CFOs at the start of 2023 are holding a tight grip on technology spending as several risks beyond their control threaten profitability.
Forecasts of recession, high inflation, turbulent equity markets, rising borrowing costs, geopolitical tensions and the most aggressive monetary tightening in four decades are compelling CFOs to conserve cash and ensure every dollar spent on technology pays off, according to financial executives and technology consultants.
A recession “is not going to be a surprise to anyone,” Coupa Software CFO Tony Tiscornia said in an interview. “Everyone is battening down the hatches, getting ready for whatever may come in the next year or two years, and most CFOs are hoping for the best but fearing and preparing for the worst.”
Gartner this month cut its projection for 2023 growth in global information technology spending to 2.4% from an estimate of 5.1% just three months ago. It forecasts $4.5 trillion in IT outlays this year, only 2.1% higher than in 2021.
“What every CFO is saying right now is, ‘I don’t want to buy it unless I have a business leader who is sitting in front of me screaming they have to have it,’” Salesloft CFO Chad Gold said in an interview. “It’s this idea of how do you do more with less?”
Weak growth in corporate spending has prompted tech industry giants to slash payrolls. Microsoft, Twitter, SAP and International Business Machines have announced sweeping layoffs in recent weeks. Both Amazon.com and Alphabet plan to cut staff by about 6%, and Meta Platforms in November said it will lay off 13% of its workforce.
Companies outside the tech industry are also coming down from a spending sugar high after years of near-zero interest rates. Focused on growth, CFOs borrowed heavily with a conviction that “profitability is not really what investors are focused on,” Tiscornia said.
Last year the Federal Reserve halted the period of easy money by pushing up the federal funds rate 4.25 percentage points. Fed policymakers have committed to further tightening, and may announce a quarter-point increase in the benchmark interest rate on Feb. 1.
The pullback in stimulus has prompted a change in CFO strategy. During the past six to nine months, “profitability and generation of cash flow have really become as important if not more important than growth to investors,” Tiscornia said.
CFOs in many industries face high stakes as they try to conserve cash without missing out on the newest profit-boosting innovation. Advances in technologies such as artificial intelligence, data analytics and cloud computing can determine whether CFOs lead or lag their peers.
To achieve high ROI from technology, financial executives and technology consultants offer CFOs five tips:
1. Take a technology inventory
CFOs determined to achieve a bigger payback from technology and improve cash flow should start by drawing up a detailed inventory of software, hardware and tech services, the financial executives said. The aim: consolidate and eliminate duplication.
“Take inventory of every piece of technology you have in your company,” Gold said. “Have a list of everything that’s there and sit down with every business leader and ask them what it does.
“You’ll find that there are things and pieces of technology that either one, they don’t know what they have, or two, they can’t even explain what it does,” Gold said.
Many CFOs lack visibility on technology outlays, with scattered groups in the company separately spending without cooperating to find the lowest cost, the financial executives and technology consultants said.
CFOs may find that two or more units in the company bought two different technologies to perform the same task, or purchased the same technology from the same vendor without having negotiated a volume discount.
“Visibility is really key to budgeting during economic uncertainty,” Tiscornia said.
2. Prioritize, postpone spending
Amid increasing forecasts of a brief, shallow recession, many CFOs are reviewing their technology priority list and postponing spending and hiring until the outlook for the economy brightens.
“The stuff that we’re buying right now is the stuff that makes us say, ‘We’ll go backwards if we don’t have this,’” Gold said.
Gryphon.ai, a provider of AI-guided sales intelligence, has decided to continue relying on outside cloud computing consultants rather than add to its current in-house expertise, CFO John Renehan said. It has also postponed buying new back-office infrastructure technology.
“Rather than putting in place new systems this year, we’re really focusing on making sure our Salesforce or Zendesk — they’re all communicating with each other,” Renehan said in an interview. “We’re prioritizing the payback period more than we used to as a component of ROI.”
3. Renegotiate contracts
The prospect of a downturn has added urgency to talks between vendors and buyers over costs, the financial executives and technology consultants said.
“Every negotiation is a little harder these days,” Renehan said, referring to discussions with Gryphon.ai’s customers. “We’re seeing that they’re tightening their belts, some of them have had layoffs, and it’s imperative for us to work with them closely to show how our products are making them more productive.”
Gryphon.ai is also more sharply scrutinizing its costs with “a constant review of every piece of software in the business,” and pushing back against vendors after low returns, Renehan said.
“There’s certain technologies that sales uses where, in my opinion, the providers of these technologies just routinely increase your prices,” he said.
“They’re not in the business like your cloud operator of trying to help you maximize your investment,” Renehan said. “They’re just trying to raise your prices every year.”
Gryphon.ai has identified the best software, and achieved high value in negotiations, by simultaneously running applications from two companies and then choosing the best when the licensing period ends, Renehan said.
When sizing up software, financial executives should pick apart the vendor’s ROI pitch, talking to peer companies selling similar products and contacts at other companies using the software, Tiscornia said.
“Let’s say it’s a lead generation tool for sales,” he said. “I’d want to understand very intimately or have someone on my team understand that calculation of how they arrived at that ROI.”
4. Gather front-line insights
When scrutinizing technology, CFOs should reach out to ground-level staff, as well as department heads and other members of the executive team, the financial executives and technology consultants said.
“A CFO, especially at a time like this, really needs to have a hand on the pulse of the business,” Tiscornia said.
“Usability of software is of the utmost importance — No. 1 from an employee morale perspective,” he said. “You want employees to have solutions that they feel enable them to do their best work, so they feel like the company is investing in them and you can avoid burnout.”
Close consultation with grass-roots staff can yield big improvements in a company’s products, Renehan said. Gryphon.ai’s sales team was the first user of its AI for customer support and increasing sales. “They understand exactly what the product needs, so they helped make the investment decisions,” he said.
5. Bring cloud spending down to earth
Cloud computing will grow more than any other IT category in 2023 and remain as the No. 1 spending target, Gartner said. It forecasts that worldwide end-user spending on public cloud services will surge 20.7% this year to $591.8 billion.
At the same time, concerns about recession and the availability of broader, deeper data on the value of cloud computing has prompted many CFOs to scrutinize their cloud use, according to CFOs and technology consultants.
CFOs are asking, “‘OK, we moved to the cloud and that was great, but have we really been applying financial discipline to it?’” according to Randy Armknecht, managing director for enterprise cloud and global delivery at Protiviti.
At some companies CFOs are refining key performance metrics, such as cost per sale, and compelling their cloud computing providers to commit to a plan for savings extending two years or longer. They are also tracking how closely costs match forecasts.
“Did we forecast that it was going to cost X and it’s costing 2X?” Armknecht said.
Financial executives at some companies have stepped up collaboration with software engineering teams to gain insights on the strong or weak spots in cloud computing, he said in an interview.
With such data CFOs can determine the cost of a sale down to the cent and predict the cost of a project in the design phase before deployment in the cloud, he said. They can also precisely track whether a project has met its target and refine the customer journey, maximizing the value of time spent with the company’s app.
Cloud providers feel more compelled to show value as competition in cloud computing intensifies and customers master the technology, the CFOs and technology consultants said.
“When we first moved our products to the cloud years ago, we didn’t know what we didn’t know,” Renehan said. “You just bought this big block of time up in the cloud.”
“Now the focus is on reducing the costs and increasing our gross margins,” he said, noting that Google Cloud Platform is helping the company identify savings and increase value.
Cloud computing providers in recent years have recognized that “the onus is on them and their transparency in reporting on your spending within their platforms,” Armknecht said. Instead of losing a customer, “they would rather have a customer that works with them to figure out how to optimize spending.”
While highlighting the need to maximize the value of technology investment, the prospect of recession has also underscored the longstanding imperative for scenario planning.
“Conservation of cash is just something that’s in our blood as a CFO, so you’re always looking at that,” Renehan said. “What we’ve done through our budget process is a lot more scenario testing, including for the worst case.”
As technology innovations accelerate, companies also need to focus on the future needs of their customers, the financial executives and technology consultants said.
CFOs “should be thinking about where the customer is going to be and not necessarily just keep funding where they were,” Armknecht said. “Market alignment and customer alignment — that is huge in driving the strategy for funding tech.”