Deloitte CFO Survey Summer and Autumn

International indicators

The summer and autumn Deloitte CFO Surveys are sobering reads. Geopolitical risk surfaced as the main concern of Swiss CFOs in the summer survey and developments in the third quarter led to heightened concerns persisting into the autumn. 63% of CFOs continue to rate uncertainty in the economic and financial environment as high. The sustained uncertainty is so marked perhaps because it pervades each of the world’s principal economic regions and Switzerland’s main export markets.

In America, clear direction from the new administration in The White House will take time to establish and there remains a danger that US retrenchment could harm trade at a time when the latest OECD data reveal that growth in world trade lags growth in global GDP for the first time since the aftermath of the financial crisis.

Slowing growth in China and other emerging economies, major targets for Swiss exporters, is a further cause for concern. Whilst some latest data may point towards a soft, rather than hard landing in China, the spectre of the debt to GDP ratio remains at a record level. The risk of a hard landing has not yet passed and will continue to weigh on confidence. Second round effects may transmit the slowdown around the globe, particularly to economies reliant on commodity exports to fuel their growth. Debt-laden economies are vulnerable to weak growth and the IMF has warned recently over mind-bogglingly high levels of global debt in excess of $150 trillion.

In Europe the question of which trade model will emerge from Brexit is far from being answered. Whilst the post-referendum UK economy may be faring better than the darkest predictions, the Brexit process itself remains opaque with few clear signs of the approach to be adopted on either side of the negotiating table. The EU team may favour a tough stance on the four freedoms in an attempt to limit contagion by providing a disincentive to other member states where opinion formers are arguing for their own vote on membership.

The Brexit-induced risks Swiss firms face appear to be two-fold. As an export led economy Switzerland is vulnerable to geopolitical developments which harm free trade or demand in its principal export markets. More specifically the country’s own negotiations over freedom of movement and market access may be disadvantaged by a hardening mood in Brussels. Whilst EU leaders admit that the bloc faces an “existential crisis” there is so far very little detail on which reforms or compromises they may consider to avert the crisis.

The same global risks that CFOs see may be driving another of their concerns - financial market turbulence. Almost two-thirds of CFOs rate uncertainty in the financial and economic environment as high. Investors react to economic uncertainty by requiring higher risk-premia and if the cost of capital rises business cases falter and investments are postponed. The Survey finds that three out of four CFOs do not think now is a good time to add additional risk to their balance sheet and 45% are not optimistic that their company’s financial performance will improve over the next three months. The prevailing low interest rates may be driving a search for yield leading investors towards riskier asset classes, and denting the markets’ effectiveness as platforms for capital raising.

Domestic indicators

Although the prospects for export markets and expansion remain uncertain there is a strong consensus amongst CFOs on Swiss domestic indicators. CFOs expect interest rate stability at least for the term of the 2017 annual plan and only slight movement in the exchange rate over even the 36 month planning horizon. The latter may be recognition of the SNB’s determination to prevent the flight to quality driven by geopolitical uncertainty from further over-valuing the Franc. Inflation expectations too remain benign.

The divided picture of tough but relatively stable conditions at home amidst international economic and political turmoil challenges even the most sophisticated business planning and forecasting capabilities. How should CFOs respond to maintain planning and forecasting accuracy when the planning environment is so volatile?

Challenges and opportunities

Deloitte describes the CFO’s role as one where they are required to have “four faces” – the faces of the Catalyst, Strategist, Steward and Operator. The current geopolitical situation tests the Strategist and Catalyst roles most severely but even amidst all the uncertainty there are ways for CFOs to do familiar things differently and to chart the way forward successfully. Our experience in the market suggests that the leading finance organisations are already confronting these challenges in fresh and innovative ways.

The sweep of digital change through finance brings opportunity to radically improve business planning and forecasting. Breakthroughs in data discovery, in-memory computing, visualisation and mobile equip finance to perform real-time scenario analyses, alert audiences and trigger interventions as soon as KPI exceptions are identified. CFOs needn’t be disconnected from real-time information.

Whilst the outcomes of elections and referenda may continue to produce political and economic shocks the road ahead needn’t be fogged by uncertainty. Technologies now give the CFO the agility to prepare multiple driver-based projections to model different economic scenarios or weigh the possible outcomes from the key strategic decisions faced by management.

Markets react quickly to shock news and the resulting sell-offs cause further share price volatility. The CFO who can provide rapid-fire reforecasts can soothe investors’ nerves by reducing the time taken to release updated guidance. Ultimately the markets reward accurate guidance with a lower risk premium which drives a lower cost of capital and brings a greater range of investment opportunities into contention.

Today’s digital technologies can undoubtedly make a big impact on planning and forecasting but CFOs continue to report that their tools are being used simply as data collection and aggregation systems and that their potential as driver-based planning engines remains largely untapped. Even when used to its full potential, technology alone is not the whole solution. Capturing the benefits of investments in finance systems requires a complementary focus on the other key finance enablers – data, information and talent. Whilst the tools bring the freedom to mine and extract insights from ever bigger datasets, that freedom brings with it the responsibility of relentless focus on data integrity. As the amount of planning data continues to expand, governance, more than ever, is the watchword.

Rolling forecasts present a further way of managing the uncertainty. As a forward look over the 12, 24 or 36 month horizon refreshed frequently, rolling forecasts throw light into the blindspots inherent in traditional models which project to the end of the current financial year and leave the update of future years to the annual planning round. Geopolitical risks are by their nature relatively long term in their impact. The sooner a multi-period forecast can be refreshed for the outcome of an event or the latest economic data the sooner the organisation can assess whether projected performance is still on-track and aligned with the strategic plan.

Whilst economic and political risks can be global in nature, their impact is felt at the national or regional level. In this context the country or legal entity view of projected performance becomes as important as the more established business division view. Planning data models can be constructed so that each planning unit represents an intersect of business line with legal entity and / or region. The extra granularity makes possible a more accurate application of business drivers and planning assumptions to a specific business “cell”. Deeper involvement of regional and country CFOs in planning and forecasting allows for constructive challenge and validation of the projections for a cell and, by aggregation, for the regional or national businesses for which they are responsible. To be successful the CFO needs not only to construct the right data model, but also to coach and develop the business partnering skills – financial insight, business acumen and relationship management – which underpin an effective challenge process.

Accurate planning and forecasting promotes well-informed decision taking by Boards and management, promotes share price stability by giving clear guidance to investors, reassures regulators and, in a time when forecast accuracy is increasingly used as one determinant of CFO’s variable compensation, protects CFO remuneration.

That last point at least could help to put a smile on the face of the CFO, perhaps on all four faces.

We hope that you find these perspectives thought provoking and useful and welcome your contributions to the discussion of the points raised in the CFO survey.