Gartner Says a CFO’s Cost Management Style Can Produce a 7 Percentage Point Differential in Return on Invested Capital
ARLINGTON, Va.--(BUSINESS WIRE)--May 14, 2019--
The best CFO approaches to cost management deliver up to a 7 percentage point return on invested capital premium since 2010, according to Gartner, Inc. The findings come from a new study of long-term value creation in more than 1,000 of the world’s largest companies (by market cap).
“Company costs have increased faster than revenue since 2013, creating a profitability gap that has not been filled even as earnings have improved from their 2014 slump,” said Jason Boldt, director at Gartner. “The choices CFOs make about how to allocate resources to pursue growth and how to cut costs show quantifiable differences to returns on invested capital.”
The findings indicate that companies that spend for revenue growth while also proactively cutting costs, an approach Gartner calls “Efficient Growth,” significantly outperformed those companies that focused on high growth or on reducing costs alone.
“Managing costs is a prevalent theme in recent earnings transcripts, and many large companies have already launched significant cost-reduction programs,” said Mr. Boldt. “While, on average, 81% of a company’s costs are defined by the industry they are in, the remaining 19% are largely determined by executive decision-making, and this is where high-performing CFOs — who deliver the best return on capital — are making their impact felt.”
Four “Cost Anchors” Drag Down Earnings
The research showed four key “cost anchors” — or negative management behaviors that drag down earnings — that most companies suffered from. Eighty-seven percent of companies suffered from poor cost visibility, 89% from cost equivalence, 84% used outdated cost models and 90% suffered from business resistance.
To overcome poor cost visibility, companies should employ multiple budget models that provide a more flexible approach for identifying good costs from bad. A mix of rolling forecast, driver-based budgeting and zero-based budgeting provides CFOs with a clearer analysis of the relationship between costs and revenue.
To overcome cost equivalence, or the perception that all costs are the same, companies should separate costs into transactional and value-add categories.
Companies can update their cost model approach by using a service-based view of costs.
Overcoming business resistance is a matter of helping business partners focus on controllable factors.
Raising “Cost Ladders” That Positively Impact Earnings
Leading cost management executives also encourage four positive cost behaviors, or “cost ladders,” that contribute to positive shareholder return. However, fewer than one in three companies Gartner studied exhibit any of these positive behaviors.
- Encouraging transformational bets: Companies with this positive cost management behavior have mapped their previous investment and clearly categorize between transformational and iterative bets. By doing this, CFOs can better decide how to allocate funds to transformational bets that will have the most impact on achieving the company’s overall investment criteria.
- Increasing cost agility: Less than one in four companies display the cost agility needed to positively impact earnings. Cost management leaders employ “proof of concept” financing that investigates uncertain variables underpinning a growth investment’s chance of success. If a proof of concept test reduces uncertainty, CFOs release full funding to complete the growth investment. This uncertainty-reduction process gives management teams an edge on competitors in taking on risky growth bets with more confidence.
- Detecting early cost warnings: Most companies don’t have a clear mechanism to flag when costs are likely to spiral out of control. Cost leaders in this area operate from a forecast model that identifies cost headwinds and tailwinds, which can be assessed on a quarterly basis, and considers factors such as foreign exchange rates; selling, general and administrative (SG&A) costs; pricing; volume; and productivity.
- Rapid reallocation from losers to winners: Reallocating funds from losing to winning projects can have a very positive effect on overall company performance, but only 15% of companies actively manage projects in a way that makes this possible. An in-progress initiative review can provide the data needed to make such decisions. Evaluating projects that are in progress, based both on current performance and leading indicator trends, can help CFOs identify opportunities to provide additional capacity and funding to projects that are outperforming.
The findings will be explored in more detail in the Gartner presentation “The Three Habits of Elite Cost Cutters,” which will take place at the Gartner CFO & Finance Executive Conference on June 10-11 in Washington, D.C.
About Gartner CFO & Finance Executive Conference
CFOs and senior finance executives seeking to learn more from Gartner research insights on the trends that will shape finance, company performance and personal leadership are invited to attend the Gartner CFO & Finance Executive Conference on June 10-11 in Washington, D.C. Follow news and updates for the conference on Twitter at #GartnerFinance.
About Gartner for Finance Leaders
Gartner for Finance Leaders supports senior finance executives with their most critical priorities. Gartner offers a unique breadth and depth of content to support clients’ individual success and deliver on key initiatives that cut across finance functions to drive business impact. Learn more at https://www.gartner.com/en/finance/finance-leaders.
Gartner, Inc. (NYSE: IT), is the world’s leading research and advisory company and a member of the S&P 500. We equip business leaders with indispensable insights, advice and tools to achieve their mission-critical priorities today and build the successful organizations of tomorrow.
Our unmatched combination of expert-led, practitioner-sourced and data-driven research steers clients toward the right decisions on the issues that matter most. We are a trusted advisor and objective resource for more than 15,000 organizations in more than 100 countries — across all major functions, in every industry and enterprise size.
To learn more about how we help decision makers fuel the future of business, visit gartner.com.
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SOURCE: Gartner, Inc.
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PUB: 05/14/2019 09:00 AM/DISC: 05/14/2019 09:01 AM