to sell the book and generate a when control is transferred to the cus- the following: profit? Under the principles of the new tomer. However, if the item cannot be Transfer of control. Under the revenue recognition standard, this is a readily resold (or used for some oth- new standard, product revenue is rec- judgment call. er valuable purpose), revenue would ognized when control of the product is Measure of progress. Although be recognized incrementally over the transferred to the new owner. For ex- revenue for construction projects is course of the build process. ample, a publishing company normally typically recognized based on a proj- Of course, judgment comes into

26 CFO | April/May 2018 Thinkstock play when deciding whether some- valuable input and knowledge, “Companies thing can be “readily” resold or redi- and when appropriate seek need to tread rected for another use. If no additional guidance from them in getting cost would be incurred to make the authoritative direction from the carefully, making product resalable, then the answer is Securities and Exchange Com- sure their judg- clearly “yes.” However, if the required mission and FASB. ments can be cost of rework would be more than 2. Consider alternatives. justified.” zero, then what is the cutoff point? Companies sometimes fall into —Eric Knachel, senior 10%? 20%? 50%? Since there are no the trap of applying judgment partner, Deloitte & Touche hard-and-fast criteria, this situation and then thinking their conclu- calls for considerable judgment. sion is the obvious and only answer. understand the significant revenue Encourage a healthy and constructive judgments that were made, and the ba- Managing the Challenge internal debate, focusing on alterna- sis for those judgments. This can help The first important step is to under- tives that best reflect the substance of foster a better understanding of why stand the challenge and acknowledge it the transaction. Also, once the compa- a particular accounting treatment was exists. Beyond that, here are four steps ny has reached a decision, constantly used, and how revenue numbers com- companies can take: remind yourself that the answer isn’t pare with those of other companies. 1. Seek input and clarification black and white. Although the new revenue recog- from others. Look for guidance from 3. Document your judgments. nition standard allows a significant the AICPA, which has established 16 When making decisions and applying amount of judgment, that does not industry groups to help resolve these judgment, be sure to document your mean any and all judgments are ac- kinds of difficult accounting issues. reasoning and judgments along the ceptable. Different judgments might be Participate in informal peer groups way. Trying to connect the dots from acceptable in some cases, but for other within your industry to try and reach a memory later is a lot less reliable—and instances similar facts should result in consensus on the “right” approach (or a lot less reassuring to regulators. similar judgments. CFO an agreement that different approach- 4. Provide robust and transpar- es and answers are acceptable for the ent disclosures. Include information Eric Knachel is the senior consultation issue in question). Tap into auditors in the company’s financial statements partner for revenue recognition at De- and external advisers as sources of and related disclosures so readers can loitte & Touche LLP.

of 20 to 25 participants that included should establish a set of guidelines to Help With audit committee members, manage- follow when preparing and present- Non-GAAP ment, investors, lawyers, and auditors. ing non-GAAP measures. Guidelines The result of the conversations was can, for example, help in deciding on The Center for Audit Quality a concise document, “Non-GAAP Mea- the treatment of new transactions or recommends best practices sures: A Roadmap for Audit Commit- events within non-GAAP measures. for non-GAAP presentations. tees,” that was released in March. Of Audit committee disclosure | direct interest to CFOs are some rec- There was no consensus among round- The use of non-GAAP metrics ommended best practices: table participants on whether disclos- remains under close scrutiny by Disclosure controls | Establishing ing non-GAAP policies, or even merely regulators, even while investors and disclosure controls specific to non- disclosing that the company has one, analysts lean ever-more heavily on GAAP measures could enable compa- would be a good practice. “Given the the measures. With that backdrop, the nies to mitigate risks, support sound current regulatory environment and Center for Audit Quality undertook decision-making on their reporting, the fact that non-GAAP measures are a mission to educate audit commit- and drive more consistency and trans- important to investors, there could be tees on leading practices for exercising parency in preparing and presenting benefits to an audit committee volun- their roles as overseers of companies’ the metrics, CAQ says. The controls tarily disclosing that the company has financial reporting. should be documented and robust non-GAAP policies (but not necessar- CAQ held three roundtable discus- enough to facilitate testing. ily the relevant details of those poli- sions in 2017, each with a diverse roster Non-GAAP policies | Companies cies),” the report states. | DAVID McCANN

Courtesy Eric Knachel April/May 2018 | CFO 27 2018 Financial Topics Include: With an agenda geared to CFOs as well as Leadership Forum executives in leadership roles in finance, this forum will feature thought-provoking sessions on: • Leading your finance teams to broaden their skills Los Angeles, CA beyond reporting on past financial results to establish overarching performance goals May 22, 2018 • How CFOs extend their influence beyond finance by establishing partnerships with human resources, sales, Explore how CFOs take the lead in establishing IT, and other areas of their companies a culture of collaboration and performance • Preparing companies for economic, regulatory, and po- improvement. litical developments that will have the greatest impact on how they do business RSVP Online to Attend! (Tickets are complimentary, but limited) Speakers Include: http://www.argyleforum.com/2018cfola [email protected] Paul LaQuerre VP, CFO Marketing and Sales MGM Resorts International

Arianna Ozzanto CFO Screen Actors Guild and the American Federation of Television and Radio Artists Tech Companies To Watch 2018 Digital Remedies These 20 vendors offer compelling products that address longstanding points of pain for enterprises.

Because IT investment is clearly ramping up, hordes of tech companies are vying for mind- share. Seeing through the blizzard of pitches to discover the really compelling, difference-making solutions is difficult. That’s why we bring you the second annual edition of CFO’s Tech Companies to Watch. In assembling this roster of 20 vendors, we uncovered a breadth of technologies that would be valuable to finance chiefs. At the same time, we also discovered a wealth of innovation going on in “traditional” finance-related tech categories. 

Thinkstock April/May 2018 | CFO 29 For example, organizations work? There’s a company on our capabilities. But the descriptions looking to improve their hir- the list addressing that too. on the following pages should provide ing processes (and who isn’t?) If those solutions sound too a clear idea of whether these tools de- will want to experiment with a Tech exotic, rest assured the list serve a closer look—and maybe merit Companies talent acquisition tool that we also includes the latest and being part of your organization’s digital to Watch unearthed. Executives in need 2018 greatest in accounts payable transformation. of a virtual assistant to sched- automation, corporate per- ule meetings (without creating formance management, and The company profiles were written by a yards-long trail of emails) will find a other classic, vital categories. freelance writers Keith Button and Bob solution also. How can a blockchain- Testing the quality and reliability of Violino; deputy editor David McCann;

based product reduce corporate paper- these companies’ products is beyond and editor-in-chief Vincent Ryan. 

PYMETRICS person. Having perfect grades and test Matchmaker scores does not Data seems to be the backbone of most corporate mean you’re a per- decision-making these days, so why not throw the hiring pro- fect fit for all jobs.” cess into the mix? Pymetrics, a growing startup that landed By applying arti- its first clients in 2015, is on a mission to displace the résumé ficial intelligence to as the first point of contact between a job candidate and a the test results, she potential employer. Why? Because, Pymetrics says, résumés Pymetrics test games adds, Pymetrics “can trigger biases in those reviewing them and hinder employers filter through thou- from hiring the best candidates for the job’s duties. “We believe there are sands of data points, Here’s how the Pymetrics process works. First, a client multiple roads to success whereas someone company decides what types of positions it wants Pymet- looking at a résumé rics to help it fill. Then the company selects at least 50 of its and multiple kinds of can only pick up on existing best performers in each of those role types to play intelligence,” says Piche. a few.” Hiring biases a series of 12 online test games. related to a candi- Pymetrics (The games are based on well-es- date’s name, age, previous employers, and colleges attended tablished neuroscience research.) can be overcome via the system. Product category: Talent acquisition Instead of answering questions, the A person could be a great fit for a role he or she has never software employees engage in various activi- had before, notes Piche. That’s important today, as employ- Year founded: 2013 ties designed to assess cognitive ers typically believe there aren’t enough qualified candidates Headquarters: and emotional traits like risk toler- for their vacant positions. “Résumés reflect only past infor- New York ance, reaction time, pattern recog- mation, so they don’t help in those situations,” the CFO says. Employees: 65 nition, impulsivity, focus, memory, The requirement that clients have 50 high performers in and fairness. each role to be filled play the test games is necessary for Then, candidates for the posi- building the behavioral profile that correlates with success tions the Pymetrics client is trying in that role. That means Pymetrics is targeting large compa- to fill play the same test games. nies—clients include Accenture, Burger King, and Unilever— Finally, artificial intelligence al- but not just large ones. For example, even midsize companies gorithms match up the traits dis- commonly have call-center staffs numbering in the hundreds. played by the client’s star per- Interestingly, the test games are not tailored to specific formers with those exhibited by role types. Every candidate for any position plays the same candidates to determine which 12 games. Marie-Eve Piche, job seekers are best suited for While Piche notes that Pymetrics is growing fast, collect- CFO of Pymetrics particular roles. ing enough data to be confident that good results can be rep- “We believe there are multiple licated over time requires patience. To date the company has roads to success and multiple kinds of intelligence,” Pymet- worked most extensively with Unilever, and very successfully, rics CFO Marie-Eve Piche tells CFO. “What makes a great she says. “But people are asking us, ‘What will it look like five accountant is very different from what makes a great sales- years down the line?’ We don’t have that information yet.”

30 CFO | April/May 2018 Courtesy Pymetrics Squeezing bias out of the hiring process serves a social tlety that Prattle takes purpose as well as a business one, of course. Under a part- into account involves us- nership with the Rockefeller Foundation, four companies have age of the words “moder- agreed to use Pymetrics to find job candidates from pools of ate” and “modest.” How unemployed young people. people use those words And selling companies on a brand-new way of doing some- makes a huge difference thing is always a challenge, especially when it’s an activity in financial markets, ac- that’s steeped in traditional practices. But with many compa- cording to Peterson. “In nies reinventing their business models, the climate might just Federal Reserve a straight-up sentiment be right for open-minded thinking on the talent-acquisition analysis, they could both front. ◗ DAVID McCANN Prattle upped its be positive and they’d

game considerably have the same weighting,”  last September, he says. “But in financial when it began selling market settings, they can access to analyses of have significantly differ- PRATTLE ent meanings.” the earnings calls of Prattle upped its game Figuring Speech 3,000 U.S. companies. considerably last Septem- What corporate executives say during earnings calls ber, when it began selling matters, obviously. That’s why sentiment analyses exist: access to analyses of the earnings calls of 3,000 U.S. compa- investors want to gauge whether the language CEOs and nies that had been publicly held for at least four years. The CFOs use on a call is positive, negative, or neutral. But Prat- data has revealed some interesting trends. For one, when a tle, a small company that’s starting to make a big splash in company’s CFO speaks for a larger percentage of the call, the investment research arena, is providing what could be compared with the CEO, there is less short-term volatility characterized as “sentiment analyses on steroids.” in the company’s share price. The trend holds true for both In late 2016, Prattle launched its first product: an ad- positive and negative volatility. vanced analysis of speeches and other communications by Prattle’s methodology seems to be on the money. A the U.S. Federal Reserve and 19 other central banks. Its cli- third-party research firm, Lucena Quantitative Analytics, ents—asset managers, hedge funds, investment banks—use performed portfolio backtests using Prattle data to guide the data to guide their investment decisions. trading strategies. The backtests, which factored in realistic Prattle’s algorithms calculate positive or negative scores trading conditions such as transaction costs, involved “buy- in terms of their predicted impact on subsequent short- ing” stocks of companies that Prattle scored as positive and term market movements of various asset classes. The analy- holding them for one month before “selling.” sis looks at words, sentences, phrases, and the relationships Applying that strategy to stocks included in the Dow between them to generate a score Jones Industrial Average from the beginning of 2013 Prattle indicating the speech’s relative through mid-September 2017 resulted in a 112% return pre- dovish or hawkish quality. mium over the Dow’s actual performance. The same strat- Product category: Automated That’s not all. Using machine egy, applied to Russell 1000 stocks from the beginning of investment research learning and natural language pro- 2012 through mid-September 2017, scored a 44% return pre- Year founded: 2013 cessing, Prattle analyzes how the mium. The Sharpe ratios for the two portfolios, represent- Headquarters: language patterns in a speech dif- ing risk-adjusted return, were 1.33 and 1.46—“huge returns St. Louis fer from those the speaker used in over the benchmarks,” says Peterson. Employees: 20 previous addresses. The analysis “At its core, the typical sentiment analysis takes all the tracks how markets moved after positive and negative words in a communication, and the the earlier speeches and, if lan- net difference is the score,” Peterson says. “Our version is guage patterns are different in the much more mature.” new speech, adjusts the expected Prattle may not need many clients to profit from its market movements accordingly. groundbreaking products. The company’s main assets are With each new speech the algo- the algorithms, and they are developed and refined by a rithms are designed to grow more small number of people. Startup funds were negligible, al- accurate, says Brian Peterson, though last year the company landed $3.3 million in seed Prattle’s chief operating officer funding for its expansion into equities. Now the company Brian Peterson, and de facto finance chief. is working toward expanding its analyses to company press COO of Prattle An example of a language sub- releases and stocks listed internationally. ◗ D.M.

Top, Wikipedia; bottom, courtesy Prattle April/May 2018 | CFO 31  particularly suited to multi-entity organizations. “I think you need to have a few hundred pay- TIPALTI ments a month to start feeling the pain. If [the vol- Tech ume is] smaller than that, your admin or your ac- Companies Payables Specialist countant will be able to handle the burden, but once to Watch What company doesn’t want to improve its 2018 you hit a few hundred a month, then it becomes too working capital? One step toward that goal involves risky, painful, and expensive,” Amit says. seeking efficiencies in accounts payable processes. A key to Tipalti’s success is the ease with which a But the area has been somewhat neglected, especially for client’s suppliers can sign up. The system also provides vis- companies that don’t have the capital to piece together best- ibility into a payment’s status and notifies suppliers when of-breed treasury management solutions or invoice process- their payments go out. A wizard walks suppliers through tax ing systems. forms. And if a supplier wants to change payment methods, Instead, their overworked accounts payable staffers type no work on the part of the payer is required. in supplier information manually, collect tax forms via email For clients, setup can be fast, says Amit. Some organiza- in a mad scramble at year-end, and log-on to five or six bank tions can sign up on a Monday and portals to execute payments. Even “Midmarket make payments on the platform by Tipalti the “top performers” in a bench- companies Friday. The more complex imple- marking analysis from AQPC have mentations take longer. Twitter, for Product category: don’t have the Accounts payable to manually key in 42% of their example, uses “every bell and whis- automation invoices. resources to go tle that Tipalti offers,” and imple- Year founded: 2010 It’s a void in automation that all out solving mentation took six weeks from the Headquarters: Chen Amit, co-founder and CEO of this problem,” time Tipalti won the request for San Mateo, Calif. Tipalti, saw as an opportunity. “Mid- proposal to when Twitter made its Employees: says Amit. 118 market companies don’t have the first payment on the system. resources to go all out solving this Tipalti raised $30 million in a series C round in February, problem,” Amit says, and instead do which should help in defending its market territory by finding what they would rather not—throw areas to add value. The company introduced a purchase or- more and more people at accounts der matching capability in January that adds machine learn- payable. Even large companies have ing on top of invoice processing. this problem: some are using as For being a leader in automating a large chunk of the pay- many as 22 full-time-equivalent ment workflows, Tipalti merits watching. ◗ VINCENT RYAN

employees in AP per $1 billion of revenue, according to APQC.  Chen Amit, Tipalti (Hebrew for “I look care CEO of Tipalti of it”) is a global payables automation solution that claims it can auto- UIPATH mate 80% of the work. The product isn’t the only horse in the running, but it seems better-equipped and more enterprise- Hot Bot ready than services like Bill.com. There’s been a triad of leading vendors since the Tipalti’s open API application allows users to make pay- term robotic process automation (RPA) was coined several ments across 190 countries and in 120 currencies, and those years ago: Automation Anywhere, Blue Prism, and UiPath. users can offer suppliers six different forms of payment (Pay- Last year CFO named Automation Anywhere a “tech com- Pal, prepaid debit cards, wire transfer, U.S. ACH, global ACH, pany to watch” because prospects for RPA were soaring and local bank transfer). and Forrester Research had recently ranked the company The Silicon Valley firm has racked up many big-name tech first in three important categories: strength of technology, clients, including Amazon, GoDaddy, Roku, Indeed, and Twit- strategy, and market share. This ter. And its solution seems to be scaling well: men’s fashion UiPath says year, things may be shaping up dif- website Touch of Modern implemented Tipalti when it had it will “easily” ferently. Prospects for RPA are still $6 million in revenue; it’s still using the platform at $150 mil- have 1,500 soaring, but in particular UiPath’s lion in revenue. And, according to Robert Israch, Tipalti’s chief enterprise star appears to be on the rise. marketing officer, the company has not hired another AP per- While all three leading vendors son since adopting Tipalti. customers by are experiencing strong growth, Ui- About 250,00 payees use the Tipalti platform, and it has the end of Path’s leap over the past 12 months processed as much as $4.5 billion of payments in a year. It’s 2018. has been eye-popping. In early 2017

32 CFO | April/May 2018 Courtesy Tipalti the company had fewer than 100 enterprise customers for Much of the cash infusion will be used to develop ma- its robot-building software platform—putting UiPath far chine learning and artificial intelligence capabilities, says behind its major competitors. But that number has since UiPath. That could help the company in a potential future swelled to more than 700. battle between RPA and AI vendors to provide turnkey Officials at the Romania-based company claim it will products integrating both types of automation. “easily” have 1,500 enterprise customers by the end of 2018. “[Leading] AI companies typically have higher valua- They also say it has become “the most widely adopted en- tions and are better financed than the RPA companies— terprise RPA platform.” However, cautions Forrester ana- with the exception, now, of UiPath,” says Le Clair. ◗ D.M.

lyst Craig Le Clair, “We have no way to reliably assess that.” Like many RPA vendors, UiPath is increasingly ham-  pered by the limited number of companies qualified to implement RPA platforms—third parties, like Accenture, Deloitte, and Ernst & Young. UiPath, though, has a singular EXABEAM approach to mitigating the problem. The company offers free downloads of its platform for individuals, companies Threat Spotter with less than $1 million in annual revenue, and educational Organizations are looking for any advantages they can organizations. Anyone who down- find to better defend themselves against increasingly so- UiPath loads the platform is not only a phisticated cyber criminals and other security threats. One potential future paying customer avenue that’s become essential to good security is leverag- Product category: Robotic process but also a potential future imple- ing data and the latest analytical tools to detect and thwart automation menter—and, according to UiPath, attacks before they do damage. Five-year-old Exabeam is one Year founded: 2005 during 2017 there were more than of a number of companies aiming to help customers do just Headquarters: 125,000 downloads. that. The company offers security intelligence and manage- Bucharest, Romania “With free online training avail- ment products that support threat detection and security Employees: 600 able from our UiPath Academy, incident response. the response has been tremen- The Exabeam Security Intelligence Platform combines dous,” says company founder and a data lake for unlimited data collection, machine learning CEO Daniel Dines. More than for advanced analytics, and auto- 36,000 people registered for cours- Exabeam mated response “playbooks” for es last year. handling the many kinds of security Product category: Dines, says Le Clair, is “a very Security information incidents that enterprises experi- smart guy who has created a good and event ence. The market Exabeam plays in culture within the company.” That management is called security information and culture values being straight- Year founded: 2013 event management (SIEM), and Nir Daniel Dines, forward and generally not over- Headquarters: Polak, Exabeam CEO, considers the CEO of UiPath promising what can be delivered. San Mateo, Calif. other products in the market to be Employees: 190 The company offers “a very strong “broken.” platform,” according to Le Clair, who last year rated its “They charge by the volume of technology as second-best in the RPA field, a hair behind data being stored, effectively pe- Automation Anywhere. Le Clair says UiPath “may do bet- nalizing customers who are try- ter” in his 2018 report on the sector. ing to be more secure,” says Polak. The UiPath Studio platform is especially touted for its “They are notoriously inaccurate, ease of use. It’s based on Microsoft’s Windows Workflow creating literally hundreds of false Foundation, which gives users “a highly intuitive, Visio-like alarms every day. That wastes the process automation experience,” says Dines. The compa- time of valuable [IT] employees. ny’s best-known differentiator is Computer Vision, a prod- And they only find problems; they uct that allows customers to automate Citrix virtual ma- Nir Polak, don’t automate.” chine environments quickly and precisely. CEO of Exabeam Exabeam charges a flat rate Investors have taken notice of the pluses. In March Ui- based on company size, not data Path announced a Series B funding of $153 million led by volume. It contends that applying machine learning—the Accel Partners—which solely provided the $30 million the same technology that has enabled advances in autonomous company secured in its first funding round, in 2017. Google driving—to cybersecurity provides more accurate informa- investment arm CapitalG was one of two other venture tion for busy security analysts. capital firms that supported the Series B. Given the massive volume of events that are logged at

Courtesy the companies April/May 2018 | CFO 33 companies because users access corpo- The key to an effective digital assistant is specializa- rate networks multiple times a day from tion, and that’s what’s driving a wave of new digital assis- several devices, humans can’t keep up, tants focused on completing specific tasks very efficiently. Polak says. “We need machine intelligence Tech A company to watch in this area is x.ai. Why? Think about a Companies to lend a helping hand,” he contends. And task you perform in your job often enough that it robs some to Watch with the shortage of security talent, any- 2018 of your productivity. How about scheduling meetings and thing that enables organizations to auto- phone calls? X.ai has created an artificially intelligent digi- mate and repeat standardized processes tal assistant to significantly reduce can help, he says. x.ai the time spent on that activity. Apparently, the security marketplace agrees with Exa- Product category: A user simply creates an email beam’s approach. The company concluded a record year in Digital assistant with brief instructions—whom 2017, with billings growing 250% over 2016. Year founded: 2014 to meet with, when and where, The company debuted in the 2017 Gartner SIEM Mag- Headquarters: and in what medium. He sends it ic Quadrant as a “visionary” vendor. One of Exabeam’s New York to the digital assistant, which is strengths, Gartner said, is that its architecture is “big-data Employees: 53 linked with his activity calendars oriented” and it supports a variety of deployment options (in- and will know when he is avail- cluding on-premises, infrastructure-as-a-service, and hybrid). able. The assistant, called Amy That’s not to say there aren’t challenges lying in Exa- Ingram or Andrew Ingram (user beam’s path. For example, IBM, choice), will then handle most of “Every day we Hewlett-Packard Enterprise, the subsequent details: contacting have hard, honest Intel Security, and Splunk are other meeting participants, re- discussions to help all competitors, and that’s not sponding to requests for informa- even a complete list. “We are tion, and rescheduling meetings if us fix problems taking on a big market, with necessary. and move ahead established players, so we Dennis Mortensen, It may sound simple, but actu- faster,” says Polak. have to execute,” Polak says. CEO of x.ai ally it’s not. Company founder and “We also need to hire a lot of CEO Dennis Mortensen employed good people, and the hiring market is tight right now. But dozens of programmers over four years to figure out how usually, when people hear about our growth and tech, their to use machine learning to make the system work. Efforts eyes light up.” to commercialize the product didn’t begin until mid-2017. Exabeam was built by seasoned security and enterprise “If every human being were extremely rational and wrote IT veterans from companies such as Imperva, ArcSight, and without any ambiguity, the whole thing would be a lot eas- Sumo Logic. Their collective industry knowledge has created ier,” Mortensen says. But of course, they don’t. They lack a company culture of continuous innovation and collabora- clarity, and use slang and idioms. tion, Polak claims. “We are also a very transparent culture,” As an example of a problem Amy must solve, imagine he says. “Every day we have hard, honest discussions to help you’re working late and send an email to someone after us fix problems and move ahead faster.” midnight asking to chat “first thing tomorrow.” Amy has With cyber criminals adapting quickly to enterprise de- been taught to understand that, when humans say that, they fenses, moving swiftly will be important. Up next for Exa- beam: “tightening integrations within the platform, enhancing the user experience, and increasing emphasis on the

cloud,” Polak says. ◗ BOB VIOLINO 

X.AI Executive Assistance Everyone has a digital assistant, whether it’s Siri, Al- “Amy is among a set of highly special- exa, Cortana, or the less endearingly named Google Assis- tant. But what they can effectively help you with is limited. ized, vertical AI assistants that do only That’s why an iPhone, for example, offers access to a store one thing, but do it extremely well,” says with 2.5 million apps in addition to Siri. Mortensen.

34 CFO | April/May 2018 Courtesy x.ai don’t mean 24 hours later; they mean 7 or 8 hours later. tions through the use “And there are tens of thousands of examples like that,” says of new and emerg- Mortensen. There is, of course, a failure rate, but humans ing technologies. To scheduling meetings make mistakes too, he points out. wit, in 2018 Emagia Mortensen says he got the idea for the service after he introduced Gia, a sold his previous software company and recalled spending digital finance assis- an enormous amount of time the year before the transac- tant that leverages tion setting up meetings. “I went back into my calendar, and artificial intelligence. it was a staggering amount: 1,019 meetings in that one year, Gia offers cognitive 2012,” he says. “Even sadder, there were 672 reschedules.” Emagia’s Gia and human-like con- On average, he says, setting up a meeting between two versational AI and parties requires about 3.5 emails on each end. It takes just “AI has to be trained computational AI ca- under 5 minutes per email to open it, read it, flip to anoth- on specific use cases pabilities, along with er tab, open a calendar, check availability, and craft a reply and becomes better with continuously evolv- email. So, each person spends about 15 minutes on sched- time. Managing [the ing job skills to per- uling a meeting. If a company is paying a salary of $65,000 need for] instant grati- form specific tasks to someone who schedules an average of 10 meetings per related to finance week, each month it costs the company $300 worth of the fication is a challenge,” operations. person’s time to just schedule meetings. says Gundavelli. The software Mortensen plans to add languages other than Eng- platform is designed lish, but he’s not yet thinking about branching out beyond to help finance executives, shared services teams, and opera- scheduling meetings. “Amy is among a set of highly special- tions staff by increasing efficiency and enhancing decision ized, vertical AI assistants that do only one thing, but do it support in areas such as credit, order entry, receivables, pay- extremely well,” he says. ◗ D.M. ables, and treasury.

Finance chiefs, for example, can ask Gia for an update  on the week’s total cash received in North America. Gia can “provide quick information and perform repetitive tasks,” like providing an accounts receivable update on a large custom- EMAGIA er. Gia can send to or retrieve information from SAP, Oracle, PeopleSoft, Teradata, and other systems. Alexa’s Rival A subsidiary of India’s publicly held Technvision Ventures If you’ve never heard of Emagia, you have plenty of (formerly Solix Technologies), Emagia has seen rapid growth company. For more than a decade, Emagia has been deliver- both in customer base and revenue, according to Veena Gun- ing order-to-cash automation platforms for global finance. Its davelli, founder and CEO. The company has seen expanded flagship product, Enterprise Re- sales and distribution around the world with technology part- Emagia ceivables Management Suite, auto- ners such as Conduent, Cognizant, TechM, NTTData, Trianz, mates the management of credit, and Solix. Product category: Order-to-cash receivables, collections, deduc- One of the biggest challenges Emagia has is servicing automation tions, cash flow forecasting, cash fast-growing product deployments efficiently, Gundavelli Year founded: 1998 application, and billing and pay- says. To keep pace with growth the company continues to Headquarters: ments for large global companies. forge partnerships with global systems integrators. Santa Clara, Calif. And the company’s Advanced Another challenge is finding and hiring people with AI Employees: 50 Analytics for Receivables offering skills at a time when demand for such talent exceeds the sup- provides pre-packaged descriptive, ply. “To address this gap we have partnered with institutions predictive, and prescriptive analyt- such as U.C. Berkeley and top-class engineering institutes in ics for managing the credit-to-cash India,” Gundavelli says. “We also have a strong upskilling pro- cycle and customer payment be- gram for our engineers.” havior. But that’s not why CFO is Finally, managing the hype surrounding AI can be difficult. naming Emagia a tech company Many mistakenly consider the technology a remedy for all to watch. business problems. “AI has to be trained on specific use cas- Emagia says it aims to maxi- es and becomes better with time,” Gundavelli says. “Manag- mize the financial performance of ing [the need for] instant gratification is a challenge.” Veena Gundavelli, its customers by driving efficiency Emagia understands that it has to remain innovative in CEO of Emagia and intelligence in finance opera- order to succeed. It not only faces competition from other

Courtesy Emagia April/May 2018 | CFO 35 fintech companies, it also has Microsoft, Google, and Amazon nipping at its heels, as they are giving Cortana, Google Assis- tant, and Alexa, respectively, capabilities Tech Companies suited to businesses. So far, though, Alexa to Watch can only perform general tasks such as 2018 setting appointment reminders, controlling conference room settings, or notifying IT of an equipment issue. Cortana’s use cases, too, are relatively simple. But both organizations, as well as Google, are aiming to build an application ecosystem around their products. Whether Emagia can take full advantage of its head start is an open question. Everyone in Emagia “is motivated by the fact that our [products] drive financial efficiency for our “If you’re trying to run a large business- customers in their business operations,” Gundavelli says. planning process on Excel … you really “We describe our culture [as being] ‘entrepreneurial and customer centric,’ characterized by innovation, creativity, calcu- don’t have time to step back and say ‘Let’s lated risk-taking, and empowered associates. And we focus do this differently,’” says Johnson. on providing a positive customer experience before and after the sale.” ◗ B.V. the cloud, it isn’t possible to build planning models that are

powerful enough or that can refresh all relevant data, John-  son says. “You can’t be collaborative in a spreadsheet environment; you have individuals with a model on their laptop doing a piece of the work. It’s just not possible to inter- ADAPTIVE INSIGHTS connect all of those pieces effectively, to keep them up-to- date,” he adds. Spreadsheet Slayer Adaptive Insights is riding an impressive growth streak In the eyes of Jim Johnson, CFO of Adaptive Insights, with its Adaptive Suite product. Deloitte named the com- the software-as-a-service (SaaS) company is accomplishing pany to its 2017 Technology Fast 500 Ranking—its fourth nothing less than putting financial planning and analysis straight year on the list—as Adaptive tripled revenue be- into the hands of the masses, or at least the executive team tween its 2013 and 2016 fiscal years. In its fiscal year ended members of its customers. Jan. 31, the company passed the $100 million mark for annu- Most CFOs and CEOs would agree, Johnson says, that al recurring subscriptions under contract. the people in a company who are Gartner’s 2017 Magic Quadrant report for cloud-based Adaptive Insights closest to the business are best at corporate performance management software rates planning. “Finance typically runs Adaptive Insights among the market leaders—along with Product category: Corporate perfor- the process, but it’s a collabora- Anaplan, Host Analytics, and Oracle—with customer mance management tive process across the company, satisfaction in the top quartile and high scores for sales Year founded: 2003 and it should be,” he says. “All the execution and cloud experience. Headquarters: executive staff members want to The biggest challenges for Adaptive’s growth come from Palo Alto, Calif. be more involved in the planning potential customers who don’t want to give up their Excel Employees: 500 process. They don’t want it to be spreadsheets, Johnson says. In fact, on user review website a finance exercise where they get G2 Crowd, some customers complain of a lack of integra- a spreadsheet and they’re asked tion between Adaptive and Excel, saying that exporting out to input a bunch of numbers and of Adaptive to Excel requires manual intervention. send it back. They want to par- Says Johnson: “There’s a characteristic among finance ticipate; they want to see the [key people who like to control things that says: ‘I’ve always performance indicators]; they done it this way, I’m in control, and I know how to do it.’ want to see how the plan develops There’s a little bit of inertia around change. It’s almost self- and evolves.” fulfilling: If you’re trying to run a large business-planning The appeal of cloud-based process on Excel, you spend so much time on modeling, Jim Johnson, planning software like that from consolidation, fixing errors, and getting things updated that CFO of Adaptive Adaptive Insights is that it al- you really don’t have time to step back and say ‘Let’s do this Insights lows for collaboration. Without differently.’” More frequently on G2 Crowd, users comment

36 CFO | April/May 2018 Courtesy Adaptive Insights on how Adaptive cuts budgeting and forecasting time and network doesn’t play a big makes what-if scenario planning easy. role in security anymore.” Adaptive is focusing its growth strategy on four areas: The end points are growth through verticals; growth internationally, which ac- changing cybersecurity’s counts for about 20% of its revenue; improvement of scal- focus also. “The devices we ability features, to win large enterprises; and expansion into have in our hands, our iOS sales planning. and Android devices, are That last growth area is a natural progression for Adap- more secure than the end tive, because sales operations are such a key part of a com- devices [the National Secu- pany’s overall business and financial planning, Johnson rity Agency] had four years says. “The sales component is the most complicated and ago,” says Oberheide. the hardest to keep aligned with the financial plan, because Duo is able to check you’re typically modeling at a detail that’s significantly the “security health” of deeper,” he says. ◗ KEITH BUTTON a mobile device attempt-

ing to sign on to an appli-  cation and block the de- Duo’s mobile authentication vice (and tell the user to update the device) if it’s DUO SECURITY “Your corporate deemed risky. It can also Easier Authentication network doesn’t play designate some devices as a big role in security “trusted” so they can get Duo Security, a cloud-based cybersecurity company, faster access. In addition, dispenses with the traditional points of access control: at the anymore,” says customers can see a dash- network level and on users’ devices. Instead, it places tools Oberheide. board that shows whether between the user and the corporate application to verify us- the device has unapproved ers’ identities. For example, with Duo’s multi-factor authen- software on it, if a passcode is set, and other attributes. tication product, when a user logs in he must approve push With more than 10,000 customers—including Altegra notifications to his smartphone or Health, Bolton NHS Foundation Trust, Etsy, Facebook, the Duo Security enter a time-based, one-time pass- University of Michigan, and Yelp—the company handles more code. That means Duo’s corpo- than 300 million user authentications per month. Product category: Cloud-based access rate clients have less of a need for Duo’s pitch to chief financial officers: its product is easy security bolt-on security products for wired to deploy, can replace several other security tools at once, Year founded: 2010 networks, Wi-Fi, laptops, or mobile and is hospitable to employees or contractors who bring Headquarters: devices, says Jon Oberheide, co- their own devices to work, says Sydney Carey, Duo’s CFO. Ann Arbor, Mich. founder and chief technology offi- The company boasts a Net Promoter Score—a measure of Employees: 600 cer of Duo. customer loyalty—of 68. (An NPS above 50 is considered The company, which surpassed excellent.) $100 million in annualized custom- It’s not uncommon for Duo to deploy its tool for a client er subscription revenue in 2017, is with 7,000 to 10,000 users over a weekend, Carey says, and capitalizing on a changing focus easy deployment means faster return on investment due to in the cybersecurity market, from fewer requests for help-desk support and the potential dis- bolted-on to built-in security tools. placement of other security measures. Some clients have re- The trend—deploying security placed several of their point products—such as mobile device measures and control at the access management tools, strong authentication, single sign-ons, layer instead of the network layer and network access control software—by implementing Duo. Jon Oberheide, or on the end points—will have a Duo customers commonly buy the application when CTO of Duo Security dramatic effect on the cybersecu- they’re upgrading or moving their IT systems, or parts of rity market, customer budgets, them, to the cloud. “We’re kind of riding that wave of cloud and tools deployed and retired over the next 5 to 10 years, transformation to help drive our business,” CFO Carey says. Oberheide says. News of data breaches, especially when the breach happens “The traditional data center and corporate network are at a peer company, is also a big motivator for new Duo becoming less and less relevant,” he explains. Access is hap- customers. pening directly on mobile devices, sometimes over public To continue growing, Duo is taking a “land and expand” Wi-Fi, to a cloud application, he points out. “Your corporate approach: get a customer that buys a Duo app for a limited

Courtesy Duo Security April/May 2018 | CFO 37 number of users to like it so much that it deploys the app traction with blockchain applications for company-wide. Duo is also focusing on enterprise custom- corporations is somewhat startling. ers—those with more than 5,000 employees. They make up In August 2017, Delaware passed a law Tech about half of Duo’s business currently. (which Symbiont helped write) recogniz- Companies “We used to essentially build castles for our security pro- to Watch ing blockchain as an acceptable form of grams—build really high walls and hope that nobody ever 2018 recordkeeping for Delaware-registered got inside,” Oberheide says. “Companies made lots of invest- corporations. They can issue shares and ments in security products, built really strong castles. But manage ownership records using Sym- many of those existing security investments don’t bridge to biont’s blockchain technology. Delaware’s integration of its the new world.” ◗ K.B. systems with Symbiont is still in progress, but when com-

plete it will enable end-to-end automation of corporate se-  curities administration, from inception to maturity. 10 Symbiont is also “on a very long roadmap” with index fund giant Vanguard Group to develop several blockchain SYMBIONT products. The first is an effort to automate the distribution of equity index data. When Vanguard receives informa- Building on Blockchain tion about corporate actions that requires it to rebalance A lot of people talk about applications for block- its passive funds, the process requires “massive amounts chain like they talk about renovating their basement: the of internal reconciliation, and is fraught with errors due to talk doesn’t result in much action. But Symbiont, a startup, the use of database repli- is earning revenue and actually succeeding in applying “We were looking cation and screen scrap- blockchain to specific, concrete problems in the world of for a way to bring ing,” says Smith. Success- finance. ful distribution with the Blockchain is the much-hyped, digital distributed ledger markets back to their Symbiont blockchain has technology that records transactions chronologically and natural state, which already been tested for publicly without a central admin- is decentralized and two quarters with data Symbiont istrator. It powers the cryptocur- distributed,” says provider CRSP. rency bitcoin, but many entre- Finally, Symbiont, along Product category: Smith. Blockchain and smart preneurs are trying to adapt it for with several partners, has contracts other business uses. tested a working solution to automate the servicing of syn- Year founded: 2013 When one of the founders of dicated loans. With blockchain, in theory, a syndicated loan Headquarters: Symbiont, CEO Mark Smith, first facility could be supported from origination to payoff. Be- New York set out, he was looking for a tech- sides involving multiple participants on a peer-to-peer ba- Employees: 38 nology to solve some of the market sis, “a [syndicated] loan is a living instrument—cash-flow weaknesses exposed during the payments change from month to month, for example,” says 2008 banking crisis. Among them Smith. “It’s a homerun for blockchain and smart contracts.” were the dangers of counterparty Symbiont has plenty of competitors in the race to re- risk. “We were looking for a way to alize the promise of blockchain. They include the IBM bring markets back to their natural Hyperledger project and even the bitcoin and ethereum state, which is decentralized and blockchains. But many of the open-source projects, in par- distributed,” says Smith. ticular, are “not ready for prime time in financial markets,” After having blockchain ex- says Smith. plained to him by mathematicians, Indeed, Symbiont’s biggest battle may be in just get- Mark Smith, Smith realized it presented an op- ting executives to understand what blockchain is (only 3% CEO of Symbiont portunity to build “peer-to-peer of CFOs claim to) and to “fight misrepresentations in the markets in which you don’t have media and in general.” Says Smith: “Many people way over- to have an intermediary and can create true transparency state what blockchain technology can do—almost like it’s a without counterparty risk.” snake oil, which it’s not.” By 2014, the company was developing what Smith calls The rash of initial coin offerings of cryptocurrencies, “a novel and purpose-built” proprietary blockchain and which Smith calls “a horrible black eye on our ecosystem,” smart contracts solution for certain areas of the capital is another obstacle. “Now when you talk about blockchain markets. (A smart contract is a computer protocol designed or bitcoin, it gets lumped in with those ICOs, and we’re to digitally facilitate, verify, or enforce the negotiation or back to where we were in 2013, when we were trying to con- performance of a contract.) Four years later, Symbiont’s vince everyone that bitcoin wasn’t just for criminals.” ◗ V.R.

38 CFO | April/May 2018 Courtesy Symbiont 10 More Worth Watching

THE FOLLOWING COMPANIES ARE STRIVING TO BE MAJOR DISRUPTORS IN SOME KEY  ENTERPRISE TECHNOLOGY CATEGORIES.

lock the earnings it needs to go public. 150,000 business customers. It has Dubbed “Project Orion,” it’s the first ratcheted up the stakes in 2018 with its enterprise performance management new NextOS, which unifies fragmented system designed for business users enterprise communications technolo- rather than finance professionals. gies—phone, CRM, chat, surveys—as well as analytics into a single platform. 4. Spoke The aim: souped-up customer sentiment analysis. CATEGORY: Communications A startup in the truest sense, Spoke 8. Acumatica was gearing up for general availability of its product in early April, following CATEGORY: Enterprise resource planning pilots. The workplace request platform With its cloud-based ERP system aimed simplifies internal ticketing for every- at small and midsize businesses, Acu- one from IT to HR. It uses AI and natural matica has a host of competitors. But 1. Catalant Technologies language processing to route and re- none of them, arguably, is growing CATEGORY: On-demand business expertise solve internal requests, while learning faster than Acumatica, which Nucleus Research recently ranked first in us- Consultants may spend days or weeks with each ask. The system integrates learning about a client’s industry or with Slack, email, and text. ability among all ERP platforms—in- project type. Catalant, launched in 2013 cluding enterprise market leaders SAP as HourlyNerd.com, matches subject- 5. FloQast and Oracle. Those two lead in function- matter experts with organizations in ality, but in usability Nucleus rates Acu- CATEGORY: Accounting need of specific expertise. The compa- matica ahead of notable competitors ny uses a “smart matching algorithm” FloQast close-management software NetSuite, Epicor, and FinancialForce. to scan its 50,000-expert database and provides a single location for activities make recommendations. A dashboard related to closing the books, with vis- 9. Paycor lets users find out more information on ibility for everyone working on the proj- CATEGORY: Payroll/HR candidates, as well as schedule inter- ect. It claims to shorten closings by an views and compare proposals. Post- average of three days by automating It takes guts to battle a dominant mar- engagement, they can rate an expert’s repetitive, time-consuming processes ket player, but Paycor has been looking performance. and integrating with both ERP systems up at ADP since 1990 with its payroll and Excel. Among FloQast’s hundreds and HR services for small and midsize of customers are Twilio, Nutanix, Zil- companies. Things have changed along 2. Signifyd low, and The Golden State Warriors. the way, with the once-tiny Paycor hav- CATEGORY: Fraud protection ing sustained meteoric growth for a Like other kinds of cyber attacks, e- 6. RapidMiner decade-plus and achieved annual rev- commerce fraud is a deepening prob- enue exceeding $200 million. Highlights CATEGORY: Predictive analytics lem. Signifyd offers an antidote with an of 2017 included new data visualization eyebrow-raising feature: Customers— RapidMiner’s analytics platform for and learning management solutions. online retailers—are guaranteed 100% data science teams is well-positioned, payment on pre-approved customer given the exploding development of 10. Medallia orders, even when a credit-card pro- AI and machine learning applications. CATEGORY: Customer experience vider demands a charge-back. There’s Gartner rates RapidMiner a best-in- management a complete shifting of responsibility, class performer for its ease of use and as Signifyd (not its customers) de- its “wisdom of crowds” guidance for Customer experience initiatives are hot. cides whether to approve each order, developing a predictive analytics pro- Enter Medallia’s cloud-based customer based on the plethora of data sources cess. The guidance is based on input feedback management platform, which it mines. from the platform’s hundreds of thou- helps companies collect and analyze sands of users. customer interactions from the web, social media, SMS, and other channels. 3. Host Analytics 7. Nextiva The insights can be distributed across CATEGORY: Corporate performance an organization in real time, and built- management CATEGORY: Cloud-based VoIP in workflows help employees close the This top-tier provider of cloud-based Nextiva’s claim to fame used to be its loop with customers. The information CPM solutions still hasn’t pulled the affordable, user-friendly, enterprise can also be used to identify coaching trigger on its long-expected IPO, but phone system. A dozen years after opportunities and experiment with in- perhaps its latest gambit could units founding, Nextiva reportedly has novative ideas through A/B testing. CFO

Thinkstock April/May 2018 | CFO 39 40 CFO | April/May 2018 SPECIAL REPORT Cyber Risk

Thunder in the Cloud Migration to the cloud is causing a buildup of cyber risks that could leave customers financially exposed. By David M. Katz

Insurers dread what they like to call “aggregation risk.” The like application-level controls and, in part, identity and access management. threat arises when a large number of companies face the However, customer data is never the same catastrophic peril concurrently, multiplying the poten- cloud provider’s province, which “in tial losses in an insurer’s portfolio. The issue gained promi- the event of a breach makes [the customer] most liable for any third-party nence in the wake of the 9/11 attacks, when many companies damages or responsible for regulatory in the same location lost people, saw property destroyed, action,” according to Lloyd’s/AIR. And few, if any, cyber insurance and suffered lengthy business inter- er financial losses of about $7 billion products offer the kinds of payouts or ruptions from a single event. to $15 billion, according to a report, the type of coverage companies will Flash forward nearly 17 years and “Cloud Down,” by Lloyd’s of London need if a massive cyber event in the the problem is cropping up again, but and catastrophic risk modeler AIR cloud threatens their ability to function. in a different form. This time, the ag- Worldwide. gregation refers to the vast accumula- Rather than focusing on just the Fundamental Shift tions of cyber risks faced by compa- security of their own company net- The sources of potential losses assume nies seeking efficiency and safety by works, CFOs and risk managers must a wider footprint as companies become automating some or all of their opera- now consider the threat of existing in a more dependent on outside informa- tions in the cloud. What could happen much wider “attack surface” (as cyber- tion-technology providers, who them- to such companies if one or more of risk management experts call it), which selves are part of a closely intertwined the large providers that have cornered multiplies the chances of being hit. tech supply chain. And the stunning the cloud-computing market gets hit Cloud platforms have limited re- speed with which this supply chain has with a devastating cyber attack or suf- sponsibility. For companies using in- arisen hasn’t given corporations much fers a system failure? frastructure-as-a-service, the cloud time to erect cyber defenses or devise To be sure, nothing comparable to provider is only responsible for core backup plans adequate to the risk. the loss of the more than 3,000 lives infrastructure security, like storage In a 2015 report, McKinsey & Co. and $10 billion in property and infra- and networking at the physical level. noted a “fundamental shift” by corpo- structure damage caused by the Sep- Software-as-a-service providers, in rations from the traditional approach tember 11 attacks has hit corporate contrast, are responsible for more, of maintaining computers and servers America. But the aggregation of risk in on-site to outsourcing those functions the cloud creates an attractive target Cloud customers would to cloud-services providers. Citing for hackers and a place where small like providers “to assume that shift, McKinsey predicted that the mistakes, like a flub during a routine unlimited liability for percentage of global companies us- maintenance upgrade, can wreak wide- outages and any resultant ing traditional IT infrastructure would spread havoc. drop from 77% that year to 43% by A cyber incident that takes a top- business interruption,” 2018. Over the same period, companies three cloud-services vendor offline for says the Lloyd’s/AIR using the publicly available cloud for three to six days would spawn custom- Worldwide report. at least one IT task, the firm predicted,

Thinkstock April/May 2018 | CFO 41 SPECIAL REPORT Cyber Risk would jump to 37% from 25%, based Better in the Cloud the company’s cloud-computing ser- on the survey of about 800 CIOs and Contrary to the claim that custom- vice, provides protections for third-par- other IT executives. ers should be worried about security ty cloud applications—demonstrating While McKinsey hasn’t updated its in the cloud, cloud-services vendors concern, perhaps, for the security of numbers, it’s obvious that many com- maintain that they offer customers a the broader IT supply chain it inhabits. panies are putting the management of big step up in security compared with Indeed, there’s no evidence that exceedingly costly cyber risks in the the days when businesses were manag- cloud providers are skimping on things hands of third-party providers. ing their own cyber risks. Ann John- like co-located hardware, redundant In the universe of tech companies son, a vice president in Microsoft’s en- networking and power, and business servicing the publicly available cloud, terprise cybersecurity group, contends continuity plans. But the big cloud in- in which users buy slices of server that businesses operating outside the frastructure providers are not invul- time in a multi-tenant environment, cloud have a significant flaw: “their nerable to bugs, breakdowns, and hu- there are just five providers or so. As tools to protect, detect, and respond man errors that can have broad-scale of February 2018, according to the are not integrated.” effects. Azure, Google Cloud, and AWS RightScale State of the Cloud Report, Because of that, the amount of time have all experienced major outages or 64% of 997 IT professionals surveyed between when such companies detect disruptions in the last few years. Their said their companies were running a cyber attack and when they recov- length ranged from a couple of hours to applications on Amazon Web Servic- er from it, known as “attacker dwell three days. In February 2017, the AWS es; 45% on Microsoft Azure; 18% on time,” is much too long, according to Simple Storage Service (S3), which pro- Google Cloud; 10% on IBM; and 6% Johnson. “The cloud changes the en- vides hosting for images, entire web- on Oracle. tire approach to one that democratizes sites, and app back ends, experienced a That market concentration increas- cybersecurity, giving experts and the severe, four-hour disruption that affect- es the likelihood that a hacking attack resource-constrained the same powered some websites for up to 11 hours. or a major outage experienced by one ful tools,” she says. or more of the top providers could hurt Johnson notes that the $1 billion Mi- Small Steps many among the burgeoning number crosoft spends yearly on cybersecurity The fear of absorbing the costs of such of companies whose networks or appli- includes investments in malware pro- interruptions has so far led services cations are housed in the cloud. Cloud tection and threat intelligence centers providers as well as underwriters to vendors tend to minimize corporate aimed at guarding its customers. Azure, step gingerly into the business of in- concerns about that. They argue demnifying companies. Accord- that aggregation risk is really a ing to the Lloyd’s/AIR report, concern of insurance companies A Variety of Threats while cloud customers would likely to have a large number of The following hazards could lead to like providers “to assume unlim- at-risk clients in their portfolios, prolonged cloud service downtime. ited liability for outages and any and not a systemic risk to cloud resultant business interruption,” providers or their customers. Lightning strike on a data center vendors want to restrict and cap “Among insurers, there is Flooding and earthquakes their liability. widespread recognition of the Even if a major cloud pro- Accidental cutting of fiber line to ISP potential for extreme accumu- vider bears some responsibil- lated losses from a cyber event, Intentional destruction of power grids ity for a service outage, affected be it from an attack on a cloud Distributed denial-of-service attack on cloud customers are very rarely com- provider or payment processor, provider pensated. The customer is more a power grid attack, a massive Intentional deletion of a large number of virtual likely to receive credits for a data theft aggregation event, [a machines by a malicious insider certain amount of free usage. hacker] exploiting a weakness in Human errors introduced during routine And where the legal burden lies a commonly used software ap- maintenance or upgrades is unclear. Determining which plication, or any one of a num- Accidental stoppage of a core cloud service, jurisdiction’s laws apply during ber of other nightmare scenari- such as storage a particular downtime event os,” according to the Lloyd’s/AIR Failure of environmental management systems of a cloud service would be report. But cloud providers seem considerably complex, says to lack that recognition. Source: Lloyd’s/AIR Worldwide Lloyd’s/AIR.

42 CFO | April/May 2018 While some companies might A Small Universe agement Society. The services be able to individually negoti- the policies can pay for include Amazon Web Services is used by a ate indemnification provisions in majority of enterprise IT professionals to forensic investigation, public their cloud-computing contracts, run applications in a public cloud. relations, reputation and crisis “the bulk of the costs will be on management, breach notification, the insureds themselves,” says Amazon Web and restoration of proper credit 64% Elissa Doroff, an underwriter and Services monitoring for hacked clients. product manager for cyber liabil- Leery of losses, though, the Microsoft Azure 45 ity at XL Catlin, a large commer- insurance industry has acted to cial insurer. (Microsoft did not Google Cloud 18 limit its exposure to the cloud. respond to a question about the Indeed, the insurance industry kinds of indemnification or in- IBM Cloud 10 today would foot the bill for only surance, if any, it provides for its about 20% of the business effects VMware Cloud 8 cloud clients.) on AWS of a major cloud vendor’s three- Not that insurers have been to-six-day event. eager to pay for the bulk of those Oracle Cloud 6 While some policies may cov- costs, either. Thus far, insurers er the income a company loses Alibaba Cloud 2% have managed to hive themselves when its network goes down, off from the vast magnitude of 0% 20 40 60 80% they haven’t typically been trig- cyber perils, avoiding excessive gered when the downtime results Source: RightScale survey of 997 IT professionals, exposure to ransomware attacks 2018 State of the Cloud Report from a problem experienced by a and data breaches experienced cloud-computing vendor or other by their corporate policyholders. third-party IT service provider. So, while many U.S. compa- Up, Up, and Away Now, however, insurers are hot to nies buy insurance to cover cy- Thirty-five percent of businesses plan to sell “contingent business inter- ber risks, the coverage under increase their spending on public cloud ruption” coverage that reimburs- such policies is severely limited. services in 2018 by 50% or more. es a company for earnings lost Many cyber insurance policies when a vendor gets hit, players in Growth in public cloud spend include low limits on the dol- 40% the cyber insurance market say. lars they will pay out after a loss, 31% There is an opportunity for long waiting periods after a cy- 30 the insurance industry to help ber event happens before cov- businesses prepare for and re- 18% 18% erage kicks in, and “a multitude 20 17% 16% cover from extreme scenarios of of exclusions,” according to the cyber risk aggregation, says the Lloyd’s/AIR study. 10 Lloyd’s/AIR report. But that’s not For example, Equifax incurred a priority yet. Meanwhile, in the $164 million in costs related to its 0% scenarios run by Lloyd’s/AIR, large data breach in the summer Up Up Up Up less No smaller companies in particular 100% or 50% to 20% to than change of 2017, but only $50 million was more 100% 50% 20% or fare badly, since they are more offset by insurance. This year, decrease likely to use the cloud to avoid Equifax is projecting about $200 building computing infrastruc- Source: RightScale survey of 997 IT professionals, 2018 State million of net incremental IT and of the Cloud Report ture in-house. In addition, they data security project costs and rarely buy cyber insurance. legal and professional fees, of So, while movement to the which insurance is expected to cover alone cyber insurance is typically trig- cloud may “democratize” cyber secu- $75 million. gered by claims stemming from either rity, it is definitely not distributing the The laser-like specificity with which a security failure or unauthorized ac- risks evenly: in the event of a severe insurers have zeroed out their expo- cess to the policyholder’s network. disruption to or an attack on a cloud sure to serious cyber losses has result- Such policies may cover costs stem- services platform, the bulk of the fi- ed in a confusing array of highly spe- ming from business interruption, cy- nancial losses could be borne by the cific “standalone” policies (referred to ber extortion, data loss, theft or fraud, businesses that can least afford it. CFO as such because they stand apart from regulatory fines, and lawsuits arising the cyber coverage offered in tradition- from a data breach, according to a 2017 David M. Katz is a freelance writer al property-casualty policies). Stand- report by the Risk and Insurance Man- based in New York.

April/May 2018 | CFO 43 BUSINESS OUTLOOK Duke University/CFO Survey Results

Looking Up Buoyed by the Tax Cuts and Jobs Act, U.S. CFOs project sizable increases in earnings, capital spending, and technology outlays this year. By Chris Schmidt

The Tax Cuts and Jobs Act may be getting a lukewarm Among companies that plan to increase investment in reception from consumers, but CFOs are clearly over the the United States, 53% said the reduced corporate income moon about the lower corporate income tax rate and other tax rate was the reason. Forty-four percent indicated the provisions in the new law. In the first quarter, CFO opti- immediate expensing of capital expenditures enacted un- mism in the United States climbed to its highest level since der the new law was driving their change in U.S. investment 1996, and finance chiefs laid out their concrete plans for plans. Full expensing of qualified capital expenditures lasts spending the tax cut windfall, which should be a shot in the for only five years, however, and 37% of companies indicat- arm for the U.S. economy. ed they would shift investment so that it occurs sooner. According to the results of the latest Duke University/ Due to tax reform, CFOs expected the effective (or av- CFO Global Business Outlook survey, which ended March erage) tax rate for U.S. companies to fall by about 5 per- 2, more than 40% of U.S. companies plan to boost wages centage points, to 18.8% from 24%. The lower U.S. tax rate and 38% to increase hiring in 2018 because of the recent tax increases the after-tax return on investments, so it’s no cuts. About 36% will increase domestic investment and 31% surprise that about half of Canadian, Latin American, and will increase cash holdings. And, among companies with Asian CFOs responding to the Duke/CFO survey said that defined benefit pension plans, 29% said they will boost pen- the reduced rate makes the United States a more attractive sion contributions. place to do business. Sixty-six percent of U.S. CFOs said corporate tax cuts will help their companies over the next three years, with Record-High Optimism 36% saying the overall benefit will be medium or large. The CFO optimism index in the United States increased to Only 14% rated the overall effect as negative. “Some benefits 71.2 on a 100-point scale in the first quarter, an all-time high. of tax reform are already being felt, while others will unfold Optimism among finance chiefs remains elevated around over the next several years,” said John Graham, a finance the world, anticipating strong global economic conditions professor at Duke’s Fuqua School of Business. this year. “Our analysis of past results shows the CFO optimism index is an accurate predictor of future economic growth and Economic Optimism Rises Outside hiring, therefore 2018 looks to be a very promising year,” Asia and Japan said Graham. However, “promising” doesn’t mean without Finance executives rate their optimism about challenges. their domestic or regional economy* With the United States at or near full employment, the proportion of firms indicating they were having difficulty 80 hiring and retaining qualified employees remained at a two- decade high, with 45% of CFOs calling it a top concern dur- 71.2 70 ■ U.S. ing the past quarter, up from 43% in the last period of 2017. 67.0 ■ Europe At the median, U.S. companies planned to increase employ- 62.5 ■ Asia 61.0 ment by 3% in 2018. 60 60.4 (except The tight labor market also continues to put upward Japan) pressure on wages, with wage inflation now listed seventh 52.9 ■ Latin 50 America among the concerns of U.S. CFOs. U.S. companies expect ■ Japan to pay higher wages, with median wage growth of about 3% ■ 40 Africa over the next 12 months. Wage growth is projected to be Q1 ‘17 Q2 ‘17 Q3 ‘17 Q4 ‘17 Q1 ‘18 strongest in the technology, energy, and service/consulting *On a scale of 0–100, with 0 being least optimistic industries. Africa Latin America 44 CFO | April/MayJapan 2018 Asia After difficulty finding the right Cam Harvey, a founding director of the employees, the next biggest concern survey, who teaches a blockchain inno- among U.S. CFOs in the past quar- vation course at Duke’s Fuqua School ter was the cost of employee benefits, of Business. “China is doing nearly $10 which 33% of finance chiefs cited. Reg- trillion in mobile payments, while the ulatory requirements, government poli- U.S. is barely over $100 billion. Most cies, and data security rounded out the of the big innovations over the past 25 top five. years have originated in the U.S., but this time is different. There is a lot at Adopting Innovation stake and, right now, it looks like China The first-quarter Duke/CFO survey will be eating our lunch.” asked a series of special questions 66% Twenty-seven percent of survey re- about blockchain and cryptocurrencies. U.S. finance executives spondents said they have already re- Blockchain is the distributed ledger who said tax cuts will help duced their finance workforce or will technology widely expected to dis- their companies over the within five years because of finance rupt business models as it is adopted next three years technology, or “fintech,” advances. for verifying ownership and allowing However, more than 70% of finance secure and nearly instant transactions executives said they do not expect to with low fees. cut finance employees because of fintech. “Finance back- Seventy-eight percent of U.S. finance chiefs respond- office jobs are low-hanging fruit for the fintech disruption,” ing to the survey said they don’t expect to be affected—or Harvey said. “It’s logical to expect that 70% of firms will cut aren’t sure how they’ll be affected—by blockchain. Seven- finance employees, not the other way around.” teen percent said their firms will be affected but haven’t yet In contrast to the United States, nearly 20% of European adapted their business model in response. Four percent said CFOs said they understand blockchain technology well, up they are working to adopt blockchain, and just 1% said they from only 8% who said they did two years ago. have already adopted the technology. Only 3% of U.S. CFOs claimed to understand it. Global Bumps “The U.S. needs to wake up in the fintech space,” said Elsewhere around the world, economic optimism among CFOs in Canada dropped to 59 from 64 (on a scale of 0 to 100). Capital spending is expected to shrink and hiring will Company Confidence Declines In be flat in 2018, but earnings are expected to grow above 7%. Most Regions Optimism in Europe remains high at 67, although CFOs Finance executives rate their optimism about in the United Kingdom recorded an optimism level of only their own companies’ financial prospects* 60, thanks to ongoing distress over Britain’s forthcoming exit from the European Union. CFOs across the pond es- 80 timated capital spending will grow about 5% in 2018, with employment growth flat. 70.1 ■ U.S. Optimism in Asia (except Japan) fell to 61 from 66.3 last 70 68.1 ■ Latin 65.9 quarter. Economic uncertainty, access to capital, difficulty America 61.2 attracting qualified employees, low employee morale, and 60 ■ 61.3 Africa currency risk were top concerns in the region. Still, the Jap- ■ Europe anese economy remains on a prolonged expansion streak, ■ Asia 50 the longest in 30 years. Capital spending was expected to 47.1 (except Japan) grow about 10%, and employment 3%, in 2018. ■ Japan 40 In Latin America, CFO optimism about the domestic Q1 ‘17 Q2 ‘17 Q3 ‘17 Q4 ‘17 Q1 ‘18 economy continued to rebound in most countries, rising to *On a scale of 0–100, with 0 being least optimistic 70 in Mexico, 69 in Chile, and 62 in Brazil. Economic un- Africa certainty was the top concern among CFOs in the region. Despite the positive trend of higher prices for key commod- Source for all charts:Latin DukeAmerica University/CFO Magazine Global Business Outlook Survey of finance and corporate executives. Responses for the ities, Latin American economies expanded less than expect- Japan current quarter include 263 from the U.S., 63 from Asia (outside of Japan), ed at the end of 2017. While the region is expected to benefit 16 from Japan, 106 from Europe, 86 from Latin America (including Mexico), and 47 from Africa.Asia from strong global growth in 2018, most governments in the Europe region still face large budget deficits. CFO US

Wikimedia Commons April/May 2018 | CFO 45 FIELD NOTES Perspectives from CFO Research The Revolution Will Be Digitized Driven by intense competition and heightened customer expectations, CFOs are making a serious long-term commitment to digital transformation. By Josh Hyatt

Here, without question, is the most appealing, step-by- and up to $5 billion. One-quarter of surveyed executives step path for those companies seeking to carry out a were from companies with revenues between $1 billion and digital transformation: (1) shut down completely; (2) remake $5 billion. Respondents’ industries varied widely. The larg- from scratch organizational structures and internal business est segments of respondents were from financial services/ processes; (3) re-emerge with new capabilities for engaging insurance, auto/industrial/manufacturing, health care, and employees, customers, and investors. wholesale/retail trade. If only that were possible. The absence of any such op- tion in the real world means that senior finance executives Taking the Longer View must keep their businesses running—taking orders, ship- More than two-thirds (69%) of survey participants said their ping products, posting revenue—while simultaneously re- company planned to increase its investment in digital trans- shaping core operating and business models. As daunting formation in the coming year. Four in 10 surveyed executives and draining a task as digital transformation can be under (39%) said that investment would increase by at least 10%. those circumstances, most senior finance executives say The majority of surveyed respondents (56%) reported that they are ready to tackle it. senior leadership at their organizations viewed digital trans- That, at least, was the collective sentiment among re- formation as critical to long-term business success. spondents to an online survey, “2018 CFO Insights on New Such a forward-looking mindset contrasts sharply with Technologies,” conducted by CFO Research in collaboration recent years, when short-term digitization initiatives spread with Grant Thornton. The survey drew 304 responses from from function to function, sequentially remaking areas such senior members of the finance function, ranging from CFOs as customer service, human resources, and sales support. to directors of finance. Companies are now committing themselves to pursuing More than half of the surveyed executives worked for broader-based, long-term transformations. The reason? businesses with annual revenues of more than $100 million Among finance executives, at least, there is a distinct understanding of how imperative it is for companies to keep a competitive edge. Among the executives planning increases FIGURE 1 in digital investment, 41% said they are seeking to differen- Two years from now, which enterprise goals tiate themselves from the competition, while 52% are striv- do you believe will most strongly influence ing to just stay even. But the enterprise goal that finance your organization’s strategy for investing in (or continuing to invest in) digital transformation?* executives believe will most strongly influence their organizations’ investment in digital strategy going forward is improving the customer experience. (See Figure 1.) Improved customer 39% experience The surveyed executives, it seems clear, are acutely aware of how dramatically digitization can drive value, en- Improved operational 38 abling their companies to create much richer customer ex- performance periences. When asked to share the one problem that they Reduced costs 38 most wish technology could solve, executives’ answers most often pertained to serving customers. One surveyed ex- Improved competitive ecutive wished for “simplifying the customer experience.” 33 differentiation Another desired “a set of predictive analytics that guide us to anticipate our customers’ needs so that we can be even Better performance 27% management more proactive, particularly in marketing and sales.” As customers have become increasingly digital-centric, 0% 10 20 30 40% satisfying their heightened demands has turned into a com- *Multiple responses allowed; top five responses shown petitive necessity. By leveraging data-intensive processes

46 CFO | April/May 2018 and platforms, companies can acquire aligned as possible, ensuring that the the nimbleness they need to keep de- entire customer experience progress- signing and delivering more respon- es at as even a pace as possible. sive and personalized customer ex- The company that emerges from periences. Exploiting the full force such a transformation will be much of digital technology, by applying ad- more data-driven, agile, and capable vanced analytics to segment and serve of adapting to new ways of work- customers, can build momentum and ing. Built on a foundation of reliable drive growth. By consistently revisiting and scalable services, such as cloud strategies for giving customers a dy- technology, a company’s infrastruc- namic cross-channel experience, com- ture isn’t so much created as it is as- panies can elevate customer satisfac- 69% sembled, a function of leveraging and tion and forge long-term relationships. blending available platforms. Finance executives who said In the survey, executives expressed Shedding Fear of Commitment their companies planned to concerns regarding both the fun- Digital transformation is more than an increase investments in digital damentals of managing increased investment, it’s a commitment—and a transformation this coming year volumes of data—“aggregating and two-pronged one at that. Not only is making sense of big data,” as one re- technology always advancing, but the spondent put it—and the deeper chal- challenges of managing an organization through such a vital lenges involved in ensuring that the data is useful. transformation are continually surfacing. Broadly, compa- One executive alluded to the scope of transformational nies may have to reorganize by combining individual silos technology by elaborating on the challenge of “improving or by reversing an ingrained tendency toward decentraliza- the overall quality and consistency of data across the busi- tion. While a successful digital transformation is enabled by ness segments around the globe.” Added the respondent, technology, it ultimately requires changes in the habits and “The explanation of why this is critical has not been effec- structures of an earlier analog era. tively communicated, and the potential impact across the No matter the organizational structure, the breadth of the business is not yet understood.” need for digitization is bound to exceed available resourc- Making such issues understood throughout the business es. The IT function, after all, is under pressure to address a is also part of digital transformation, which changes more host of challenges that accompany growth (see Figure 2). than just the nature of the company’s products and services. Therefore, once companies identify opportunities, they To compete in a dynamic business environment, companies need to prioritize them, balancing back-office functions with need to define and keep redefining the set of digital experi- customer-facing activities. The goal is to keep both ends as ences they want to deliver. Rather than a top-down change that a company must implement periodically, digital transformation requires an ongoing adaptability that becomes FIGURE 2 part of a company’s mindset. What are the greatest challenges your IT organization faces as it seeks to support Digital Receptivity enterprise growth?* Instilling digital know-how into an organization means ensuring that employees understand the vision and possess the System complexity 38% necessary capabilities to bring it to fruition. For some companies, achieving that end requires recruiting employees Legacy systems 38 who already possess the needed skills or hiring executives maintenance who can coach current workers in the desired direction. Business integration 37 To enable digitization on a transformative scale, organizations must keep internal communication lines open, as cross-functional groups create shared criteria for success Talent/skills 31 and agree on milestones. A digital transformation, after all, is the outcome of many mini-transformations, carefully Investment budget/ 27% strategy coordinated and strategically aligned. Rather than being constrained by a hierarchy or hampered by rigidity, organi- 0% 10 20 30 40% zations must be imbued with a collaborative culture of con- *Multiple responses allowed; top five responses shown tinuous improvement. CFO

Thinkstock April/May 2018 | CFO 47 THE QUIZ

Hire Learning In the wake of the U.S. corporate tax cuts, about one-third of companies plan to increase domestic hiring. But with workers getting scarce, the fight for talent will dominate 2018. Companies will be pushed to use the latest tools to screen, test, and evaluate talent. How much do you know about job search and hiring trends?

In 2018, what percentage of Americans will be Which interviewing innovation do talent 1 looking for a new job, according to Glassdoor? 5 professionals think will prove most useful to A. 52% companies that are trying to get better at hiring? B. 14% A. Soft skills assessments C. 26% B. Job auditions D. 38% C. Meeting in casual settings D. Video interviews A large majority of workers leave their job for 2 which reason, according to numerous global The use of data is one of the top trends impact- studies? 6 ing how organizations hire. Which is NOT one A. Insufficient compensation of the top uses for data in talent acquisition? B. Poor overall company performance A. Predicting candidate success C. Distrust/dislike of management B. Assessing soft skills D. Lack of appreciation for their work C. Evaluating skills gaps D. Predicting talent supply and demand At what time and on which day of the week 3 do job searches on the Internet and on job Where will artificial intelligence prove most sites peak? 7 useful in the hiring process, according to talent A. Friday, after 3 p.m. professionals and hiring managers? B. Monday, before 11 a.m. A. Sourcing candidates C. Thursday, after 5 p.m. B. Screening candidates D. Wednesday, after 12 p.m. C. Scheduling candidates D. Responding to candidates’ questions Which employee benefit do job candidates 4 want most from a hiring company? A. Profit sharing B. Retirement plan C. Health insurance

D. Flex time

7–A 6–B; 5–A; 4–C; 3–B; 2–D; 1–D; Answers:

48 CFO | April/May 2018 Source: LinkedIn, Glassdoor, Careerbuilder, Gallup | Photo: Thinkstock Raise Your Visibility With Large Enterprise Leaders

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