Many finance leaders are currently at a high risk of making four common mistakes that could negatively impact their ability to fund digital growth and reduce expenses overall, according to Gartner.
This comes at a time when recovery from the Covid-19 pandemic will be centred on rapid digital transformation.
“We’ll look back on this recovery and say, ‘there were companies that funded digital change correctly, and those that missed the boat’,” says Alexander Bant, vice-president: research in Gartner’s Finance practice. “As leaders try to boost cash flow and profitability into 2021, they will be tempted to cut costs with traditional methods. Finance leaders should think about the future of their digital enterprise and reallocate resources in a way that will shave years off their digital transformation.”
Gartner analysts highlight four of the most common mistakes leaders can make when thinking about cost optimisation in a downturn.
Make blanket cuts with unrealistic targets
Less than half (43%) of organisations achieve the cuts they set out to in the first year of cost reduction. This suggests that the intended cost cuts are often not feasible in practice and the process of trying to achieve them can be highly disruptive to an organisation.
“Setting the bar too high can look good on paper but it is likely that not only will you fail to achieve overambitious targets, you will also underfund the things your organisation needs to grow,” says Bant.
Fail to sustain behaviour change
Only 11% of organisations managed to maintain cost savings for three consecutive years. This shows that most companies do not take a sustainable approach to cost optimisation that can improve margins and growth in the long term.
“This kind of ‘crash dieting’ is very common in downturns,” says Bant. “It is not the right way to drive the best long-term business outcomes. Making sustained improvements to margins over several years has a bigger cumulative effect than a few quarters of drastic measures, and it is less disruptive for the organisation.”
Slow down the organisation
Just 6% of organisations consistently managed to invest in growth opportunities without burdening the organisation with excessive complexity. Winning companies tend to focus on fewer products and service lines during a downturn than the average organisation.
“This means that companies need to invest for scale in their best performing areas rather than adding unnecessary scope that can slow the whole organization,” says Bant. “This will result in fewer, bigger growth bets focused on areas of successful competitive differentiation — and in this recovery around digital.”
Choke off needed innovation
When organisations do pursue growth opportunities, only 9% create enough capacity to make them a success. Being conservative with new bets may appear prudent in times of crisis, but in many cases, it damages the organisation’s overall performance in the long-term.
“It may seem counterintuitive, but this is the stage in the business cycle where big, bold bets pay off the most,” says Bant. “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.”
Shift to digital
Leaders are already pivoting their business models and internal operations to meet digital customers, do more online, and automate as many routine tasks as they can. In fact, a recent Gartner survey showed that 67% of boards expect that digital technology initiatives will serve as the top strategic business priority for the next two years.
Survey respondents expected their IT budgets to increase nearly 7% for 2020. Gartner’s latest IT spending forecast also predicts that global IT spending will bounce back strongly in 2021. At the same time, boards are placing pressure on leaders to reduce expenses in functional areas such as marketing and HR, where leaders are expected to make budgetary cuts.
Moreover, another Gartner survey of business leaders from mid-2020 showed that 65% plan to accelerate digital business transformation further. Leaders must enable this rapid digital change, while getting on firmer financial footing.
“Companies that pulled ahead out of 2008, paid more attention to where their customer was going and protected costs that drove new growth,” says Bant. “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.”