CFOs step up as companies look for strategic guidance

For some executives, Baltimore’s Francis Scott Key Bridge collapse reawakened grim memories of the pandemic-era shocks that led to snarled supply chains and soaring shipping costs. For CFOs who got that wakeup call, experts say there are a number of steps they can take to keep their transport costs under control.  

When it comes to supply chain management, there are a variety of tactics executives can deploy to smooth transportation budgets and be prepared for the next cycle — or crisis. Craig Russell, a logistics and distribution advisor with Big Four accounting and consulting firm KPMG, suggests finance chiefs need to take a “control tower” approach; asserting that they should be actively involved so that they can know where and when adjustments are needed in order to manage their costs when circumstances change. 

“The ones who have remained flexible and agile have been able to take on different types of transportation contracting and costing mechanisms,” he said.

Price creep amid resiliency

For now, executives who pay to ship goods are enjoying some tailwinds despite the alarming headlines around the events in Baltimore as well as spiking ocean shipping rates amid attacks on ships in the Red Sea. Indeed, while the bridge collapse led to delays, congestion and logistical challenges, supply chains showed their resiliency with transportation modes absorbing pressures, Industry Dive sister publication Supply Chain Dive reported.   

Generally, shipping prices have eased considerably since 2021, according to Ashutosh Dekhne, the supply chain and operations practice leader at Big Four accounting and consulting firm Ernst & Young. However, prices are starting to climb, he noted. 

Josh Allen, chief commercial officer with ITS Logistics which provides fulfillment services, confirmed shippers are planning price increases this year and beyond.  

“You will see incremental gains in price, but I don’t think it will be a hockey stick,” he said. With this in mind, he said CFOs need to be thinking not just about 2024, but 2025 and even 2026. 

Goldilocks scenario

When it comes to choosing what or how many carriers companies should partner with, some experts suggest a kind of happy medium or Goldilocks scenario. 

Philip Schmidbauer, senior director of analytics and solutions with ODW Logistics, advised CFOs not to spread themselves too thin, nor should they put all their eggs in one basket. Having different carrier options means CFOs can leverage competition,but whoever the carrier is, he recommended the firm should be one that actively consults with their customer, versus someone who books orders mindlessly. 

Work with the people who will be consultative and who will help you drive costs and waste out of your supply chain, he said.  

Finance leaders also need to be aware that transportation is only one component of shipping costs, he warned For instance, the goods also need to be stored somewhere while awaiting shipment or arriving at their destination. Those warehousing costs, which have been growing, can quickly add up.

“Warehouse and inventory are two separate levers CFOs can pull,” Schmidbauer said of how CFOs can manage costs in this area.

Timing is key

CFOs can also control costs through smart contract negotiations. Allen from ITS recommended CFOs establish long-term contracts now to lock in the comparatively lower rates before they increase further. He said this is to the benefit of both the CFO, who can hedge against price volatility, as well as providers, who know they’ll have income for the contract term. 

“So it’s a win-win for the providers and for CFOs that are running these businesses,” he said. 

Dekhne, from E&Y, also talked about the benefit of using long-term contracts, but, like Schmidbauer, cautioned against looking at just one top-line price. An ocean freight bill, for example, might have the contracted transportation cost, but also include 14 to 15 line items. 

“Most companies look at the top line and think it takes this much to go from A to B,” he said. Extra costs on top of that such as fuel or other additional surcharges — such as where items are picked up and dropped off, or issues with special equipment — can add significantly to transport costs. In total, such extra costs can comprise 15%-30% of base line haul transport costs, Dekhne said. 

Understand the big picture  

When one negotiates a contract, shipping customers need to know where they fit into the system. “If companies with smaller transport spend decide to go into the bidding cycle with carriers at the same time as the other large shippers do their bidding cycles (typically, early-mid summer), the carriers get consumed with attending to large shippers and will generally not provide the best/most aggressive bids to the smaller shippers,” Dekhne said in an email response to questions.

Then too ODW’s Schmidbauer, also cautioned CFOs against going too far in their contract negotiations, saying relationships matter in the long run. If someone locks in a low rate now, once the contract expires that company might not want to work with them anymore. Conversely, a CFO with a longstanding relationship might not get the lowest rate ever, but the shipper might be more willing to be flexible when times are tough. 

“I’d say there are certain games you can play, but if you play stupid games you can win stupid prizes. … So be cautious in your cost-cutting adventures,” Schmidbauer said. 

The shifting geopolitical landscape is a top risk for business leaders, though executives often struggle with implementation of risk plans across organizations, according to a senior risk strategist at McKinsey.

Ziad Haider, a partner and global director at McKinsey, said geopolitical risk isn’t typically managed in an integrated way across companies, with internal teams adopting a somewhat myopic approach. A reliance on research insights from external partners might not be tailored to an organization’s needs, he noted.

“Internal teams are giving quite fragmented views, so if you look at a market, the security team will be talking about the people risks, the finance team will be talking about currency controls…sometimes those worlds just don’t meet,” Haider said at The Wall Street Journal Chief Compliance Officer Council Summit in London on Thursday. “If you're a leader, risk is risk – it's not financial or legal, or reputational…how do you pull that together?”

Haider shared his insights as executives are increasingly identifying geopolitical risk as a top business concern. Geopolitical instability and conflict was the most cited risk to global growth, according to a March McKinsey survey of professionals across industries. Separately, a U.S. Bank CFO survey earlier this year found that rising geopolitical worries around global conflicts and war are driving hedging strategies, CFO Dive previously reported.

A coordinated approach to ‘black swans’

The need for organizations to prioritize geopolitical risk becomes especially important in a fragmented world, suggested Haider. Consequential events include U.S.-China competition; conflict in the Middle East and Europe; and upcoming elections, he said. At the same time, artificial intelligence is reshaping business, politics and society, he said.

In developing a framework to evaluate geopolitical risks, companies should look at three areas, he said. They should focus on getting insight, or inputs on geopolitical issues and developing a system for it; establishing oversight for the risks including board-level involvement; and developing foresight, an organization’s capacity to assess emerging risks, opportunities and threats.

Companies need to leverage the lessons of Covid, the Ukraine war and other threats, in their efforts to anticipate risks, he said.

In evaluating geopolitical risks, scenario planning can help put potential implications into context. These include “gray rhinos,” or known risks of high impact, and “black swan” events, which are those that aren’t easily foreseeable.

With regard to black swan events, “it's sort of an academic exercise to put names to it, but if I were to look around the world and think of things that are at the edge of my mind, versus at the fore of my mind, I think of the situation of the Korean peninsula…[and] another pandemic — no one says these have to happen once a century,” Haider said.

‘Eye in the sky’

Organizations seeking to gain an understanding of geopolitical risks should take an overarching “eye in the sky” approach to geopolitical risk management, he said, with efforts to scan risks and opportunities and identify which are most consequential. Organizations, he noted, should also evaluate risk versus return scenarios for different markets.

“How do you separate, amidst this cacophony, the noise and the signal, [and] zoom in on the things that matter,” Haider said. “As you scan the globe…there's that kind of satellite like almost how you scan for weather patterns.”

It’s also important for risk oversight units to be empowered to execute, he said.

“I see some of the tech firms put it in the government relations teams. I see financial services firms put it in their risk functions…if it's not embedded, and also ideally have some form of a leadership sponsor, it will not really add up too much,” he said.
 

 

Demand for robust technology and data skills has only grown since the dawn of generative AI, which is poised to have a large impact on multiple industries. In accounting, finance professionals are faced with parsing a rising amount of data with less and less time and manpower.

Emerging industries and roles featuring shiny new technologies have pulled incoming college students away from the accounting space, leading to an ongoing shortage of talent. As AI becomes more ubiquitous, however, a brighter spotlight could fall on the importance of accounting skills, said Daren Campbell, Ernst & Young Americas tax, technology and transformation leader.  

“I think one of the one of the things that is changing is, [it’s] actually making the tax and accounting domain more important, because what the technology is doing is it's creating the need for people to apply more judgment,” Campbell, a 27-year veteran of the Big Four firm, said in an interview.

Learning the language of business

Many companies are eyeing the potential benefits AI could bring to the accounting space as experienced accountants — overburdened and burnt out — depart the profession in higher numbers while a dwindling number of new graduates trickle in to replace them.  

Controllers, for example, are leaning on AI to help successfully execute accounts payable and accounts receivable processes as they struggle to keep ahead of “continuous” reporting requirements, CFO Dive previously reported. Accountants have also begun to make greater use of the technology in their day-to-day work, Campbell said.

Accountants are also not immune to the changing of the times, with companies expecting such professionals to display a growing amount of technical literacy, such as being comfortable utilizing everything from third-party tax compliance tools to different ERP systems in order to pull the data needed to correctly do their jobs, Campbell said.

AI could offer the accounting profession a silver lining, however, as technologies are becoming increasingly easier to use the more popular they become, Campbell said — putting more of a premium on core accounting and financial skills and experience, as opposed to technology competencies.

“I think there's an opportunity here to talk with more students about how accounting is the language of business,” he said. “Technology is being used. But again, you don't have to be a programmer to use it.”

Flipping the operating model

It remains early days for the introduction of AI into accounting, with the technology thus far applied as a point solution to solve a particular issue rather than diffused widely throughout a finance professional’s day-to-day, Campbell said.

With AI still in its nascent stage, there’s speculation about how the technology will ultimately affect the profession, including worries that newer entrants — having relied on AI to complete much of their manual, grunt work — won’t be able to learn the foundational skills they need to work effectively in the space.

In Campbell’s view, however, AI is actually “creating an accelerator” here, as learning “comes through more of the analysis and the application of tax and accounting rules and regulations and law to a set of facts,” he said.

“AI is allowing the professionals to spend more time in that analysis, and less time in some of the data preparation and data cleansing,” Campbell said.

This could represent a key shift for the future of the accounting industry — “for AI to really be transformative, I believe that we need to change the operating model,” Campbell said.

Rather than the present-day, where employees are leveraging technology to complete key processes, in the future “the processes are actually going to be executed by the technology, with our people applying the judgment and doing more of the review,” he said.

More than eight out of ten (84%) professionals and (85%) students identified raising starting salaries as one of the most effective strategies for tackling the accounting industry’s talent shortage, according to early results of two separate surveys contained in the “Accounting Talent Solutions Draft Report” from the National Pipeline Advisory Group. The group is an independent task force convened last July by the American Institute of CPAs to analyze causes and solutions for the current accounting talent gap.  

The findings contained in the 82-page report released last week, were based on initial responses from a national survey of 4,500 professionals received through mid-April out of the eventual total of 5,800 respondents, as well as a separate survey of 1,500 business and accounting majors queried out of an eventual 2,000. Full survey results from all 7,800 respondents will be included in the final report released in July.

Mean starting salaries for accounting and related services majors in 2022 stood at $60,698, the lowest of seven business-related majors cited in the report. Computer and information sciences majors earned the top of the starting salaries cited at $86,964, while finance and financial management services majors saw starting salaries of $66,650. “If 2022 starting salaries were the primary determinant for business students choosing a major, accounting would be their last choice among this slate of options,” the report said. 

The NPAG is looking to address the shrinking pool of U.S. accounting professionals that CFOs and finance department recruiters have been grappling with as they seek out staff needed to close books, complete audits, and make sure the company’s financials comply with GAAP and other regulations. 

The wide-ranging report examines multiple systemic drivers of the shortage in the U.S. as well as solutions; it cites the pre-pandemic decline in the number of working-age immigrants that had been a sizable pool of students pursuing accounting degrees and details such solutions as gamifying accounting education in high school to make the profession more relatable. 

But the issue of salaries that are not high enough to compete with other professions rose to the top of cited concerns among those surveyed by the group.“Early, partial results have given us helpful clarity,” the NPAG report states of the surveys’ interim findings. “Addressing the lack of competitive starting salaries ranked as the most supported solution among students and stakeholders alike.” Greater flexibility in work arrangements and more manageable workloads ranked second and third, respectively. 

More attention is needed on salaries even as many employers say they are already making adjustments, the report stated. Among the report’s cited concerns: over the six years from 2017 to 2022 when the Consumer Price Index rose 19.8%, accounting salaries rose just 16%.

The report also weighs in on the controversial issue of onerous state licensure rules that typically require certified public accountants to complete 150 college credit hours — effectively a fifth year of college. The group evaluated six different licensure alternatives, ranging from safer to more bold ways to reduce the cost and time to obtain a CPA. But it also stated that the NPAG recommends “referring to the current minimum level of required education as a bachelor’s degree, versus a number of hours, to allow flexibility as higher education experiments with changes in the hours themselves.”  

As part of its action plan to address the talent shortage, the group also made recommendations based on six high-level themes that it identified as needing to be addressed including: telling a more compelling story about careers in accounting, creating a more engaging college experience for accounting majors and potential majors, reducing the time and cost of education, increasing support for CPA Exam candidates, expanding access for underrepresented groups and transforming employer cultures and business models.

In a statement, the AICPA last week praised the group’s work to date. But it also cautioned against making changes that would harm the ability for CPAs to practice outside the states they are certified to practice in, a term referred to as “mobility”.  

“Minimizing or eliminating those disruptions is key, and a nationally coordinated and cohesive plan on licensure changes represents the best path forward to achieve that goal. Unilateral actions by states will be highly disruptive to CPAs and the businesses who engage or hire them and should be avoided,” the statement said.

The task force, will present the draft report at the AICPA Spring Council Meeting later this week and reflect any feedback received in the final report that will be published in July. The task force is comprised of 22 members from 15 states that included public accounting firm members, state accounting society chiefs, academics, business and industry leaders, a representative from the AICPA and others.

Tornadoes, floods, hurricanes and other calamities whipped up by climate change are upending a cornerstone for CFO risk management.

The cost of commercial property insurance in the U.S. has surged, increasing 15% last year in the biggest jump in more than three decades, the Insurance Information Institute said. During the first six months of 2023, the cost from commercial property claims ballooned 30%, according to the Swiss Re Institute.

Severe weather has created “certainly the most challenging property market we’ve seen probably since 9/11,” according to Brandon Thompson, senior vice president for risk management at Transwestern, a Houston-based commercial real estate company. “We’re in for a rough ride for the next couple of years.”

CFOs face a seller’s market for commercial property insurance as carriers push up premiums and pull back from high-risk areas, Thompson said in an interview. “You can’t just walk down the street any more and pick up an insurer.”

The turbulence from global warming puts pressure on CFOs and chief risk officers to precisely gauge company vulnerabilities and minimize insurance costs, according to experts in risk management. Solutions range from closer partnerships with insurers and hardening buildings against damage to use of new insurance structures and advanced data analytics.

“If you hold on to your old ways, you’re not going to be able to move forward,” said Zaheer Hooda, head of North America for Cytora, a London-based InsurTech firm.

The frequency of calamities induced by climate change shows no sign of falling.

Through early November this year, the U.S. suffered 25 weather-related disasters, each causing at least $1 billion in damage, according to the National Oceanic and Atmospheric Administration. From 1980 until 2022, the country annually faced just eight such catastrophes on average, adjusted for inflation.
 

A $1-billion-dollar catastrophe currently strikes the U.S. on average every three weeks compared with every four months during the 1980s, NOAA said this month in the U.S. National Climate Assessment, citing inflation-adjusted data.

The footprint from destruction is growing. So called convective storms of heavy rain, lightning, hail and violent wind spread further north this year into Great Lakes states, expanding the range of vulnerability for insurers and businesses alike.

During the first half of 2023, convective storms caused $34 billion in insured damage in the U.S. — a record for a six-month period and 68% of insured natural catastrophe losses worldwide, according to Swiss Re.
 

When calibrating their exposure to potential losses, insurers have long balanced the risk of policies written in damage-prone coastal states such as Florida and California with those in less vulnerable areas of the U.S. heartland.

“That’s no longer as effective with convective storm losses growing so much in the middle of the country,” Thompson said.

During the past 10 years rocketing costs to insurers from extreme weather have outpaced the rise in labor and construction materials costs from inflation — even after accounting for the high price pressures beginning in late 2021.

So-called claim severity, or the average cost of an insurance claim, has soared 150% during the past decade, or about six times faster than inflation, according to David Hemry, director of commercial strategy at LexisNexis Risk Solutions.

Facing losses from severe weather, several insurers are running for cover.

State Farm, one of several carriers pulling back from California, announced in May it will stop accepting new applications for commercial and personal property insurance in the Golden State. Nationwide announced in June unspecified risk reduction in its small- and middle-market commercial property insurance in unidentified states.

Hail in recent years has hammered several regions, especially along the Interstate 35 corridor in Texas and in Denver and other parts of Colorado, Hemry said in an interview. Carriers that for years could accurately predict claims in many areas can no do longer so.

“Insurers in Arkansas, Illinois, Kentucky and Indiana are in a particularly unstable situation,” Demex Group CEO Bill Clark said in an email response to questions.

Meanwhile, reinsurers — the providers of lifeblood financing to insurers — are pulling back. They have hiked premiums from 30% to 50% across the U.S. this year for insurers with catastrophic losses, according to an order signed by California Governor Gavin Newsom in September aimed at strengthening the state’s private insurance market.

“The impact of climate change and these billion-dollar losses has really put a strain on reinsurance, which ultimately dictates the terms of what you can buy in the retail insurance market,” Thompson said.

As insurance costs rise, CFOs and financial executives who gauge risk and handle insurance will likely gain greater C-suite clout, he said. “Risk management is going to need a bigger seat at the table than they probably have had in the past few years.”

Called to a larger role, a CFO can limit the costs from climate change, risk management experts said, by taking five steps:

1. Run a clean-sheet review of risk tolerance

A CFO who thoroughly gauges a company's ability to cope with damage from extreme weather will sooner adapt to rising commercial property insurance premiums and the prospect that inflation will exceed the Federal Reserve’s 2% target for a few more years, experts in risk management said.

A CFO should no longer treat insurance as just another expense item, rolled over from one year to the next, they said.

Financial executives will likely need to more frequently change insurance packages and more precisely gauge company needs, using data that models weather as well as labor, construction and other costs. CFOs will probably find they need to budget more for insurance for at least the foreseeable future.

As always, shopping around for higher-value insurance will probably help hold down costs, Hooda said in an interview.

Yet CFOs need to keep in mind a basic principle, Hooda said: “Number One, accept the reality that premiums are increasing and adjust your bottom line implications for it.”

2. Tighten partnerships with insurers

A CFO should increase the frequency and depth of contacts with carriers as the market for commercial property insurance adjusts to the barrage in extreme weather, the experts said.

Financial executives should reach out to insurers as many as 180 days before an application is due rather than the usual 90 days, they said. They should also detail, with supporting data, the ways that they are reducing risk and limiting losses.

“Make sure you’re putting together a top-notch submission with a loss-control narrative,” Thompson said.

3. Redouble efforts to avert loss

CFOs should not neglect the surefire tactic of reducing insurance costs by installing improvements such as storm shutters, flood barriers and fire-suppression systems, the risk management experts said.

Each dollar invested in limiting property damage through steps including retrofitting or adopting updated building codes can avert as much as $13 in damage, according to the National Institute of Building Sciences.

“It’s not just the property risk,” Hemry said. “It’s also the liability risks of people getting hurt on the property, breaking into the property — those sorts of things.”

Many owners of commercial properties neglected maintenance after the pandemic pushed down occupancy, the risk management experts said. Instead, with the Fed having hiked the benchmark interest rate to a 22-year high, CFOs are focused on the high cost of refinancing debt.

“We’re in a bit of a vicious cycle that as occupancy drops and loans are coming due, there can be retreat from investing back in the properties,” Thompson said. “That’s only going to lead to increased severity of claims.”

4. Consider insurance innovations

Alternatives to traditional commercial property insurance can fill in for policies scaled back or withdrawn because of the frequency in severe weather, the risk management experts said.

CFOs responsible for properties in disaster-prone areas may want to consider so-called parametric insurance, which pays out a set dollar amount based on the traits of a destructive event rather than repair costs.

CFOs most often buy parametric insurance as a supplement or substitute for traditional policies.

“It gives a bit of stability from a CFO perspective,” Hooda said, while noting that the ratio of loss to payout is usually less favorable than with traditional policies.

5. Dive into data analytics

“Big data has been around for as long as insurance companies have been around,” Gary Sullivan, senior director for emerging risks at the American Property Casualty Insurance Association, said in an interview. Yet today, insurers can use advanced analytics to more precisely measure wind, wildfire and other risks, identifying vulnerabilities and finding new opportunities.

“Historically, the insurance industry has been fairly glacial to move,” Hemry said. “It’s conservative in nature.”

Insurance start-ups are stirring up older firms by using new forms of data gathering and analysis. For example, computer analysis of photos of rooftops taken from an aircraft precisely gauges risk across vast areas, reducing claims and premiums.

InsurTechs “integrate with carriers to help them do things that, quite frankly, they haven’t been able to do for the past 100 years because it’s not their nature,” Hemry said.

CFOs should ask carriers how they are using artificial intelligence, data analytics and other advanced technology to measure risk, the risk management experts said.

Also, when drawing up an application for insurance, CFOs should consider using customized risk management systems “to tell a narrative that prevents getting baked into the general market trend,” Thompson said.

Eventually, higher premiums triggered by destructive weather will likely attract fresh capital for insurance. The market for commercial property insurance will stabilize and CFOs may find the costs of risk management easier to bear.

“Folks are going to see this as an entrepreneurial opportunity, and they’ll jump in,” Hooda predicted. “You’ll see an improvement over time.”