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, Inc. This is at a time when recovery from the COVID-19 pandemic will be centered 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'," said 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 highlighted four of the most common mistakes leaders can make when thinking about cost optimization in a downturn.
1) Make blanket cuts with unrealistic targets
Less than half (43%) of organizations 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 organization.
"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 organization needs to grow," said Mr. Bant.
2) Fail to sustain behavior change
Only 11% of organizations managed to maintain cost savings for three consecutive years. This shows that most companies do not take a sustainable approach to cost optimization that can improve margins and growth in the long term.
"This kind of 'crash dieting' is very common in downturns," said Mr. 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 organization."
3) Slow down the organization
Just 6% of organizations consistently managed to invest in growth opportunities without burdening the organization with excessive complexity. Winning companies tend to focus on fewer products and service lines during a downturn than the average organization.
"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," said Mr. Bant. "This will result in fewer, bigger growth bets focused on areas of successful competitive differentiation - and in this recovery around digital."
4) Choke off needed innovation
When organizations 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 organization'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," said Mr. 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 Board of Directors (BODs) 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, BoDs 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," said Mr. 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."
Gartner clients can watch more in Expert Insight Video: How to Create Value Through Cost Optimization.
Non clients can register for a complementary webinar: Balancing Cost and Growth: 7 Mistakes to Avoid in 2021.
CFOs and finance leaders can participate in Gartner research and get complementary access by joining the Gartner Research Circle.
About the Gartner Finance Practice
The Gartner Finance practice helps senior finance executives meet their top 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.