‘CFO sentiment is increasingly negative’: Finance chiefs assess layoffs, planned investments, government aid — and returning to work

Welcome to Human Capital, an open exploration of the ideas and people moving financial services forward. While we typically feature a leader or rising star changing the game, in this special edition we check back in with a group of leaders at PwC from a previous edition who are on the frontline of advising businesses during the coronavirus pandemic. Click Subscribe above to be notified of future editions.

I recently had a chance to regroup with executives at PwC as they keep a finger on the pulse of how corporate leaders are sizing up the coronavirus pandemic and economic downturn.

Notably, the consulting giant's surveys of chief financial officers, as well as its ongoing conversations with corporate executives, are revealing what U.S. chairman Tim Ryan calls a "turning point" — a wider acknowledgment that the global economy is in recession, that businesses previously thought to be resilient may now be vulnerable, and that "the way things were" in the workplace may, in fact, forever remain in the past.

Below are excerpts from the conversation, which other members of the media joined as well.

Tim Ryan, U.S. chairman and senior partner, PwC

In terms of overall sentiment, we are clearly seeing a turning point around earnings, investments, and when we bounce back.

We're clearly in a recession at this point, and CFOs are trying to figure out how long and how deep the recession is, and they're struggling with how do you provide guidance when you simply don't have the answer.

If I were to highlight five key themes that we're seeing:

1. It's hard to find a company that is not focused on managing cost, relooking at investments, focusing on liquidity, preserving capital, and accessing, where appropriate, the CARES Act. That's what I would call an immediate-term theme that we're seeing almost universally.
2. We're seeing and having a lot of discussion around what it looks like when we come back to the workplace. Many companies are using their own operations in China and South Korea as a model, and they're also looking to other data points to inform them in terms of how to come back to work. The safety and managing the anxiety of their employees and suppliers is also very much on people's mind as they consider how and when we come back to work.
3. Some industries will make permanent shifts as we come out of the COVID-19 crisis, whenever that is. And the reality is many industries that were already under pressure to change their business models are seeing the COVID-19 crisis accelerate that. So industries such as retail, banking, insurance, manufacturing, higher education, and even our industry, professional services, were already seeing changes afoot, and the COVID-19 crisis is accelerating many of those changes. So the concept of coming back to "the way things were" — we're seeing a growing realization that, in certain industries, depending on where you sit, things may or may not come back.
4. Businesses by the thousands have jumped into the deep end of the pool on ESG, a topic that many of us were active in and working very hard on prior to the crisis. Many organizations, particularly on the social and the governance side, have jumped into the pool in the deep end, and we are seeing remarkable acts of kindness and focus on society overall. Many CEOs that we’re speaking with have indicated a strong desire to keep that up even when we do come out of this crisis.
5. We are clearly seeing that boards are more actively engaged than ever, working with management teams, focusing not just on the short term but on strategy, making sure organizations are transparent and that organizations are calm and confident working through this challenging time even when you don't have the answers.

Amity Millhiser, vice chair and chief clients officer, PwC U.S.

CFO sentiment is increasingly negative, with far less confidence in companies bouncing back quickly. The biggest change is that CFOs really believe this will have a lasting impact on their business. It will take longer to return to business as usual, and as Tim said, in certain industries and with many of the companies we talk to, business as usual will also look very different going forward.

What's similar this time to the last time around is that 74 percent of the CFOs report that their business is experiencing a significant impact as a result of COVID-19, and just over 80 percent of those surveyed expect that COVID-19 will decrease either their revenues and/or their profits for 2020.

What's different this time around is that 61 percent of the CFOs said that their business would return to normal within three months, and that's a significant decrease compared to two weeks ago, when 76 percent thought their business would return to normal within three months — and is in fact down sharply from the first time we ran this survey.

Seventy-five percent of the U.S. CFOs this time said the financial impacts on their business is a top concern, and 70 percent said they're concerned about a potential global recession. When we started this one month ago, CFOs were more worried about the global economy and a recession there, and more confident about the resiliency of their own businesses. But over time, what we're seeing is they've accepted the likelihood of a global recession and they're more focused, frankly, on the impact on their businesses — so, more concerned about things closer to home.

The second thing I want to highlight is that as this crisis stretches further into 2020, that financial impact is, by far, their top concern. As companies continue to see decreased demand from consumers, whether it's due to lockdown and shelter-in-place or increasing unemployment, they're also seeing a shift in demand in terms of looking at more digitally enabled consumption as well as moving toward more basic products. Those sorts of shifts in demand and, in fact, decreases in demand are requiring them to be much more focused on near-term liquidity. Over 80 percent of the CFOs are now looking at cost containment measures, which is an increase significantly from the last time we ran the survey.

Some of the areas that CFOs are considering to protect their liquidity include workforce actions.

As difficult as decisions around layoffs and furloughs are, 26 percent of U.S. CFOs are anticipating layoffs as a means of cutting costs, and this is a marked increase from two weeks ago, when only 16 percent of the CFOs were considering layoffs.

When you look at it by sector, only 13 percent of the financial services CFOs expect layoffs, with 36 percent of industrial product CFOs anticipating layoffs and 30 percent of consumer market CFOs anticipating layoffs.

Pretty consistent with the last time around, two-thirds of those surveyed are considering deferring or canceling planned investments. The highest percentage of those are in facilities and capex. In fact, of those CFOs anticipating halting investments, 82 percent are considering decreasing investments in the general capex area.

And then the third area that companies are looking at in terms of protecting their liquidity is taking advantage of government relief programs. Eighty-one percent of the CFOs we surveyed are planning to take advantage of tax payment deferrals or extensions, and 42 percent say they'll turn to other tax provisions, with 35 percent planning to leverage loans or loan guarantees.

If we turn to the area of supply chain for just a minute, there's pretty much an even split between those companies that are considering making changes to their supply chain versus those that aren't. I think that reflects the fact that on one hand, as companies look to China and manufacturing coming back online, they have more confidence than they did the last time around in the near-term strength of the China supply chain.

But on the other hand, as companies are realizing that they have taken steps in recent years to really optimize their supply chains, this crisis has highlighted where their supply chains are more fragile, especially around the dependency on key suppliers and geographies. That is causing companies to have more intense conversations with their suppliers and look at how they can protect their supply chains going forward.

Bhushan Sethi, PwC joint global leader, people & organization

The good news is in the transition to remote work, everyone seems to be settling in — it's not pretty; there's a bunch of challenges that people still have based on individual circumstances — but the data tells us that now 46 percent of them are worried about the productivity impacts from remote work, compared to 60 percent of those same CFOs two weeks ago. So, a general realization there that we're acknowledging and adopting the change in the technology.

The real focus is now, as Amity said, when it comes to layoffs — that number has gone to 26 percent, and we’re seeing that reflect a general realization that even though there are a number of organizations that have come out publicly to say, "We want to protect our people and look at alternatives to layoffs," in our data 26 percent are making layoffs and 41 percent furloughs. That, coupled with the tens of millions of people who filed for first-time unemployment, really highlights the sentiment that the country is in.

From our perspective and when we talk to our clients, the duration of this is the biggest challenge. So obviously the CARES Act and the Main Street Lending Program are going to help provide some liquidity to organizations and, therefore, to the workforce, but any longer period of unemployment impacts confidence to the economy, consumers, the psychology, and as people get to that longer-term unemployment, there's obviously going to be more challenges.

What our clients are looking at is how they can actually think about new skills. They are now thinking about how to enable their people to build some resilient skills, how to adapt new skills in ways of working, how to build some of the digital skills. What's interesting is even though 67 percent of the CFOs are deferring investments, some are continuing programs. Their digital transformation programs are one of the areas where they've cut least. Those firms that are continuing to invest are addressing how do we drive more automation, how do we implement digital, whether it's front office or back office — those areas are continuing.

The final point is, the dialogue has changed with a number of our clients to be, "How do we start to make the transition to return to work?" It's obviously going to be a different path for different parts of the U.S., but one question employers need to start with is: How do we think about testing? For what type of workers? How do we transition people in so we're protecting them?

Employers also need to assess workforce preferences. Do people want to come back to work? Are they comfortable with the health outcomes? Is an organization prepared enough with its testing?

Is it critical from a cost or a revenue perspective? As well as, what roles and over what time frame?

Given that we're all settling into this, and with vaccines potentially not being available for up to 18 months, there’s going to be a long set of transition plans that companies are developing.

How are companies deciding when to return to work and how a return to work will look?

Bhushan Sethi

The factors that they're considering are — obviously, health is paramount. For some companies that are thinking about bringing back people, the considerations include: Do we have enough testing onsite? Do we have enough health professionals onsite? Have we reconfigured the workspace for physical distancing?

The type of workers they're thinking about — so, is it traders on the trading floor, is it people to run the manufacturing plant? Some of that is thinking about who's essential, thinking about what transition that is and how you hedge against further outbreaks. You cannot bring every single call center representative together if there's an infection.

And then also the workforce preferences. Not everyone wants to take mass transit, not everyone is comfortable with coming back into an office environment. What we're seeing now is a lot of firms leading with empathy and purpose to say, "It's working OK right now, the remote working. We don't have to bring everyone."

So, what we're seeing is a lot of firms put together with their crisis response teams different models and scenario plans. They literally change every day or every two days. They are looking at what happened in China and Singapore, but even in those markets, there's also been spikes in cases.

There have been organizations that have brought it back and then transitioned some work out. And so a lot of models are being developed and scenarios are being tested leading with the health and protection of people, but also looking at what makes sense from a revenue and a cost perspective.

Finally, on the cost piece, we are seeing that firms are questioning whether commercial real estate is really needed. We're seeing some organizations looking at their footprint.

But our perspective is this thing will run for 18 months, and there will be different sequences and different transitions for different organizations.

Tim Ryan

And just adding to what Bhushan said, a couple of things when we compare and contrast — and we've worked with a number of multinational companies, and also looking at our own lessons. For example, in China, one of the things that has been employed widely is people are wearing masks at work. Also looking at how you roll in groups of employees by teams, as opposed to an all-or-nothing proposition.

One of the dialogues that's happening here in the U.S. among many companies — unlike China or Korea, where you had more of what I would say was a uniform approach to how work was resumed or beginning to be resumed — in the United States we will have companies dealing with disparate guidelines coming from state and federal and even city governments.

That is definitely being factored into companies' plans, because clearly they will comply, and many will go above the required result. But you can see many companies that operate globally, or even across many geographies of the United States, having multiple ways of coming back to work to make sure the minimum compliance is met. Companies are also looking at how to deal with a situation where workers come back but child care is not available because schools are still closed — they're factoring that into plans as well.

So, there's a number of things that are happening, but clearly, when you look at some of the lessons learned around China — it’s basically masks and temperature checks before people can come into buildings to ensure safety — those are things that companies are looking at hard to make sure we do take advantage of some of the lessons learned, to reduce some of the anxiety, and to increase the safety of employees who come back to work.