2023 CFO outlook: Tightening tech, real estate spend

CFOs at the start of 2023 are holding a tight grip on technology spending as several risks beyond their control threaten profitability.

Forecasts of recession, high inflation, turbulent equity markets, rising borrowing costs, geopolitical tensions and the most aggressive monetary tightening in four decades are compelling CFOs to conserve cash and ensure every dollar spent on technology pays off, according to financial executives and technology consultants.

A recession “is not going to be a surprise to anyone,” Coupa Software CFO Tony Tiscornia said in an interview. “Everyone is battening down the hatches, getting ready for whatever may come in the next year or two years, and most CFOs are hoping for the best but fearing and preparing for the worst.”

Gartner this month cut its projection for 2023 growth in global information technology spending to 2.4% from an estimate of 5.1% just three months ago. It forecasts $4.5 trillion in IT outlays this year, only 2.1% higher than in 2021.

“What every CFO is saying right now is, ‘I don’t want to buy it unless I have a business leader who is sitting in front of me screaming they have to have it,’” Salesloft CFO Chad Gold said in an interview. “It’s this idea of how do you do more with less?”

Weak growth in corporate spending has prompted tech industry giants to slash payrolls. Microsoft, Twitter, SAP and International Business Machines have announced sweeping layoffs in recent weeks. Both Amazon.com and Alphabet plan to cut staff by about 6%, and Meta Platforms in November said it will lay off 13% of its workforce.

Companies outside the tech industry are also coming down from a spending sugar high after years of near-zero interest rates. Focused on growth, CFOs borrowed heavily with a conviction that “profitability is not really what investors are focused on,” Tiscornia said.

Last year the Federal Reserve halted the period of easy money by pushing up the federal funds rate 4.25 percentage points. Fed policymakers have committed to further tightening, and may announce a quarter-point increase in the benchmark interest rate on Feb. 1.

The pullback in stimulus has prompted a change in CFO strategy. During the past six to nine months, “profitability and generation of cash flow have really become as important if not more important than growth to investors,” Tiscornia said.

CFOs in many industries face high stakes as they try to conserve cash without missing out on the newest profit-boosting innovation. Advances in technologies such as artificial intelligence, data analytics and cloud computing can determine whether CFOs lead or lag their peers.

To achieve high ROI from technology, financial executives and technology consultants offer CFOs five tips:

1. Take a technology inventory

CFOs determined to achieve a bigger payback from technology and improve cash flow should start by drawing up a detailed inventory of software, hardware and tech services, the financial executives said. The aim: consolidate and eliminate duplication.

“Take inventory of every piece of technology you have in your company,” Gold said. “Have a list of everything that’s there and sit down with every business leader and ask them what it does.

“You’ll find that there are things and pieces of technology that either one, they don’t know what they have, or two, they can’t even explain what it does,” Gold said.

Many CFOs lack visibility on technology outlays, with scattered groups in the company separately spending without cooperating to find the lowest cost, the financial executives and technology consultants said.

CFOs may find that two or more units in the company bought two different technologies to perform the same task, or purchased the same technology from the same vendor without having negotiated a volume discount.

“Visibility is really key to budgeting during economic uncertainty,” Tiscornia said.

2. Prioritize, postpone spending

Amid increasing forecasts of a brief, shallow recession, many CFOs are reviewing their technology priority list and postponing spending and hiring until the outlook for the economy brightens.

“The stuff that we’re buying right now is the stuff that makes us say, ‘We’ll go backwards if we don’t have this,’” Gold said.

Gryphon.ai, a provider of AI-guided sales intelligence, has decided to continue relying on outside cloud computing consultants rather than add to its current in-house expertise, CFO John Renehan said. It has also postponed buying new back-office infrastructure technology.

“Rather than putting in place new systems this year, we’re really focusing on making sure our Salesforce or Zendesk — they’re all communicating with each other,” Renehan said in an interview. “We’re prioritizing the payback period more than we used to as a component of ROI.”

3. Renegotiate contracts

The prospect of a downturn has added urgency to talks between vendors and buyers over costs, the financial executives and technology consultants said.

“Every negotiation is a little harder these days,” Renehan said, referring to discussions with Gryphon.ai’s customers. “We’re seeing that they’re tightening their belts, some of them have had layoffs, and it’s imperative for us to work with them closely to show how our products are making them more productive.”

Gryphon.ai is also more sharply scrutinizing its costs with “a constant review of every piece of software in the business,” and pushing back against vendors after low returns, Renehan said.

“There’s certain technologies that sales uses where, in my opinion, the providers of these technologies just routinely increase your prices,” he said.

“They’re not in the business like your cloud operator of trying to help you maximize your investment,” Renehan said. “They’re just trying to raise your prices every year.”

Gryphon.ai has identified the best software, and achieved high value in negotiations, by simultaneously running applications from two companies and then choosing the best when the licensing period ends, Renehan said.

When sizing up software, financial executives should pick apart the vendor’s ROI pitch, talking to peer companies selling similar products and contacts at other companies using the software, Tiscornia said.

“Let’s say it’s a lead generation tool for sales,” he said. “I’d want to understand very intimately or have someone on my team understand that calculation of how they arrived at that ROI.”

4. Gather front-line insights

When scrutinizing technology, CFOs should reach out to ground-level staff, as well as department heads and other members of the executive team, the financial executives and technology consultants said.

“A CFO, especially at a time like this, really needs to have a hand on the pulse of the business,” Tiscornia said.

“Usability of software is of the utmost importance — No. 1 from an employee morale perspective,” he said. “You want employees to have solutions that they feel enable them to do their best work, so they feel like the company is investing in them and you can avoid burnout.”

Close consultation with grass-roots staff can yield big improvements in a company’s products, Renehan said. Gryphon.ai’s sales team was the first user of its AI for customer support and increasing sales. “They understand exactly what the product needs, so they helped make the investment decisions,” he said.

5. Bring cloud spending down to earth

Cloud computing will grow more than any other IT category in 2023 and remain as the No. 1 spending target, Gartner said. It forecasts that worldwide end-user spending on public cloud services will surge 20.7% this year to $591.8 billion.

At the same time, concerns about recession and the availability of broader, deeper data on the value of cloud computing has prompted many CFOs to scrutinize their cloud use, according to CFOs and technology consultants.

CFOs are asking, “‘OK, we moved to the cloud and that was great, but have we really been applying financial discipline to it?’” according to Randy Armknecht, managing director for enterprise cloud and global delivery at Protiviti.

At some companies CFOs are refining key performance metrics, such as cost per sale, and compelling their cloud computing providers to commit to a plan for savings extending two years or longer. They are also tracking how closely costs match forecasts.

“Did we forecast that it was going to cost X and it’s costing 2X?” Armknecht said.

Financial executives at some companies have stepped up collaboration with software engineering teams to gain insights on the strong or weak spots in cloud computing, he said in an interview.

With such data CFOs can determine the cost of a sale down to the cent and predict the cost of a project in the design phase before deployment in the cloud, he said. They can also precisely track whether a project has met its target and refine the customer journey, maximizing the value of time spent with the company’s app.

Cloud providers feel more compelled to show value as competition in cloud computing intensifies and customers master the technology, the CFOs and technology consultants said.

“When we first moved our products to the cloud years ago, we didn’t know what we didn’t know,” Renehan said. “You just bought this big block of time up in the cloud.”

“Now the focus is on reducing the costs and increasing our gross margins,” he said, noting that Google Cloud Platform is helping the company identify savings and increase value.

Cloud computing providers in recent years have recognized that “the onus is on them and their transparency in reporting on your spending within their platforms,” Armknecht said. Instead of losing a customer, “they would rather have a customer that works with them to figure out how to optimize spending.”

While highlighting the need to maximize the value of technology investment, the prospect of recession has also underscored the longstanding imperative for scenario planning.

“Conservation of cash is just something that’s in our blood as a CFO, so you’re always looking at that,” Renehan said. “What we’ve done through our budget process is a lot more scenario testing, including for the worst case.”

As technology innovations accelerate, companies also need to focus on the future needs of their customers, the financial executives and technology consultants said.

CFOs “should be thinking about where the customer is going to be and not necessarily just keep funding where they were,” Armknecht said. “Market alignment and customer alignment — that is huge in driving the strategy for funding tech.”

CFOs in 2023 may want to think twice before planning for an end to the turmoil of the past two years.

A new variant of COVID-19 may flare up, inflation persists well above the Federal Reserve’s 2% target and geopolitical tensions, such as Russia’s invasion of Ukraine, loom large in even the most carefully crafted scenario planning.

The U.S. government is trying to curb many of the risks, with mixed results so far. One of its antidotes, as prescribed by the Securities and Exchange Commission (SEC), will require CFOs to spend more on compliance and plan for more disclosure and detailed risk management.

Other trends, such as a possible slide into recession, are beyond a CFO’s control.

Here’s a look at four of the trends for 2023. 

1. Close combat against inflation

Battling inflation is a core mission of the Federal Reserve. Since 2021, inflation has won.

Fed Chair Jerome Powell acknowledged early last year that policymakers underestimated price pressures.

In March, three months before the consumer price index (CPI) hit a four-decade high of 9.1% on an annual basis, policymakers began the most aggressive pullback in stimulus since the 1980s. Over the course of last year, they pushed up the federal funds rate by 4.25 percentage points.

Fed tightening reduced the CPI to 7.1% by November while also increasing the risk of recession. The probability of a downturn during the next 12 months is 65%, Goldman Sachs said Thursday, citing consensus estimates while adding that its own researchers see a 35% probability of recession.

Powell has repeatedly said the Fed will curb inflation even at the cost of setting back businesses and employment. But with price gains easing and the risk of a downturn rising, some economists fear policymakers in 2023 will pause or reverse course before bringing down inflation to their 2% target.

“What worries me is if inflation starts approaching 5%, they might let up and then we’ll see inflation shoot back up,” according to Aleksandar Tomic, director of the graduate programs in applied economics and applied analytics at Boston College.

Inflation this year will likely persist somewhere between 5% and 7%, Tomic predicted in an interview. “I don’t think there is any way we will get to 2% within 12 months without really bringing the economy down tremendously.”

Based on their median projections last month, Fed officials forecast that they will raise the federal funds rate by December to 5.1% — from a current range of 4.25% to 4.5% — before trimming the benchmark to 4.1% by Dec. 2024. They see the economy growing 0.5% this year and 1.6% in 2024.

Powell acknowledged that the forecasts are educated guesses at best. “No one knows with any certainty where the economy will be a year or more from now,” he said at a Dec. 14 press conference after the Fed released its projections.

Given the murky outlook, CFOs should avoid borrowing at variable interest rates or use swaps to hedge against rising rates, Tomic said.

Scenario planning is also essential when preparing for the future economic or monetary policy landscape, Tomic said, adding “whoever tells you anything with certainty is just lying to you.”

“This time last year, nobody thought Russia would invade Ukraine,” he said. “For many companies that turned everything upside down.”

2. Job openings go unfilled

Many CFOs eager to fill some of the economy’s 10.5 million job openings may need to keep “help wanted” signs posted well into 2023.

The tight labor market will probably persist for at least the next few months, according to Cristian deRitis, deputy chief economist at Moody’s Analytics.

“The dynamic in terms of demand exceeding supply is going to hold for a long while,” he said in an interview. “I don’t see a reversal of the trends there unless we go into recession,” he said, noting that Moody’s forecasts a “slowcession” of low growth rather than a downturn.

The unemployment rate in December fell to 3.5% from 3.6% the prior month as U.S. employers added 233,000 jobs, the Labor Department said Friday. The total number of available jobs was unchanged.

CFOs aiming to hire workers face several obstacles, including limits on immigration, an aging and shrinking labor force, and a trend of pandemic-induced early retirement, deRitis said.

Fed policymakers worry that the strong labor market will fuel wage pressures and worsen inflation by compelling companies to raise prices. Wages rose last year by 4.6%, according to the Labor Department.

“Wages are running well above what would be consistent with 2% inflation,” Powell said at a Dec. 14 press conference.

At the same time, compensation gains lagged inflation by more than 2 percentage points, prompting many workers to quit jobs for higher pay elsewhere and compounding wage pressures.

For some workers, “the only way for your salary to keep up with inflation is to change jobs,” Tomic said.

Eventually, as the Fed’s aggressive monetary tightening takes hold, unemployment will likely rise this year to 4.2%, deRitis said. Average monthly job growth will probably slump to around 75,000 from 370,000 in 2022, taking “some of the pressure off wage growth that we’ve been seeing that would certainly help the Fed’s case.”

Annual growth in wages may fall to between 3% and 3.5%, deRitis said.

CFOs leery of raising wages too much may want to consider providing workers with more job flexibility, including out-of-office work arrangements, deRitis said.

“It’s key for the employer to be creative in terms of the ways that they compensate employees,” he said. “I think you can build loyalty and high retention by having flexible policies.”

3. SEC demands disclosure

Since his swearing in as SEC chair in April 2021, Gary Gensler has laid out aggressive goals for increasing disclosure by public companies.

Investors need more information on companies’ cybersecurity, workforce diversity and vulnerability to crypto asset markets, Gensler has said.

Some proposed rules would shake up management by CFOs and their C-suite colleagues, compelling more detailed measurement of employee demographics and an overhaul in aspects of risk management, according to David Brown, a partner at Alston & Bird.

“We are forcing companies through disclosure to change the way they operate,” Brown said in an interview. “It’s extraordinarily ambitious.”

Gensler in March sparked criticism — and more than 14,000 public comment letters — after releasing a 490-page proposed rule that would require publicly traded companies to provide detailed disclosures on carbon emissions and climate risk.

The SEC aims to mandate that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for curbing such risk.

Companies would need to disclose data on their greenhouse gas (GHG) emissions, either from their facilities (so-called Scope 1 emissions) or through their energy purchases (Scope 2). They would also need to obtain independent attestation of their data.

Clear, uniform disclosures on the costs from climate change will benefit both businesses and investors, according to Gensler. Businesses will gain detailed insights into potential costs and opportunities, while investors will be able to better gauge risks at specific companies and compare risk levels across industries.

Companies, industry groups, lawmakers and asset managers — including BlackRock — have focused much of their criticism on the mandate that companies disclose in detail Scope 3 carbon emissions by their upstream and downstream suppliers and vendors.

Gensler has said the requirement would only apply to large companies that have already committed to Scope 3 measurement. Yet critics say the rule would impose onerous costs and challenges in measurement on small businesses, such as farmers, woven into the supply chains of big companies.

The SEC in coming months may sidestep opposition to the Scope III requirement and other controversial aspects of the proposed rule by rolling out the final regulation in two phases, Brown said.

In the first phase, the agency would require measurement and disclosure of Scope 1 and Scope 2 emissions and details on climate risk, including how the C-suite and board track and manage such risks, Brown said.

In the second phase, companies would need to gain external assessments of their GHG emissions and climate risk calculations, and report measurement of climate risks on their 10-Ks, Brown said. As part of this phase, large companies that made prior pledges to disclose Scope 3 emissions would be required to do so.

In a two-step approach, “people still may challenge it, but there may be less of a chance that the challenge is successful,” Brown said.

Despite opposition, the SEC will push forward with the regulation, he said. “I don’t think there’s any chance whatsoever that they’re going to shelve it.”

4. Sharper accounting oversight

The implosion of crypto exchange FTX and absence of financial controls revealed in its bankruptcy filings — such as the use of emojis in an on-line chat platform to approve disbursements — will sharpen scrutiny of the accounting industry and its standards this year, experts say.

While some accounting experts are quick to note that regulations won’t prevent those who flout the law from harming investors, others say the FTX failure will likely intensify efforts by regulators to avert failures in accounting and financial reporting.

Soon after FTX collapsed in December, the SEC called on companies to fully disclose crypto asset risks, joining efforts by lawmakers, investors and creditors to gauge the crypto market’s vulnerabilities.

“We don’t know where FTX is going to fall out … it’s a period of time where we’re trying to see where all these things are going to land,” Kecia Williams Smith, an accounting professor at North Carolina Agricultural and Technical State University, said in an interview.

The blowback from FTX, although big, will probably not prompt the same sweeping changes in accounting and financial reporting that followed the Enron accounting scandal, she said. “We’re tiptoeing on the precipice but I don’t think we’re back at Enron proportions.”

But the failure of FTX, which owes more than $3 billion to its top creditors, will undoubtedly spotlight for the Financial Accounting Standards Board (FASB) the problems it needs to address as it sets standards for crypto-currency this year, according to Kelly Richmond Pope, an accounting professor at DePaul University in Chicago.

“This fraud is so egregious it’s forcing you to see how bad it can actually be and how negligent founders and CEOs can be,” Pope said. FTX “gives [FASB] something to dissect … We need to see this so we can set up the right protocols for us to follow in the future.”

The FTX debacle played out late last year as CFOs and their finance and accounting teams were already facing sharper regulatory scrutiny of financial reporting and a push for more disclosure.

The FASB begins 2023 with many ambitious projects carrying over from 2022. In addition to crypto standards, it also plans to revamp outdated accounting for software and is poised to beef up the income tax information that companies would be required to disclose in financial reports.

The board is also making the most sweeping segment accounting change in 25 years — a move that would require companies to require more frequent and comprehensive data broken down by business units.

Meanwhile, the Public Company Accounting Oversight Board (PCAOB), under its new Chair Erica Williams, pledged in its 2022-2026 draft strategic plan to increase average penalties and enforce some rules for the first time.

Intensified enforcement will persist in 2023, Smith predicted.

“CFOs who are trying to have a good 2023 just don’t want to be on the bad actors list,” Smith said. To avoid sanctions, finance chiefs should work closely with their audit committees and keep in close communication over changes in disclosure requirements and other matters.

“The common theme … is making sure the company’s disclosures are transparent and not misleading to investors,” Smith said. “The preventative measure is to always have investors top of mind, because that’s the kind of enforcement actions we’re seeing.”

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.