Economic cycles and disruption are where top CFOs set their firms apart from the competition

Conflicting signals on the economy and related uncertainty should be looked upon by CFOs as an opportunity to accelerate growth and innovation strategies, according to Gartner.

Gartner experts highlighted the key differences between firms that use uncertainty to accelerate business performance and those that stall, and the specific behaviors of CFOs that allow their firms to accelerate during times of economic and industry uncertainty.

“Far from being something to dread, changing economic cycles and disruption are where winning CFOs set their firms apart from the competition,” said Mark Wiedemer, group vice president in the finance practice at Gartner.

“They accomplish this by operating with a different mentality regarding the opportunities external change presents and focusing their organizations on growth that leads to competitive cost advantage.”

Gartner’s research is based on a long-term study of the S&P Global 1200, which identified key differentiators of the 5% of companies that were able to achieve top-quartile performance in long-term revenue growth, cost-management, and maintain a balance between growth and expanding margins.

Gartner found that the performance of these companies actually accelerated through the last recession, sustaining their competitive advantages from their lower-performing industry peers over the long term. Gartner refers to this rare combination of achievements as “Efficient Growth.”

A different view of the economic cycle

CFOs of the Efficient Growth companies displayed a key difference in mindset when approaching economic turns compared with peers. While most companies are managed for either “boom” or “bust” periods, winning CFOs approach economic cycles in four distinct phases: stable growth, peak growth, recessionary transition and trough.

“There were two key insights from studying how the highest-performing CFOs approached the business cycle,” Mr. Wiedemer explained to the more than 400 CFOs and finance leaders in the audience.

“The first is that they refused to see business cycles as binary and displayed a more nuanced understanding of the different phases of their organization’s growth. Perhaps more importantly, they understood that different parts of their business may be experiencing different phases of the cycle, with some business units experiencing markedly different levels of growth.”

This elongated view of the business cycle resulted in a different type of planning, focused less on seeing around the corner of macroeconomic cycles and more tightly focused on the realities of their business. These CFOs were able to plan out two economic phases ahead and manage resources accordingly.

Scale vs. scope

“Another key lesson from Efficient Growth CFOs was their approach to cost management and their realization that not all growth is created equal,” said Mr. Wiedemer.

“In practical terms this played out in their relative approach to the question of ‘scale vs. scope’ within their cost structures. The best CFOs in this area recognized the good costs that led to growth and were unafraid to scale them, focusing on generating greater gains from fewer industries, business lines and geographies.”

Gartner found that Efficient Growth companies operated in 20% fewer industries than peers, choosing to focus on a few core industries where they maintained a high degree of expertise and maintained technological and competitive advantages. These companies also operated 24% fewer lines of business than rivals.

A tighter focus on core business lines led to a 9% variable cost advantage over peers as growth and reduced complexity drove down costs. Finally, these companies also generated 20% more revenue from their largest geographic segment.

Focusing on the right geographies led Efficient Growth companies to improving the customer experience for their most valuable segments, thereby protecting those relationships from competitive threats.

By focusing on how scale contributed to growth, Efficient Growth CFOs were able to distinguish between good growth and good costs that supported it.

How finance leaders can accelerate in the turns

Mr. Wiedemer shared three key areas of focus for CFOs who want to better prepare for accelerating company performance during times of uncertainty. Each area of focus is being explored in more detail with dedicated learning tracks during the Gartner CFO and Finance Executive Conference.

• Focus on personal effectiveness — The most effective CFOs prioritize their time differently, have a customer-centric focus, strong relationship with their sales leaders and go beyond the numbers to know their business.
• Create team readiness — In order to seize opportunities presented by an economic turn, CFOs must have teams ready for the challenge. This means achieving clarity on what skills can be taught vs. bought and adjusting hiring and training processes accordingly. Aligning finance teams to better meet the needs of the business through a decision-support model is also increasingly critical.
• Become digitally relevant — Finance leaders must own and create the digital strategies that will enable better performance from the data that accounting, financial planning and analysis and their risk teams uncover.