Gartner experts have been tracking the fortunes of thousands of companies since 2003 and have codified a set of nine core strategic planning behaviors exemplified by CFOs from the 60 companies that performed best during that period.
These strategic plans of these 60 “efficient growth” leaders delivered EBITDA returns 13 percentage points higher on average than the rest of the pack.
“The biggest differentials took place after the 2009 great financial crisis, where efficient growth leaders began to break away from the rest in terms of their performance,” says Samantha Ellison, Senior Principal, Advisory. “Given the recent downturn driven by COVID-19, it makes sense to review and apply those lessons in smart cost management.”
Gartner has identified nine principles that define the strategic approach that CFOs of outperforming companies take to resource allocation — making sure to allocate finite resources without choking off opportunity. This will be critical as organizations enter the recovery phase of this crisis — first reintroducing costs and growth projects opportunistically and then building a culture of cost and value optimization.
No. 1: Make bigger, riskier bets
Efficient growth leaders resisted the urge to hedge their bets in the growth investment process. Instead of spreading scarce investment funds thinly to ensure at least some return, leading CFOs identified the best growth opportunities and refocused their available capital on them, with bigger bets.
Research shows efficient growth leaders were 1.44x more likely to be first movers on transformative opportunities, they pursued M&A deals that were more than 20% bigger on average and increased their capital expenditure budget nearly three times faster in the first three years after recession.
No. 2: Fight “scope creep”
The CFOs of efficient growth leaders managed to stay focused on operating at scale and understanding and controlling the hidden costs of too much organizational complexity.
In practice, this has meant that efficient growth leaders had on average 18% fewer industry groups in their business portfolio compared to peers. Moreover efficient growth leaders on average had 24% fewer product and service lines, and tended to have 20% more revenue concentrated in their largest geographic segment.
No. 3: Set aside dry powder for critical strategic initiatives
Leading CFOs find a way to set aside a portion of unallocated capital that the company’s most strategic initiatives can access if needed. This capital can be released for a variety of reasons; perhaps a project becomes more attractive than initially anticipated and should be expanded in scope.
Alternatively, a project may be missing or exceeding its anticipated timeline and needs more funds to ensure it continues to run smoothly. Or it may need additional funds to avoid performance issues.
“This is about getting the most critical initiatives for business performance over the line despite ongoing disruption,” says Ellison. “CFOs will need to build consensus on what those initiatives are and what sufficient resourcing will be.”
No. 4: Remove the “anchors” that finance creates
CFOs who are able to take bigger, riskier bets tend to see the payoff in the long term. But part of success in this is removing the many anchors that hinder growth investment. CFOs must take aim at the day-to-day finance processes that undermine the business’s willingness to make smart growth bets.
Leading CFOs actively build and test their own hypotheses about what drives value for customers
These anchors can take many forms. Bureaucratic anchors such as requiring very detailed financial models in business cases or lengthy debates about appropriate hurdle rates are common. Short-termism anchors are also common during times of crisis, where too much focus is on measures that impact revenue or cash flow in the next quarter.
The “dangerous-to-fail” mindset is another anchor that shuts down growth projects at the first sign of trouble. Also common in times of downturn are capacity anchors where teams are forced to run as lean as possible. Removing these anchors where possible increases the chances of making the kinds of growth bets that tend to perform best.
No. 5: Guide investments with a “theory of the customer”
Leading CFOs actively build and test their own hypotheses about what drives value for customers, instead of deferring that debate to colleagues in sales and marketing. Gartner research shows they spend at least 5% of their time with customers, but intend to increase that to 10%.
No. 6: Know in advance why you would exit new investments
Leading CFOs manage the risk of bigger, riskier growth bets by having open discussions about their downside risks and also the conditions that would signal that they should cut their losses and redirect resources.
The ability to minimize the impact from failed growth bets is key to efficient growth. This means having clear criteria for walking away from an initiative or project.
No. 7: Protect costs that support competitive advantages
Leading CFOs tend to look at nondifferentiated costs for savings while doing their utmost to protect the areas of the business that deliver the most competitive advantage. For example, if a business has a best-in-class IT infrastructure that enables its employees to work from home more efficiently than its competitors during COVID-19 disruptions, now is not a good time to cut back there. At the same time, making cuts to an office supplies budget right now is unlikely to undermine overall performance.
No. 8: Engage the entire business in finding cost savings
Leading CFOs recognize the limits of centralized corporate campaigns and incorporate business partners in the ongoing search for efficiency. Many did achieve this with a winback approach, where business units see a direct reciprocal benefit for reducing their cost structure.
Winbacks can take many forms: Direct winbacks return a portion of savings directly to a budget owner; central winbacks gather savings into a pot used for organizational priorities. Similarly, monetary bonuses can incentivize savings by rewarding payouts to budget owners. Accelerated or matched winbacks do the same — often with a corporate match to further incentivize savings.
No. 9: Use a mix of budget models to align resources properly
Leading CFOs have their teams use a mixture of zero-based and driver-based budgeting models so that they can identify what activities truly support the business. This is how CFOs can zero in on fewer product and service lines in the best geographies for their business to create lean but effective organizations.