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CFOs Must Protect and Pivot Long-Term Investments

April 27, 2020

Contributor: Jackie Wiles

Effective CFOs will evolve, not slash, long-term investment and growth bets as part of their COVID-19 cost management response.

Many CFOs, eying the worst-case scenarios for coronavirus pandemic effects, see drastic cost management initiatives as inevitable. But to maintain business momentum now and recover as business conditions improve, CFOs still need to invest in longer-term growth bets — even as those scenarios themselves evolve.

“We know from studying companies that were successful during prior business-cycle turns that investing in growth bets now is vital to come out on top as the tide changes,” says Alexander Bant, Vice President, Gartner. “To emerge as a leader in your industry, you need to pivot quickly and replace previous long-term growth investments with new ones.”

CFOs spend 5%-10% of their time with customers. In crisis mode, Gartner recommends CFOs spend even more time on the front line

CFOs need a solid theory of how their business model is changing to guide the business through rethinking these investments — starting with the customer base and its needs. In normal conditions, the most effective CFOs spend 5%-10% of their time with customers. In crisis mode, Gartner recommends CFOs spend even more time on the front line listening to how their key customers are modeling out the recovery and how, therefore, things will change.

Download: Cost Optimization Framework for Finance

Stay strategic even as scenarios worsen

Gartner surveyed 145 CFOs and finance leaders on April 12, 2020; 94% said they were preparing for a revenue contraction this year, and 28% said revenue would contract by 31% or more. At the same time, 50% said they were suspending long-term growth investments on a selective basis, and 15% said they planned to suspend them altogether.

“Many CFOs have told us they are using the most severe downside scenarios to inform their decisions right now, which means many are considering drastic cost management actions across April and May — and that includes reductions in longer-term investments,” says Bant.

But knee-jerk, reactive decisions now could have unintended and existential consequences for the longer term — and that’s true even in the early stages of cost remedies.

A programmatic approach to cost optimization should drive savings and efficiencies but take account of the associated risks

In a recent Gartner snap poll, 62% of CFOs said they intend to cut some selling, general and administration (SG&A) budgets by at least 10% this year; 18% said they plan to cut every category of SG&A budget by at least 10%. But across-the-board costs are rarely strategic.

“This type of ‘peanut buttering’ of budget cuts can turn out to be shortsighted,” says Bant. For example, making heavy cuts to IT at a time when your business continuity relies on remote working technology creates new risks that could negatively affect future performance — while you’re trying to sustain business today and recover as conditions improve.

A programmatic approach to cost optimization should drive savings and efficiencies but take account of the associated risks. In this way, CFOs can continue to deploy resources and capacity to areas that are critical to business strategy, while deprioritizing initiatives with lower strategic importance.

Read more: How to Pick Your Best Cost Initiatives

Strategize for what’s to come

CFOs have leapt to triage the initial effects of the COVID-19 crisis with the “low-hanging fruit” of cost cutting (e.g., travel, supplies), and soon moved onto more extensive reductions in certain line items. But now that the initial pandemic panic has faded, it’s time to explore innovation and look for areas to invest to grow the business.

That might seem counterintuitive, especially when confidence has yet to return, but it’s important to put this doldrums phase to good use so you are ready to ramp up for recovery.

Gartner witnessed this dynamic after the 2008 recession, when a select few — just 60 of the largest publicly traded companies in the U.S. and Europe — emerged from the recession ahead of their competitors and sustained their outperformance for the subsequent decade.

Deconstruct and clarify evolving business cases into their most uncertain components so you can decide when and how to fund investments that are critical

Progressive business leaders at these outperforming companies prepared early and confidently to act before the scenarios were totally clear. And they certainly didn’t power their way to success with indiscriminate cost cuts. In fact, Gartner research shows that focusing only on cost-cutting has historically tended to come at the expense of top-line growth.

Admittedly, it’s even more challenging to balance top- and bottom-line growth during a crisis, when conditions and scenarios are unclear. One critical step is to address information gaps so that uncertainty doesn’t overwhelm investment decisions.

But if you yield to the cost pressure by slashing growth investments, it could set your organization back years in terms of growth and innovation. Instead, start to deconstruct and clarify evolving business cases into their most uncertain components so you can decide when and how to fund investments that are critical to business continuity and recovery. If you don’t do this now, it will be difficult to stave off competitors or ramp up quickly during any recovery.

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