Although I usually talk about COO priorities in my blogs, after a year marked by soaring inflation and the threat of recession, I was eager to read Deloitte’s latest CFO Signals survey from just before Christmas in which CFOs describe their priorities and expectations for 2023, something that of course is of interest to the entire organisation and certainly the entire executive leadership team.
And their priorities are interesting: The top priority for CFOs in 2023 (voiced by more than half of the respondents) is cost management. The second priority is financial performance. Growth only comes third. When asked to go into details about these priorities, the respondents mentioned the ability to cut costs rapidly enough in line with market weaknesses, focusing on cost cutting speed and efficacy, being able to turn around fast enough to control spending and investment if a recession comes, as well as being able to manage pressure on pricing while also dealing with the increase of supply chain related cost.
For companies, these priorities of course have massive consequences as they signal a market of caution and distrust. Other research comes to similar conclusions, having estimated that, on average, SG&A costs have doubled over the last 15 years, but until recently that hadn’t affected margins due to price increases. However, given the current environment of high inflation, many consumers will not be ready to accept further increases, and – as we are seeing right now – many companies are forced to find new ways to reduce costs considerably to avoid the margin erosion that is already happening in many industries.
Uncertainty is also top-of-mind among CEOs
Similarly, in Deloitte’s latest CEO Survey , also from late 2022, global CEOs share modest growth expectations over the next 12 months. Inflation continues to be named as one of the biggest challenges CEOs face today, despite the hope that inflation will decrease during 2023. Three-quarters (74%) of CEOs ranked inflation as their top external concern, when asked what would disrupt their business strategy within the next 12 months.
As CEOs and COOs rethink and reshape many of the key levers that define their organisations, they’re also focused on providing an element of safety and stability and a path forward for their people, balancing how to keep their people positive and engaged during uncertain times.
While more than half (54%) of CEOs believe hybrid workplace models will lead to lower employee engagement and loyalty, 43% of CEOs don’t feel they can mandate employees return to the office, given the tight labour market. To attract in-demand talent, 96% state that their organizations will continue to focus on the employee experience, with 80% planning to develop new tools to drive engagement and loyalty that don’t depend on co-location.
Moving from rapid to transformative cost reduction
The big question is how will companies navigate in this volatile market of modest or no growth, shortage of talent and customers whose willingness to pay is close to a breaking point? Well, for once executive teams will need to distinguish between what is short-term fat-cutting and what is long-term reconfiguration for profitability and growth.
Here is how I would define rapid cost reduction as opposed to strategic cost transformation:
- With rapid cost reduction the horizon is short-term, emphasizing liquidity, continuity and value preservation. Activities could include measures such as eliminating discretionary spend, reducing contractor spend, freezing recruitment, re-negotiating vendor contracts, eliminating low-value activities as well as pausing non-essential projects and programmes.
- Strategic cost transformation, on the other hand, allows for a long-term horizon and with focus on the broader business options in line with market developments. Here, you take the time to design and plan for structural impact, while also creating strong and visible leadership for a marathon, not a sprint. This is where you really configure the company to thrive in a crisis in order to come out stronger and outperform the competition.
When planning this kind of strategic transformation, my advice is always to not neglect the classic, yet highly effective levers of rapid cost reduction, but also take the opportunity to reduce costs more intelligently, more strategically and with the help of new technology.
For example, the smart use of analytics enables much faster opportunity identification and more precision about where and how to cut costs. Artificial intelligence-driven spend analysis tools can enhance spending visibility and provide actionable insights quicker and cheaper than traditional analysis. Other digital solutions can also enable new and more innovative business models. As companies are now setting up their core business solutions and processes for long-term success rather than immediate survival, it has become evident that the notion of a clean, robust core with cloud-native satellites around it is now THE way to develop intelligent solutions in order to increase competitiveness and reduce operational costs.
Interestingly, a huge majority (91%) of CEOs said in the survey that they plan to invest to some degree in AI over the next 12 months. The goals, among other things, are to increase competitiveness in the marketplace, improve decision-making throughout the organisation, increase speed to execution and reduce costs. I couldn’t agree more!
Finally, don’t forget the human angle: Organising for adaptability enables resilience in a complex world. With agile ways of working and adaptable networks of teams, many organisations have the opportunity to increase flexibility in costs and operating model – while still keeping their talents motivated and ready to make a difference. That might very well be part of the winning formula to get us through a somewhat difficult year.
[1] https://www2.deloitte.com/content/dam/Deloitte/us/Documents/us-xa-4q22-cfo-signals-full-report.pdf
[2] https://www2.deloitte.com/us/en/pages/chief-executive-officer/articles/ceo-survey.html
Forfatter spotlight
Tore Christian Jensen
As a part of the Strategy & Operations practice Tore has worked with analysis, development and implementation of operational strategies. Tore has deep experience with aligning business models to changing market demands through optimisation of business processes and aligning systems, organisation and governance accordingly. He has industry experience from manufacturing, transportation, consumer products and energy. His main focus is on on the operational core processes but he also covers administrative support processes. As a program manager Tore has been leading transformation projects for international clients heading multiple parallel projects and reporting directly to executive committee members. His responsibilities cover everything from initiating assessments, identifying opportunities for improvement to building business cases and following up by designing solutions and driving teams through implementation.