With Hong Kong’s economy moving out of recession, growth in China accelerating and signs of an emerging recovery in North American and European markets, you could be forgiven for thinking that the role of the CFO was about to become a lot easier than it has been over the last 12 months.
In fact the opposite may well be true: it’s about to get even more complex as CFOs now face tremendous challenges in forecasting the recovery as they prepare business plans for FY2010, while dealing with weak balance sheets, managing working capital and coping with tight credit conditions.
Finance will be a critical part of company strategy as the economy transitions.When markets turn, the best returns go to those companies that respond quickly – now is the time for bold moves, disruptive strategies and positioning to win. CFOs have never been better positioned to help create a more intelligent, dynamic and integrated enterprise to navigate the new economic environment as they help their companies seize opportunities available in the recovery.
Leading in Turbulent Times
Over the last decade, the role of the CFO has been steadily morphing towards a more strategic position driving greater value in the enterprise and holding more statutory responsibilities. Then, in the third quarter of 2008, CFOs were thrown into the spotlight to implement emergency measures as markets and economies began to slide. Until this point, CFOs had traditionally focused on maintaining their income statements, but the rapid deepening of the recession shifted this focus to the balance sheet.
In the current business environment, cash flow is central to survival and strategic flexibility. A company’s current and expected cash position is just as important as its income stream when considering most purchasing decisions. As a result, CFOs are applying more scrutiny to spending and investments and more power is shifting to them as they become key players and leaders in major decisions. They are looking at every investment that the company considers and asking “Is this investment really necessary right now?”
A recent global poll of CFOs undertaken by Duke University provides some insight into how CFOs are answering that question. According to the survey, CFOs in the U.S. expect capital spending to decline by three percent over the next 12 months with tight credit markets continuing to dampen recovery efforts. More than half of U.S. CFOs surveyed say the credit market has proven detrimental to their business.
By comparison, CFOs in China are generally more optimistic than their U.S. and European counterparts and plan to increase capital expenditure by six percent over the next year, reflecting the earlier recovery in Asia. During this period of economic transition from recession to rebound, Hong Kong and China CFOs have an opportunity to lead a plan for the business that identifies opportunities to restructure, preserve capital and streamline operations, as well as tap into growth opportunities.
Based on IBM’s experience, our research and an analysis of early winners during the recession, we are advising business leaders and CFOs in particular, to:
- Focus more than ever on value
- Exploit opportunities presented by the current situation
- Act quickly to gain first mover advantage as the economy recovers.
Focus on Value
A focus on value means conserving capital and cutting expenses where little value is being created, as well as redeploying capital to activities, products and markets that generate growth, margins and true differentiation. It means doing more with less, focusing on the core, and realigning relationships to tightly manage volatility and risk.
In reaction to changing market dynamics, opportunities may also exist to structurally reduce expenses and create value. Ruthlessly re-prioritising initiatives based on the value they will deliver to the business and moving fixed costs to variable through alternative sourcing models are two solutions to investigate and implement.
Companies also need to position themselves to exploit opportunities. The severity of the downturn has created opportunities to gain share and build key capabilities. As the economy recovers, winning companies will have a vision for what moves could reshape their industry to their advantage. CFOs should seek to leverage financial and nonfinancial data to generate timely, relevant insights on emerging trends to inform decision making.
For companies with cash reserves there will be acquisition opportunities that have not existed before. With business models and asset prices under pressure, bargain acquisitions will be available for companies to springboard their growth.
Similarly, now is also a good time to stay focused on human capital issues, such as keeping and acquiring top performers. With the job market in Hong Kong expected to free-up in the first quarter of 2010 as companies hire-up for their FY2010 business plan and incumbents feel more confident about changing employers, now is the time for strategic CFOs to ensure retention plans are in place to hold on to key staff, and hiring plans are developed to target top performers before the market heats up.
Be Focused, Act Quickly and Manage the Change
Hong Kong businesses need to move quickly to gain first-mover advantage and seize opportunities available during the recovery, or risk losing market share to more nimble competitors. No matter what their strategy is, change will be required. Winners will be able to respond promptly to market demand by working smarter and driving efficiency and productivity through innovative and flexible business models.
Predicting the shape of the recovery over the next 6-12 months is a difficult business, and CFOs in China, the rest of Asia and the US cite the ability to forecast results and balance sheet weakness among their top concerns. Striking the right balance between preserving capital and mitigating risk, versus pursuing growth and opportunity, will determine which companies gain market share as the economy rebounds.
In this environment, the role of the CFO will be as much as business consultant as a finance resource. For those strong and bold enough, the current period represents a rare, once-in-a-lifetime opportunity to transform their businesses and emerge as clear winners in the recovery.
About the Author
Vincent Wong is partner and Hong Kong practice head, Global Business Services, IBM China/Hong Kong. A certified public accountant in Pennsylvania in the U.S., he earned a B.S.E in Computer Science from the University of Pennsylvania and a B.S. Econ. degree in Finance and Accounting as well as an MBA from the Wharton School of Business. He started his consulting career with PwC Consulting in 1989 and then joined IBM in 2002 when IBM acquired PwC Consulting that year.