CFOs resorting to short-term, and often unsustainable, cost cutting measures amid the pandemic risk missing the opportunity to fundamentally reshape their competitive standing over the long-term, a new study from Gartner Finance found.
Studying the performance of 1,142 public companies revealed that organizations able to navigate downturns with cost containment and top-line growth followed a differentiated set of behaviors with regards to managing costs and investments that set them apart from their lower-performing peers.
- "The pressures facing CFOs to contain costs during this crisis are intense," Dennis Gannon, advisory VP for the Gartner Finance Practice, said. "With 62% of CFOs planning to make significant SG&A cuts this year, it's important to first achieve clarity on which costs protect the long-term investments that will drive future profitability."
Gartner’s findings show that, across the board, untargeted cost cuts negatively correlate to long-term profitability.
"CFOs able to navigate successfully through crises, and lead their organizations to a stronger position in the aftermath, thought about cost containment differently than peers," Gannon said. "And that's because they thought about their growth investments differently."
Protecting prime growth investments
The most successful CFOs, Gartner said, will appreciate the few initiatives that drive outsized advantage. They not only protect these select projects from cost reductions, but scale up the areas supporting these bets.
Additionally, strong CFOs resist the temptation to hedge bets on growth investments by expanding across more communities or introducing more product lines.
"Leading CFOs are using this period of uncertainty to reevaluate their business portfolios and reduce complexity that waters down long-term profitability," Gannon said. "By reducing the number of industry battle-fronts they compete on, these CFOs will naturally find 'good' costs to cut, while simultaneously freeing up more resources to channel into the winning growth bets."
Organizations using periods of economic uncertainty to accelerate their competitive advantages have traditionally protected costs in research and development, while differentiating between SG&A costs that drive sales versus those that didn’t.
Leading organizations were more likely to benefit from R&D expenditure and be a "first mover" during times of industry disruption, and were also quicker to increase that spending coming out of a recession.
Most successful CFOs shielded logistical costs that supported the ability to ship orders, and sales and marketing costs directly leading to new business, from broad cost-cutting initiatives.
Sustainable cost reductions often require new partnerships
Beyond reducing the scope and complexity of the growth investment portfolio, Gartner wrote, CFOs seeking "sustainable, long-term cost containment" may seek to incentivize business partners to identify cost savings.
Leading CFOs recognize the limits of centralized cost initiatives and establish cost "winback" programs, which return a portion of cost savings back to business unit owners who can deploy the funds to more productive initiatives, Gartner said.
"Business unit leaders will be more likely to identify cost savings if they receive some benefit for doing so," Gannon said. "By returning some of the savings to the business unit, CFOs can create a positive feedback loop where managers continuously identify unneeded costs and channel some of those proceeds into higher-value priorities."
Of the over 1,000 companies Gartner studied for their research, only 5% achieved "Efficient Growth" status, scoring in the top quartile relative to industry peers in long-term revenue growth, long-term cost reduction and short-term simultaneous growth and margin expansion.
Pointers for CFOs
"This [study] has been going on since late last year," Gannon told CFO Dive in an interview Wednesday. "It just happens to deliver some insight that’s absolutely critical for companies now, as they navigate this crisis.
"There's certainly no magic formula, but one concept winning CFOs are using to make that decision [to cut or to retain certain costs] more effectively is differentiation, and to look through a lens of what supports and strengthens the company's comparative advantages in the marketplace," Gannon said.
One CFO told Gartner he looks at investments through the lens of whether they make "the moat around his company wider and deeper."
"The thing that really caught our attention is that winning companies in the digital era that have done the best job of driving revenue have a substantially more focused set of operating characteristics than their peers do," Gannon said. "We saw that these winning companies were more selective about their industries, and had about 18% fewer industry verticals compared to their peers."
Gannon's research team sees these characteristics as speaking to a focused investment pattern of avoiding spreading too thin. "That's a critical lesson for CFOs coming through this particular crisis, deciding which costs they want to let back in," he said. "Don't weigh your company down coming out of this. Stay focused on operating footprint."
Gannon reminds CFOs that "companies don't get all their growth strategy right coming out of the gate." The most important thing for CFOs to do is monitor the progress of their initiatives.