Stock illustration: Cutting dollars with an ax

A recent Greenwich Associates/Bloomberg survey found that 19 percent of corporate treasurers are being asked to cut costs in response to the Covid-19 crisis. The Gartner Finance Practice just released an even more alarming statistic: In response to coronavirus-related business disruptions, 62 percent of CFOs are planning to cut one or more areas of selling general, and administrative (SG&A) expenses by at least 10 percent. Only 38 percent of the 317 CFOs that Gartner surveyed are not planning reductions of 10 percent or more in any category of SG&A.

Gartner warns that “CFOs resorting to short-term and unsustainable cost-cutting measures during the Covid-19 pandemic [may miss] the opportunity to fundamentally reshape their competitive standing over the long term.”

If positioning the company for competitive advantage and long-term growth seems a far-fetched goal right now, Dennis Gannon, vice president, advisory, for the Gartner Finance Practice, explains: “The pressures facing CFOs to contain costs during this crisis are intense. [But] it’s important to first achieve clarity on which costs protect the long-term investments that will drive future profitability.”

To that end, the Gartner Finance Practice points to the firm’s extensive research into the long-term performance of 1,142 public companies around the world. This research suggests that there are fundamental differences in behavior between the companies that are able to maintain high performance in both cost containment and revenue growth during a downturn, compared with their lower-performing peers.

Gartner recommends three types of actions that treasury and finance professionals can take to help ensure resiliency in difficult times:

 

1. Drive cost optimization across the enterprise.  Cost-cutting exercises need to be carefully targeted. They should protect research and development (R&D), planned capital expenditures, and logistics spending that supports the ability to ship orders. They should also distinguish between SG&A costs that drive sales and those that do not.

Senior management should also recognize that centralized cost-cutting initiatives will have limited results. A more effective approach motivates business unit managers to propose changes. “Business unit leaders will be more likely to identify cost savings if they feel they will receive some benefit for doing so,” Gannon says. When a specific division generates savings, the company can cycle a portion of the financial benefit back to that group, to increase its funding of productive initiatives. “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.”

Meanwhile, treasury and finance leaders should also be evaluating whether their risk assessment processes need to be updated to accommodate the financial and operational exposures the business is likely to face before the Covid-19 crisis is over.

 

2. Drive business transformation.  During the crisis, utilize scenario planning to drive decisions around the scope and complexity of your product portfolio. Is this the right time to divest a particular area of the company? Gartner’s long-term research indicates that, compared with their peers, the companies best able to navigate a downturn are those 18 percent fewer focused growth bets, 24 percent fewer product and service lines, and 20 percent higher revenue in their largest geographic segment.

“Leading CFOs are using this period of uncertainty to re-evaluate their business portfolios and reduce complexity that waters down long-term profitability,” Gannon says. “By reducing the number of industry battlefronts they compete on, these CFOs will naturally find the ‘good’ costs to cut, while simultaneously freeing up more resources to channel into the winning growth bets.”

Although it may sound counterintuitive mid-crisis, but management teams should also consider opportunities for growth. Even those currently facing difficult circumstances should develop a list of merger and acquisition (M&A) targets that they could pursue should there be any shift in economic conditions.

 

3. Lead the next-generation workforce.  Finally, corporate leadership should examine their messaging and talent positioning to ensure the organizational climate supports the added discipline—and confidence in senior management—that teams across the company will need to exhibit in order to survive the crisis. This is also a good time to look at opportunistic role transitions that could better position talent for the environment the company will emerge into, post Covid-19.

 


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