Chief Financial Officer (CFOs) resorting to short-term and unsustainable cost-cutting measures during the coronavirus pandemic risk missing the opportunity to reshape their competitive standing over the long-term fundamentally, says Gartner, Inc.
Extensive long-term research into the performance of 1,142 global public companies revealed that organizations able to navigate downturns with industry-leading performance in both cost containment and top-line growth followed a differentiated set of behaviors with regards to managing costs and investments that set them apart from their lower performing peers.
“The pressures facing CFOs to contain costs during this crisis are intense, With 62% of CFOs reporting that they are planning to make significant SG&A cuts this year as a result of the coronavirus crisis, it’s important to first achieve clarity on which costs protect the long-term investments that will drive future profitability.” Said Dennis Gannon, vice president, advisory for the Gartner Finance Practice
Gartner research suggests that across the board, untargeted cost cuts have a negative correlation to long-term profitability.
“CFOs able to navigate successfully through crises and lead their organizations to a stronger position in the aftermath thought about cost containment differently than peers, and that’s because they thought about their growth investments differently.” said Mr. Gannon
Protecting Winning Growth Investments
Successful CFOs have a clear appreciation for the relatively few initiatives that will drive outsized advantage. They not only protect these projects from cost reductions but actually scale up the areas that support these bets. Leading CFOs resist “scope creep” and the temptation to hedge bets on growth investments by entering more geographies or introducing more product lines.
Portfolios of the CFOs of the leading companies Gartner studied were differentiated from a control group of peers by the following characteristics:
- 18% fewer focused growth bets
- 24% fewer product and service lines
- 20% more revenue generated in their largest geographic segment
“Leading CFOs are using this period of uncertainty to reevaluate their business portfolios and reduce the complexity that waters down long-term profitability,” said Mr. Gannon. “By reducing the number of industry battle-fronts that they compete on, these CFOs will naturally find ‘good’ costs to cut, while simultaneously freeing up more resources to channel into the winning growth bets.”
Organizations that used periods of economic uncertainty to accelerate their competitive advantages have traditionally protected costs in R&D and Capex, while differentiating between SG&A costs that drive sales versus those that did not. Leading organizations were more likely to benefit from R&D expenditure and be a “first mover” during times of industry changes or disruption and were also quicker to hike Capex spending coming out of a recession. Logistical costs that supported the ability to ship orders and sales and marketing costs that directly led to new business were shielded from broader cost cutting initiatives.
Sustainable Cost Reductions Require Business Partnership
Beyond reducing the scope and complexity of the growth investment portfolio, CFOs seeking sustainable long-term cost containment should recognize the value in incentivizing business partners to identify cost savings. Leading CFOs to recognize the limits of centralized cost initiatives and establish cost “winback” programs that return a portion of the cost savings back to business unit owners who can deploy these fund to more productive initiatives.
“Business unit leaders will be more likely to identify cost savings if they feel they will receive some benefit for doing so,” said Mr. Gannon. “By creating a mechanism that returns some of the savings back to the business unit, CFOs can create a positive feedback loop where managers are continuously identifying unneeded costs and channeling some of those proceeds into higher-value priorities.”
Gartner’s Efficient Growth research studied the performance of the largest 1,142 public companies by market capitalization in the S&P Global 1200 Index from 2010 to 2018. Of the companies studied, only 5% achieved “Efficient Growth” status, scoring in the top quartile relative to industry peers in long-term revenue growth, long-term cost reduction and short-term simultaneous growth and margin expansion.