The survey, conducted among 317 CFOs, found while 38% of finance leaders don't anticipate making any cuts this year, 18% are planning to cut budgets in every category by at least 10%, with the marketing department most likely facing the biggest cut.
"Most CFOs have navigated urgent, short-term challenges, like keeping employees safe and closing the books," Dennis Gannon, Gartner vice president of finance practice advisory, told CFO Dive. "Now, they’re approaching the urgent questions, like cost optimization and liquidity management."
Across-the-board cuts generally don't meet expectations, Gannon said, but instead tend to punish well-managed functions. But if you’re going to cut, you should "think critically about where those costs are supporting important business activities, not just the cost of providing those services," Gannon said.
For instance, the coronavirus has prompted a permanent shift to more remote working. "That puts additional strain on the IT department. Forcing IT to bear the same cost reductions as another functional area could expose your organization to new risks or negatively affect business continuity."
Gannon named HR, procurement, supply chain and even the finance team are all business segments that support the organization’s activities, rather than just crunch transactions. As a result, they all could suffer in the long-term from slashed budgets. "CFOs have a real challenge here," he said.
Cutting overhead costs by dialing back on sales force activity to force your functional leaders to tighten their belts can be effective in the short-term. But, Gannon said, these costs always come back within a few years.
"Companies that get most sustained efficiencies do so through operational management," he said.
The Gartner study draws four conclusions for CFOs looking to cut costs: think big, involve the business, establish new leading indicators, and create a recurring headwind and tailwind cost report.
Gannon advises CFOs to "be sustainable by looking at the portfolio of activities you're trying to support. Shift or double down, get more efficiency out of the cost, and don't try to keep a thousand plates spinning."
Previous Gartner research found leading companies consolidate their offerings into 24% fewer lines of business, building on the foundation of a narrower industry footprint.
"Where there is excess scope in product portfolios, the hidden costs of complexity drag down profitability," Gannon said. "The best CFOs will use COVID-19 as the catalyst to derive significant operating leverage from their most profitable lines of business without destroying value."
Involve the business
The finance team alone can't lead the cost-cutting initiatives. Each division head has a greater understanding of his or her own department and is best-positioned to identify the most effective cost-saving opportunities therein.
Gannon recommends CFOs assign a business leader to every significant cash-based cost item on the P&L. "The business leader should then assemble operational, financial and process design expertise to develop and enact real cash savings strategies in their area."
Establish new leading indicators
To anticipate the extent of the slowdown caused by the pandemic, CFOs should continuously monitor a handful economic indicators.
"Link trends in external market and customer data to internal business performance and KPIs," Gannon recommended. "Quickly move resources to emerging areas of opportunity while competitors are still ducking for cover."
Create a recurring headwind and tailwind cost report
Finally, set up a recurring report for business leaders to capture performance headwinds and tailwinds by quantifying uncertainties. This, Gartner suggests, highlights the full financial implications while also providing a focus on the right indicators.
"CFOs should charge their forecast owners with producing this type of report," Gannon said. "This will help ensure that they understand what external factors might impede or aid business performance and prepare accordingly."
Headwind and tailwind reports are a way of giving context to forecasts, Gannon added. "Many finance teams get caught up in trying to predict the future, and what their numbers are going to be," he said. "At a time like this, there’s no way to predict the future with any confidence."
The best CFOs can do is understand what will stand in the way, and what would give it a boost or would be conducive to staying on track. "What sorts of resource reallocation scenarios do you want to think about as certain things come to pass?" Dannon asks. "Focus on those."
The CFOs surveyed understood why overhead costs are being scrutinized, but the traditional playbook for managing those costs for efficiency is going to underperform, given that so much overhead work has been transformed over the years to support business value creation.
So, Gannon said, "CFOs must understand not just overhead costs, but the value of the overhead services themselves."