November 05, 2019
November 05, 2019
Contributor: Jordan Bryan
Companies that achieve efficient growth focus on building scale, not scope, into their cost structures.
Controlling costs is not a new CFO priority, but the competitive pressure for top-line growth since the 2008 financial crisis has finance leaders urgently seeking ways to translate long-term growth bets into sustainable profitability. To capture top-line opportunities while expanding margins, CFOs need to restructure their cost bases.
Companies that successfully grow the top line while reducing costs — hitting both short- and long-term targets — characterizes a performance trajectory that Gartner calls “efficient growth.” Efficient growth companies outperform across business cycles, reinvesting cost savings to fuel innovation and growth. However, most CFOs are struggling to create the conditions for efficient growth. How CFOs drive decision making on costs and growth will drive shareholder returns for the next decade.
New economic and competitive factors are emerging that are consuming CFO time and attention:
“In strong economic times, investors tend to focus on costs indirectly through the lens of growth — and are willing to view cost increases as investments,” says Jason Boldt, Director, Gartner. “But when macroeconomic uncertainty rises, their focus shifts rapidly to the bottom line.” Under this pressure, CFOs and senior management teams often make decisions that don’t support long-term value creation. In the race to demonstrate cost-cutting efforts to protect shareholder returns, senior management often destroys value by cutting head count, switching to lower-quality inputs or delaying capital and innovation investments needed to achieve long-term goals.
Efficient growth companies, by contrast, force a longer-term view by focusing their management teams on building scale, not scope, in their cost structures. However, these success stories are rare. Only 5% of CFOs from the largest 1,200 global companies have been able to outpace industry competitors since the end of the financial crisis in both revenue growth and cost reduction. The payoff for doing so is significant, with efficient growth leaders earning a 6.2 percentage-point return on invested capital (ROIC) premium over competitors and a 7.1 percentage-point ROIC premium over the broader S&P Global 1200.
How do they do it? Research shows some unique approaches. When compared with similar-sized competitors, efficient growth companies:
These actions — focused bets, simple product and service portfolios, and dense operating and customer footprints — build and reinforce the necessary scale in the cost structure to secure long-term profitable growth across economic cycles.
Read more: 3 Hallmarks of Standout CFOs
The following steps will help CFOs seeking to build their own growth plans from the foundation of differentiating costs:
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Recommended resources for Gartner clients*:
Five Critical Cost Management Tactics For Finance Executives
*Note that some documents may not be available to all Gartner clients.