As CFOs attempt to boost cash flow and profitability into 2021, they might be tempted to cut costs using traditional methods. But during these historically stressful times, finance leaders should increasingly think about the future of their company and reallocate resources in a way that is less than traditional.
Gartner analysts recently highlighted four of the most common mistakes CFOs make as they narrow their focus on cost optimization amid a prolonged economic downturn. These mistakes are equally relevant to small businesses as they are to large business, as well as to both tech and non-tech companies.
Mistake No. 1: Making blanket cuts with unrealistic targets
Fewer than half, 43 percent, of organizations achieve the cuts they set out to in the first year of cost reduction, Gartner research has found, which suggests intended cost cuts are rarely feasible, and the process of trying to achieve them can greatly upset an organization.
"Setting the bar too high can look good on paper, but it's likely you'll not only fail to achieve overambitious targets, you will also underfund the things your organization needs to grow," Alexander Bant, Gartner Finance research vice president, said.
Mistake No. 2: Failing to sustain behavior change
Only 11 percent of organizations manage to maintain cost savings for three consecutive years, which shows most companies fail to take a sustainable approach to cost optimization that can improve margins and growth long-term.
"This kind of ‘crash dieting' is very common in downturns," Bant said. "It's not the right way to drive the best long-term business outcomes."
Instead, making sustained improvements to margins over several years creates a bigger cumulative effect than a few quarters of drastic measures, while also being less disruptive to the organization.
Mistake No. 3: Slowing down the organization
Just 6 percent of organizations consistently invest in growth opportunities without burdening the company with excessive complexity, Gartner says. Successful companies focus on fewer products and service lines during a downturn than the average organization.
"This means companies need to invest for scale in their best performing areas rather than adding unnecessary scope that can slow the whole organization," Bant added. "This will result in fewer, bigger growth bets focused on areas of successful competitive differentiation."
Mistake No. 4: Choking off innovation
When organizations do pursue growth opportunities, fewer than one in 10 create enough capacity to ensure success. Being conservative with new bets may appear prudent in times of crisis, but will often damage the organization's long-term overall performance.
"It may seem counterintuitive, but this is the stage in the business cycle where big, bold bets pay off the most," Bant said. "Being too tentative can lead to growth investments not returning what they should and potentially losing a first-mover advantage to a more ambitious competitor."
To avoid each of these pitfalls, Gartner says, CFOs can hedge their bets by investing heavily in digital transformation on a continuous basis.
"Companies that pulled ahead out of 2008 paid more attention to where their customer was going and protected costs that drove new growth," Bant said.
"We know we can't cut our way to long-term sustainable growth. This recovery is an opportunity for leaders to rapidly go digital in everything they do. Meet customers in new ways, conduct work in new ways, and automate operations," he said.
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