CFOs step up as companies look for strategic guidance

Cutting fat from office space budgets would seem like a no-brainer for CFOs as the economy heads into what could be the jaws of a recession. But realizing real estate savings is likely to be a more complex process than in past downturns, experts say. 

“What organizations now need to do is say ‘ok, during every recession real estate has always been a line item that we look at’ and so they’re looking at it again,” said Julie Whelan, global head of occupier thought leadership and research consulting at the real estate services firm CBRE. “But they need to look at it with that lens of how much they cut during the pandemic and where they think their headcount is going.”

The halting pace of employees’ return to office and the toehold that hybrid work now has in corporate work models leaves experts like Whelan pegging office utilization rates at about 50% of what they were before the pandemic — even as hard-driving executives like Elon Musk and JPMorgan’s Jamie Dimon push hard to get staff back in their cubicles.

The latest round of office space cutbacks are playing out most visibly in Silicon Valley, the source of an almost daily drumbeat of announcements from high profile tech companies like Salesforce and Microsoft, many of whom are detailing layoffs and revising their real estate footprints. “Tech firms were famous for taking space to grow into. Then all of a sudden things came to a screeching halt,” Whelan said in an interview. 

Real estate is a big cost center, with office space often the second or third largest expense for service companies after labor, Whelan said.

Still, companies shouldn’t swing the budget axe until they’ve figured out what their office utilization rate is now as well as what their goals are for the total number of people they ultimately want working in the office, she said. Only then can they zero in on the delta between how many employees are showing up now and how many will show up later, and as a result, how they will manage real estate costs this year, she said.

As they sort through their portfolios of office leases, CFOs should also keep in mind that they are in the middle of another cyclical downturn in the economy, and that it’s not possible to perfectly time their moves because it’s too long a lead item, according to Eric Anton, senior managing director with the commercial real estate brokerage firm Marcus & Millichap. Office leases can extend 10 years or longer.

“You can make a perfect turkey sandwich but if you had to plan how many turkey sandwiches you should order for the company in a year that’s really hard. It’s the same thing with office space,” Anton said in an interview.

Here are four evolving issues or unexpected curveballs that CFOs need to track when deciding how or when they will go about triming office space: 

1. Savings won’t always come from lower rents: 

The U.S. office market is signaling multiple signs of distress and in most but not all markets the tenants have the upper hand, experts say. But you wouldn’t necessarily know that from a quick scan of most average asking rents, the set price buildings say they want for space.

In fact, Class A downtown space rents in the U.S. ticked up to $51.41 per square foot in the fourth quarter from $51.08 a year earlier, while the asking rents for premier suburban spaces were $33.58 last quarter compared with $33.58 a year earlier, according to a Jan. 26 Colliers report.  

Occupiers are gaining concessions such as periods of “free rent” and money that landlords give to tenants to build out space or so-called tenant improvements. Buildings in some big markets are offering 12-month rent abatements or $100 per square foot or more in tenant improvement allowances toward upgrading space, according to Stephen Newbold, Colliers International’s national director of office research, writing in a Jan. 26 blog post. 

Those rents will likely be pressured further this year. The U.S. office vacancy rate rose to 15.7% in the fourth quarter from 14.8% year-over-year, according to Colliers. If that pace continues, by midyear vacancies could touch the 16.3% peak not seen since the height of the Global Financial Crisis, Newbold wrote. The jury is out as to whether there’s a market correction in the works, and there’s considerable debate over the future of the U.S. office market, he wrote.

2. Yes, location, location, location still matters

It’s a new twist on one of the oldest real estate sayings in the book: location, location location. Employees are dictating a flight to quality office space, and companies who want to lure workers back to work in an office need to make it compelling and easy to get there, Anton said.

That is likely to be offices on top of transportation hubs such as Grand Central or Penn Station in New York City that minimize commuting hassles as opposed to the latest “cool” neighborhood, he said. “If I’m coming in three days a week and I live in Greenwich, Connecticut or New Jersey or Westchester, I don’t want to take a train and then a subway or a train and then have a 20 minute walk,” Anton said. “I want to come in and go upstairs and bang, I’m in a class A trophy office building.”

Similarly, there’s a bifurcated market when it comes to where rents are weakest. So far, the demand for newer and more modern buildings with many amenities has held up better, experts say. For example, the average asking rent across all office rent classes was largely unchanged during the third quarter of 2022 at $35.23
per square foot, but effective rents for top-tier properties in some of the largest markets increased by 4.2% last year through the third quarter, according to a CBRE report.

3. Demand for office sale leasebacks wavering

Sale leasebacks are transactions whereby companies sell their office and enter into what is typically a 10-15 year lease with the new owner. They have long been viewed as a way for companies to monetize assets. In one of the latest large deals, Biogen announced a sale leaseback agreement in September with Boston Properties which gave the company gross proceeds of nearly $603 million. 

But in recent years, investor demand for office property has cooled due to concerns about the outlook for the office market. Also, investors looking for property want to buy single-tenant office buildings, and even companies that own buildings will often have other tenants in them, according to Scott Merkle, managing partner at New York City-based SLB Capital Advisors. 

Still, Merkle said that sale leaseback arrangements merit consideration because the cost of the capital is still cheaper in the current high rate environment. The cost of debt for many middle market businesses rose over 400 bps in 2022, making sale leasebacks more attractive today than 12 months ago, he said. 

4. There’s no magic per person space ratio

Historically, there has often been a discussion in real estate circles around the right ratio of employees per square foot of office space. Right now, that is no longer realistic given the differences from industry to industry layered on top of the different ways companies are aiming to mix in hybrid, in person and remote approaches to working. 

Then too, even as patterns for work are emerging, it’s not altogether clear how to accommodate workers who may not all be in the office at the same time. For example, most tenants are adopting hybrid work with a minimum of three days in the office, according to Colliers. 

Many companies are settling in the increasingly embraced sweet spot of calling all employees back to the office Tuesday, Wednesday and Thursday. From that point some CFOs are seeking to extrapolate how much space they’ll need going forward. 

Shared desks and other systems are changing the calculations companies are making. “The square foot ratio is almost a number that doesn’t make sense anymore,” Whelan said. Over the next few years, as companies adjust to the new work environment, CBRE estimates that companies will likely reduce the amount of space needed per person by about 15%, according to CBRE’s U.S. Real Estate Market Outlook 2023.

Although layoffs at large companies like Microsoft, Salesforce, and other big name tech organizations have made headlines in recent months, small to midsize companies are still very much in a hiring mindset. 

“Companies like the Microsofts of the world, they are letting go of engineers, but if you ask mid market companies, or any company which is 300 employees to 1000 employees, they are still hiring and in that growth mindset,” said Tushar Makhija, founder and chief executive officer at TeamOhana, a headcount management platform, said in an interview. 

Makhija has worked closely with CFOs for several years — the executive has worked with startups since 2008 — and TeamOhana is the fourth company he has built from the ground up. 

In order to avoid operational lag as a result of hiring and onboarding, finance leaders need to be meticulous when it comes to hiring budgets, according to Makhija. 

The key to this, he said, is the marriage between operational reality and hiring reality. 

Tracking and measuring

“The beginning of the process of balancing headcount growth with cost efficiency starts with tracking and measuring,” he said. 

This comes down to not only deciding who it is that you are going to hire, but on determining exactly what all of the costs are associated with that hire. 

“As soon as you onboard someone you have to know, if there's an office space, you have to give them a desk. If you buy them a computer you have to get them access to basic tools like Slack and all of that keeps adding up and that multiple is where you can really run out of money, or you can actually make an operational difference,” he said. 

Between the hot labor market and current macro environment, finance leaders cannot afford to either not have sufficient staff to support growth, or not properly manage their headcount spend. 

Nearly a quarter (23%) of middle market businesses — those with revenues from $10 million to $1 billion — said that the current size of the workforce remains insufficient for market conditions, and over half (57%) plan to “aggressively hire” into 2023, according to the National Center for the Middle Market’s Year End Middle Market Indicator. 

“When you think about hiring budgets, you need to not just think, okay I have a budget to hire 10 people, because it matters who those 10 people are,” said Makhija, “Hiring someone in Latin America will be a different cost than hiring a different candidate in the UK,” he said. 

Getting these hiring budgets right really comes down to an incredibly strong relationship between the CFO and chief human resources officer, as well as the overall health of a business, and hiring plan, cohabitating in the same system, according to Makhija. 

“Once you understand the goals of your company for the year, you then start to say, ‘okay how many engineers do we need? How many salespeople?’... But then what happens is that when the real tracking and when real implementation of this plan starts happening, that decision-making sometimes moves from the CFO office to the recruiting managers, and that is where the discipline starts breaking down,” he said.

Keeping the human element in hiring

“If a company's hiring plan was, ‘I want to hire 10 people in this department or I want to hire five people in that department,’ that takes the human element out of it, and can wind up being more costly,” said Makhija. 

In order to hire effectively and avoid any operational lag, finance leaders need to really understand exactly what kind of hire their organization needs, he said. 

“Instead of looking at just rows in a spreadsheet, we need to start talking about, ‘okay this is our budget for hiring, do we have enough recruiters? Do we have enough managers? Do we have learning resources? What is our onboarding program looking like?’ These are the questions finance leaders should be asking themselves when creating a hiring plan,” he said.

The rise to the top financial seat is never smooth sailing, but for Gina Mastantuono, it required heartbreak, taking risks and a one way ticket from her empty New York apartment to a venture of six month travel — alone. 

The now CFO of SaaS company ServiceNow was making plans with her then boyfriend back in the early 2000s to move West for sunnier days and take the next step in their long distance relationship, until said boyfriend dumped her. 

“I resigned from the firm I was working with in New York — which I was up for promotion at — I had given up my apartment, packed my suitcases and I was ready to leave, and my boyfriend showed up at my empty apartment and broke up with me. As you can imagine, this was a pivotal moment,” she said in a recent Airbase webinar, ironically held on Valentine’s Day.

Instead of doing what most would, and calling up her boss to get her job back, Mastantuono decided to take a risk. 

“I could have easily called my boss back and gotten that promotion,” Mastantuono said. “Or I could take a step back and evaluate where I wanted my life to go.” She chose the latter. 

Traveling alone for six months allowed the finance chief to not only figure out what it was she wanted in life —Mastantuono went on to meet her now husband and life partner — but also in her career in general. 

The six to seven year itch: 

“When people ask me if I always wanted to be a CFO, I say absolutely not,” said Mastantuono. 

The Long Island, N.Y. native was not born with a silver spoon in her mouth by any means, and actually put herself through college with the help of babysitting funds that she had been saving since the ripe age of 12. She was the first in her family to graduate with a degree.

Not to mention, Mastantuono added, “When I graduated University, there were no CFOs who looked like me — who were women,” she said. 

“I always wanted a career where I could provide for myself and wouldn’t have to rely on anyone. I knew I wanted to go into business, which I wasn’t too sure what that meant at the time, and my brothers would say that it was because I wanted to be a ‘girl boss’,” said Mastantuono. 

After graduating from SUNY Albany, Mastantuono went on to work at Ernst & Young, where she eventually became a manager, but becoming a partner was not the end goal for her. 

“The education I had at EY was a pivotal part as to where I am today. The breadth of experience you get at the Big 4, it was the Big 8 at the time, is phenomenal.” Mastantuono said. 

After six and a half years, she left to take on her first role at a public company as director of accounting at Triarc Companies — which was a holding company — before taking her solo traveling hiatus. 

“The thing about my career is I tend to get this six to seven year itch,” Mastantuono said. “That’s when I tend to try something different, take a risk and push myself outside of my comfort zone.”

After traveling, Mastantuono came back and took a role at InterActiveCorp as an assistant controller before she left there to go to Revlon, for what she thought would maybe be another assistant controller position, but quickly turned into something more. 

“I met this new young CFO and he basically said I don’t want you for assistant controller, I want you for international CFO. Every role I had had prior was all domestic and all accounting. This was a big leap for me, a big risk,” she said. 

The great thing about finance is that from an industry perspective,” said Mastantuono, your skills are really transferable and, “if you’re like me and forever curious, I found that at times switching industries can be a great impetus for continuing that learning journey and starting fresh,” she said. 

After Revlon, Mastantuono went on to be executive vice president of finance before she was promoted to CFO at Ingram Micro, “the biggest company you have probably never heard of,” she said, where she really learned how to scale. 

Her promotion at Ingram, which didn’t happen for three years, required patience, and without that patience, Manstantuono said she would not be where she is today.

In January 2020, after seven years with Ingram, “shocker,” she said, Mastantuono moved on to ServiceNow where she took the CFO post instantly after meeting with the team.

Be willing to raise your hand

When asked about options for the path to becoming a CFO, and where is the best place to start, Mastantuono stressed how it is less about whether you come from a background in accounting, or investment banking or the like, and more about being willing to take on different opportunities. 

“I don’t promote people who are not ready, because I want them so succeed,” said Mastantuono. “If you just have accounting experience and you want to go and be a CFO, you better find a way to get some FP&A experience, treasury experience, just be willing to raise your hand and take a challenge that may not be in your core competencies,” she said. 

For Mastantuono, this was how she landed her role at Revlon. “At first I was reluctant to take the meeting because I wasn’t interested in another assistant controller position,” she said. 

It was after she took the meeting, connected with the CFO and took a risk on the then plummeting brand back in 2007, that she was able to take an opportunity in something way outside her realm of experience. 

“The more you raise your hand, the more people will tap you on the shoulder the next time something good comes around,” said Mastantuono. 

The past three years have been a master class in dealing with financial contingencies for the corporate CFO. Layoffs entail some of the most difficult decision making because they don’t just involve the success of the business, but the lives and livelihoods of other human beings.

How you as CFO communicate these significant changes is important, because it will guide the rationale and the tone the company uses to share the message both internally and externally.

We’ve recently had multiple examples of how layoffs have been handled poorly. Google notified laid off employees via their personal email, but those who hadn’t checked their personal accounts instead showed up for work, assuming they still had jobs. 

In a similar situation at Twitter, employees who hadn’t checked emails didn’t realize they were laid off until they found they were locked out of company computers. To make matters worse, the Twitter email originated from a third-party provider, which to many recipients looked like a phishing attempt.

A quick review of these and other significant layoffs this year can be a master class in how not to handle layoffs. But it doesn’t have to be this way. Here are six steps that CFOs contemplating staff cuts can take to ease the inherent pain of the process: 

Step 1: Build a communications plan early

Have a reduction in force messaging plan in place ahead of time. But when is the best time to put such a plan together? The answer is always right now. Even if your company is currently experiencing success, building your plan now allows you to plan for tone, tactics and to establish what audiences – both inside and outside the company – should you need to share negative news.  

Step 2: Deciding who and how

A layoff decision doesn’t happen in a vacuum, and as CFO, you’re often the person bringing to the table the hard numbers justifying such a move. So, in coming to the final decision, all members of the C-suite should be involved both in formulating the message and taking ownership of it, and all members of the board should understand why and how it’s happening. After that, work your way down the org chart until you reach the employees who will deliver the news to those affected. For the announcement itself, laid off employees should ideally hear the news from someone to whom they directly report (either in person or via video chat), with a company-wide message from the CEO coming after everyone has been notified. Timing is contingent upon the size of a company – international corporations need to consider the time zones in which they operate and perhaps plan progressive layoff notifications over a 12- or 24-hour period. 

Step 3: Understand that layoffs affect the company and people

The CFO’s approach to the decision to recommend a reduction in force can make a tremendous difference in how that layoff announcement is received. Showing empathy, understanding and genuine concern for the welfare of those being affected is always the best first step. Tone is always important here, and a layoff announcement should never be framed as “not personal, just business.” A layoff is an intensely personal event for those affected and recognizing it as such will help convey that the layoff decision was a difficult one.

Step 4: Address compensation

An employee’s first question upon receiving a layoff announcement is, “What about me and my family?” Answer these questions as quickly and clearly as possible – whether the company will provide severance packages, to whom and based on what criteria; details on continued insurance coverage; job counseling and search resources; when the layoffs will take effect and any other details that will answer important questions up front.

Step 5: Stay transparent

Employees who receive a layoff notification are dealing with a specific type of surprise and – yes, trauma. Your internal team should not carry on as if nothing has happened. All employees – laid off and remaining – deserve to know why this decision is being made. Explain the specific reason your company is reducing its workforce – is the company closing facilities because they are no longer profitable? Are there geopolitical or other economic realities at play?

Include any steps you’ve already taken to avoid having to make layoffs. Did executives agree to a pay cut? Were long-term employees offered buyout packages? And remember, your employees should never be made to feel that a layoff is somehow their fault. The ultimate decisions on a company’s success lie with you and your peers in the C suite. Take responsibility.

Step 6: Make yourself available

Your marketing or internal communications department will need you as a resource to craft the message that will ultimately be shared with the public. They will need your help with the economic details behind the layoffs, as well as how those realities affected your company. Depending on the size of your company, you might also be called upon to speak on the company’s behalf to reporters. Work with your company’s communications team to craft talking points and focus on staying on topic while answering questions truthfully.

Of course, the hope is that your company’s goals, whether that’s increased profitability or growth, can come to pass without the need for layoffs. But by following the six steps outlined here, if that unfortunate situation does arise, you and your company will be better prepared to share a clear, empathetic and transparent message with team members and beyond.

Some CFOs are taking the lessons learned from the currency volatility that dinged many global companies’ profits last year and revisiting their hedging strategies, according to Paula Comings, co-head of FX sales at U.S. Bank. 

Since the end of last year, many finance executives began doubling down on their systematic hedging discipline that they may have strayed away from, while still others have begun adding options to the mix of strategies that they can use to offset the risk, she said. 

“What we saw in 2022 is a lot of our clients and businesses in general were caught wrong-footed,” Comings said in an interview.”We’ve seen this happen in the past…some of the discipline falls off of even very rigorous best-in-class hedging programs when times are good. And when everything falls apart, that’s laid bare.” 

The strong dollar, typically a safe haven in times of turmoil, soared in 2022 as the markets fell and economic growth slumped in much of the world. The rising dollar hurt U.S. companies that rely on foreign sales in places like Europe, as it effectively shrunk revenue they receive in euros if or when they are repatriated and converted to the stronger dollar.  

For example, the foreign currency headwinds hit hamburger chain McDonald’s’ third quarter earnings, leading in part to the company’s decision to trim its guidance on capex spending, CFO Dive previously reported.  

The volatility has eased somewhat so far this year. After the U.S. dollar appreciated over 12% to hit a two-decade high in September, it has since trended weaker, according to a Feb. 3 JPMorgan report. This year lower gas prices and positive momentum are expected to boost the euro, which fell below parity with the dollar for the first time in two decades last year, according to the report. 

Despite the calmer waters, Comings said it’s still important for companies to learn from the mistakes of last year. She advises firms to consider three ways to reinivigorate their hedging programs: 

1. Do better at following your existing hedging policies. It’s important for companies to consistently hedge in order to benefit from dollar-cost averaging, she said. “A lot of times the policy is approved by the board and the treasury team is supposed to abide by it in terms of dollar-cost averaging and rolling and layering in the hedges,” she said. But when the currency markets are going in their favor they’ll skip a quarter or a month, she said. Companies need to be consistent. 
2. Be flexible and consider options as a hedging alternative. Historically, the most common type of hedging product is the FX forward which locks in the rate at the time that the exposure to the currency when it will be realized and converted back to U.S. dollars, she said. Forwards are very safe and predictable but the downside is you lose the ability to benefit if the currencies strengthen. That could be key now, with currencies at lows and potentially rebounding. At their most basic options involve companies paying a premium, which acts like an insurance policy, that gives the firm the right to sell a currency at a certain price. But if the conversion rate is favorable the company can let the option expire and convert the euro, for example, into dollars, at the current stronger price. However, some companies balk at options due to the cost of premiums which rise in volatile times, she said.  
3. Tap technology to improve forecasts and currency exposure management. Many subsidiaries aren’t strong forecasters, which makes it hard to put the right hedges in place. For example, some company units send in their expectations for their particular business on an excel spreadsheet once a month, she said. Software products from such companies as Kyriba can help. Companies with operations in many countries can benefit from purchasing exposure aggregation and management systems to add on top of their existing Enterprise Resource Planning System. 

C-suite leaders are reporting cautious optimism when it comes to economic trends, which may be changing how CFOs and CEOs approach their cost optimization strategies moving forward, according to recent surveys.  

CFO optimism is tentatively growing, according to a recent survey by Grant Thornton, with 45% of finance chiefs reporting they were optimistic in their outlook for the U.S. economy for the next six months, the survey of 246 CFOs found. This compares to 39% of CFOs who reported optimism in the prior quarter.

Notably, 58% of CFOs still cited cost optimization as one of their top three concerns for the next six months, according to Grant Thornton. 

Changing macroeconomic trends surrounding inflation and labor may be prompting CFOs to shift their focus when it comes to trimming those costs, however. While human capital including headcount and compensation was still cited by finance chiefs as an area to cut costs, “we’re not hearing about the Great Resignation as much anymore,” Sean Denham, national audit growth leader for Grant Thornton said in an interview. 

During the Great Resignation, compensation costs went “through the roof,” Denham said, as CFOs and other C-suite leaders moved to attract and retain talent.

However, discussion over this trend has quieted over the past few quarters as economic trends shift: the unemployment rate dipped to 3.5% among slowing wage growth in December, according to data released Jan. 6 by the Department of Labor. Inflation also slowed for the sixth consecutive month to 6.5% in December compared to a year prior, according to data released Thursday by the Labor Department. 

Fifty-eight percent of CFOs still expect challenges in attracting and retaining talent, according to Grant Thornton. Forty-three percent of CFOs said they were looking at human capital expenses — including headcount and employee compensation — as a potential cost-cutting area, the study found. Meanwhile, 32% of CFOs said they could potentially conduct layoffs or workforce reductions in the next six months.

CFOs and other C-suiters are still juggling issues of quiet quitting and questions of remote work alongside their efforts to lower costs, which come as C-suite leaders are still expecting a recession.

U.S. CEOs almost universally expect a recession at this point — an almost unanimous 99% anticipate a coming downturn — but roughly half of those U.S. CEOs think the recession will be mild domestically, according to a recent study by accounting firm Ernst & Young. 

Meanwhile, though recessions in both the U.S. and Europe are highly likely, CEOs in both of those regions anticipate to see a return to growth by either the end of this year or mid-2024, according to a survey of global C-suite leaders released Thursday by the Conference Board.

Outside of compensation and human capital, the next stage of cost optimization is really around figuring out what are the areas of discretionary spending or if there is “an opportunity to restrict third party costs,” Denham said.

This includes external consulting and technology investment, which were cited by 42% and 41% of finance chiefs, respectively, as potential places to slim down costs, according to Grant Thornton. CFOs are not looking to reduce their tech spending whole cloth, however — digital transformation still remains top of mind for financial leaders, Denham said. 

“If they can put it off for a period of time, move to the back burner certain parts of their technology journey, I think they're looking to do that because they have other needs,” he said of tech spending.