There is no shortage of items to add to the CFO agenda. From finance transformation to digital readiness, the list is seemingly endless. However, one less obvious choice is funding flexibility and for finance leaders who are serious about getting strong returns out of growth investments, it should be at the very top.
“Flexible funding has the biggest correlation, by far, with the percentage of growth investments that surpass initial business case expectations,” says Tim Raiswell, finance practice leader at CEB, now Gartner.
The reality is, the average CFO is saddled with individual growth initiatives that fail to meet the promised return on investment (ROI). Such initiatives are twice as likely to miss the expected projections as they are to exceed them. The gap between what is and what is expected has lowered organizations’ portfolio-level internal rate of returns (IRR) finds CEB, now Gartner, research.
CFOs have responded with more vigorous vetting and holding business partners accountable. But what they need is the ability to change as an investment changes. For example, if an opportunity shows more promise than expected, the finance team could double down on that initiative allowing it to over-perform.
“In other words, the most successful companies can easily and quickly ramp their resources up or down for an investment opportunity,” Raiswell explains.
The good news is that natural opportunities abound for companies to pursue this strategy. Finance leaders at the average company indicate that there is a strong case for almost one-third of all in-progress growth investments to receive materially more resources than originally planned. The bad news is that most companies have not built processes that allow them to capitalize on these opportunities. For instance, just 23% of finance teams say they are easily able to provide resources to projects in between budgeting cycles, despite 88% feeling pressure to make faster in-year adjustments.
Raiswell recommends CFOs adopt one of two proven approaches outlined below.
Calculate the upside potential
This approach uses leading indicators of “upside potential” to reallocate resources from initiatives that are low-potential to those with a high potential for growth. At Asurion, a digital devices company, the finance team uses upside potential to understand which of its investments can deliver outsized performance with a well-timed infusion of cash.
For each business case, the team identifies assumptions with the potential to be more favorable than expected — focusing only on the possibilities that the business can control. The team then specifies a best case value for each assumption and uses it to calculate the upside potential for all major growth initiatives.
Companies that use such flexible funding approaches have more investments that exceed the expectation laid out in their business cases — and as a result, stronger returns
The next step is for finance to familiarize performance management with new possibilities for each project per business unit and establish leading indicators directly tied to the likelihood of projects surpassing expectations. When that information is combined with the current performance data of growth initiatives, finance is better able to determine how to reallocate resources.
Reserve funds for strategic growth initiatives
Organizations are typically hesitant to set aside funding that does not have a specific purpose. But it is often the best way to propel performance. The finance team at global investment firm T. Rowe Price was able to realize the benefits of this approach.
The most successful companies can easily and quickly ramp their resources up or down for an investment opportunity
They set aside funds, but limit the use of those funds to a handful of highly strategic growth initiatives. This is done via a layer of scrutiny that assesses the strategic merits of each and whether or not there is sufficient funding.
Companies that use such flexible funding approaches have more investments that exceed the expectation laid out in their business cases — and as a result, stronger returns. CFOs and their teams should take heed and move away from simply minimizing failures to implementing the flexibility needed to maximize their growth investments.