Dennis Gannon is a vice president analyst in Gartner’s finance practice. Views are the author’s own.
While economic optimism – broadly speaking – is on the rise, there remain many stubborn challenges for CFOs to contend with: low growth and productivity malaise, waning pricing power in the face of cost pressures, and increased cost of capital.
Gartner calls these convergent factors the “Deadweight” economy, and it contrasts with a much more favorable economic environment in the decade before the pandemic. In such an environment CFOs are feeling the pressure to manage costs. Yet a decade-long Gartner study of major companies identified a top tier of efficient growth companies that had found a way to take bigger, bolder growth bets and unlock growth even during difficult times.
These companies achieved sustained long-term revenue growth and simultaneous margin improvements even while their peers struggled with economic volatility. The question is how these efficient growth leaders have managed to keep control of costs while still funding the growth plays that have enabled them to outperform their peers.
Growth Ladders and Anchors
Growth ladders are a set of programs, initiatives or incentives adopted by CFOs to drive bigger growth investments. While they aren’t harmful to adopt, they don’t directly address business leaders’ underlying risk aversion that remains, even when they are encouraged to take more risks.
What truly sets apart leading efficient growth companies is the way they seek to mitigate or remove what Gartner calls, “growth anchors.” Particularly in an environment where finance is trying to keep a tight control on costs, the function is prone to creating obstacles that drag on the implementation of growth.
In one case, a technology firm with more than $20 billion revenue created a growth investment committee for business leaders to get funding for big ideas. Yet the process to get in front of the committee was very bureaucratic, involving filling out lengthy business case templates just to be considered, and then needing multiple layers of approval to even get partial funding for a project that was still in the idea stage. For many business leaders, it was much easier just not bothering with growth bets and so ended up working as a growth anchor.
In another example the finance department at a global industrials company was pushing the business for a new product. But when pricing analysis around a potential product was needed to move forward, the company would send the matter to a far-flung center of excellence where it was 14th in line and might come back in a fortnight. Or when a new product required hiring engineers it would get hung up in corporate taking forever to find good candidates. Finance was urging the business to grow and yet at the same time was starving the business of the capacity it needed to grow.
Other examples of growth anchors include processes that impede action: finance builds out management reports to help support decision-making around growth projects, but by the time decision makers get the data in their hands, it’s too late to be useful. Also, short-termism: every monthly or quarterly business review is all about ‘why are you 4% over budget on this’ and ‘why was last quarter’s forecast 7% off’ – all short-term issues that distract from longer-term risks and opportunities. But starting to think about removing anchors instead of just following the processes you always have can make all the difference.
For example, when starting to think about growth anchors, one CFO at a manufacturing organization realized that the finance operating reviews they were running to drive performance were having the opposite of the intended effect – they were always dominated by backwards-looking considerations, debates about what numbers were the right ones, justification of budget variances, and so on.
So, the CFO moved the financial review to a 15-minute agenda item at the very end of the multi-hour session, instead devoting the bulk of the time to emerging risks and opportunities, customer changes, market change, and the like. This kept the discussion forward-looking and delivered far more useful information than before.
Tactics to Lessen Growth Anchors
Leading growth companies are proactive about removing growth anchors. A good place to start is to help business managers submit business cases by providing an easy-to-use tool to calculate the ROI of their proposed investment. This curtails bureaucracy by simplifying a lengthy activity and encourages business managers to submit ideas without hesitation.
Address a dangerous-to-fail culture by setting up predefined exit triggers to ease worries about what to do if an investment goes off track and to prevent premature termination of high-risk growth bets. This helps business managers feel more comfortable proposing and managing growth bets and leadership feel more comfortable approving them, and also prioritizes longer term learning over chasing the “sure thing” to hit short term metrics.
To illustrate this let’s examine the case of a CFO at a consumer products organization: They recognized that their incentive structure was acting as a growth anchor. Compensation for business leaders was heavily weighted towards delivering on targets set during the budget process, but their critical growth bets were in emerging markets where the volatility of economic conditions made it less certain that a business could deliver on its target.
This made it hard for the organization to attract their best talent to manage these critical growth opportunities. The CFO led an effort to redefine performance criteria to weight controllable management decisions more heavily, resulting in more business leaders willing to take on higher risk assignments.
In truth, much of this is a shift in mindset.That can’t solve economic volatility, but smoothing the path for growth innovation is a hallmark of those companies that navigate it best.