CFOs are Confronted with Environment Characterized by Tepid Demand Growth, Stubbornly High Costs, and Constrained Access to Capital
CFOs are facing a “deadweight” economy that challenges an organization’s ability to meeting corporate performance expectations, according to Gartner, Inc. Confronted with these difficult economic conditions, CFOs must address five emerging challenges to drive profitable growth in this environment.
CFOs now contend with tepid demand growth, stubbornly higher costs and constrained access to capital, making it harder to sustain the corporate performance stakeholders have come to expect. Gartner characterizes this combination of headwinds as the deadweight economy.
“Growing economic optimism in advanced economies obscures an inconvenient truth: favourable conditions that have powered growth in the last decade are no longer present,” said Randeep Rathindran, distinguished vice president, research, in the Gartner Finance practice. “The deadweight economy challenges an organization’s ability to meet corporate performance expectations by constraining traditional avenues for growth, pricing, investment funding, cost management, people management, and productivity gains and deadweight economic conditions can be expected to linger through most, if not all, of organizations’ current strategic planning horizons.”
Five Challenges Arising from the Deadweight Economy
The deadweight economy – coupled with recent social, political, and economic shifts and events – brings new and unique challenges to CFOs, including:
Zero-Sum Growth: Given cooling demand conditions in advanced economies, CFOs and their executive teams will have to deaverage their segmentation of markets, customers and value chains to identify new growth opportunities and customers that are underserved by industry titans.
Waning Pricing Power: Greater price sensitivity from indebted consumers and B2B customers reduce the viability of pass-through pricing as a way to neutralize the impact of cost pressures. CFOs should reconsider their automatic pass-through pricing strategies and assess opportunities for dynamic pricing.
Expensive Productivity Malaise: As the productivity stagnation continues, organizations will find it critical to drive scalable outcomes from expensive digital investments. The impending commercialization of generative AI and the rise of machine customers makes it important to strengthen the working relationship between humans and technology.
Institutional Knowledge Cliff: The tacit and experiential knowledge required to fully digitalize processes is quickly eroding due to the aging workforce and labor market trends. Organizations seeking to accelerate digital must do so in a seller’s market for technical skills, as the demand for digital talent far outstrips its supply. Expensive digital talent requires institutional knowledge to implement and run digitalized processes and analytics that deliver against lofty ROI expectations.
Bank Lending Squeeze: As many organizations come up on maturity dates for debt and revolving lines of credit, and encounter higher costs when refinancing, their CFOs will now have to consider alternate sources of financing for growth and maintaining cash reserves. This means exploring nontraditional funding sources, such as secondary equity issues, public-private consortia, private investment in public equity, venture capital, peer-to-peer lending and nondilutive financing options.
Three Strategies for CFOs to Alleviate Deadweight Economy Constraints
Although the deadweight economy poses material performance challenges and risks to organizations, there are proven strategies that CFOs can use to cultivate outperformance for their organization.
1. Focus Spending, Resources and Efforts on Points of Differentiation: CFOs should emphasize to their peer executives the primacy of differentiated spending and should encourage planning processes that disproportionately drive spending and resources to areas that support or create unique capabilities that differentiate their organization from competitors.
2. Adopt a Capital Activist Posture to Grow Market Share and Secure Funding: Capital activists (CFOs who adopt the mindset of an activist investor when making capital allocation decisions) embody a “nothing is sacred but the strategy” mindset.
3. Relentlessly Drive Digital Cohesion to Realize Productivity Gains: A proven way to drive better productivity and business results from digital spending is to focus on digital cohesion - i.e., assessing the interdependencies between various digital initiatives (and across digital initiatives, existing enterprise capabilities, data, and skill sets) and using that knowledge to make informed funding and project performance management decisions in service of an enterprise outcome.
“While the average organization will resort to managing against short-term economic volatility, forward-thinking companies that can successfully navigate these challenges will dramatically improve their performance trajectory and create sustained competitive advantages,” said Rathindran.