How CFOs can manage the Next Normal
Anders Liu-Lindberg
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It feels like the world is holding its breath right now. We’re on the back of a global pandemic and a high inflationary environment. We’re in the middle of ferocious regional crises and relatively high-interest conditions. We’re looking into… what exactly??
We’ve become accustomed to the fast pace of change in the world and new scenarios previously unimagined or only experienced in the distant past hitting us. This reduces visibility into the future and makes it harder for companies to navigate the business environment.?
However, to navigate the future we must, and business leaders are looking for insights to help them make better decisions. The heavy responsibility falls on the CFO and the finance function to deliver these insights. To navigate what McKinsey has termed the Next Normal , CFOs need to develop preparedness to ensure the company performs better than its peers no matter what the Next Normal brings.?
That’s why managing the Next Normal is one of the top 10 priorities for CFOs in 2024 . In this blog post, we dig deeper into how CFOs can develop this preparedness and what would be some next steps for CFOs to take.?
It’s all about knowing your options?
The challenge for most companies is that they’re reactive to events outside their control. Perhaps you find it unfair to expect that companies are proactive on something they don’t control. However, it is possible to prepare for the unexpected. You won’t know exactly what it is, but you can certainly know your options. It starts right from when you develop your strategy. Here’s a step-by-step guide to taking charge of the unexpected.
Let’s look closer at each of the steps.?
1. Know your strategic options?
This can be an almost incomprehensible area since the strategic options for a company seem unlimited. However, you can easily boil it down to just a handful of categories to look at. McKinsey has done extensive strategy research and found that what determines your strategic success is how many so-called Big Moves you make.?
You will need to make two or three of these moves in a ten-year time frame, and you’ll need to go all in on them. If you don’t pull these levers hard enough you won’t make any significant improvements vs. your competitors. To learn more about the rationale behind the Big Moves you can learn more here . Don’t try to succeed with all of them. Be specific and choose the two to three moves where you expect to be able to make the biggest difference.?
2. Understand the economics behind each?
You should carefully evaluate each Big Move to understand the value creation that could be expected from each of them. This is not just an economic calculation of course, but also an evaluation of the capabilities you have in your company to execute on the Big Moves.?
CFOs should be in charge of this process and take an objective approach to the evaluation. Executives will likely favor some over others simply because they stand to benefit their specific area. However, if the business case doesn’t stack up against other Big Moves it should be dropped.?
3. Document assumptions for the choice you make?
This is where most companies start to get sloppy. Since you’ve done a thorough evaluation of your options already and decided on a few of them it’s as if those business cases don’t matter anymore. They’re of high importance though since the assumptions behind your calculations are what has to be true for the strategic choice to be a good one.?
Therefore, it’s of vital importance that the assumptions are understood by all parties and tested in the strategy room. Ask “what would have to be true” for a wide range of parameters e.g., what would our customers have to do, what would our competitors have to do, what would our employees have to do, etc.?
You may conclude that the chances of success for a specific choice are meager even if the business case looks good. That’s a good thing because you’re making more data-driven decisions. Still, you do make choices and now your assumptions are thoroughly documented.?
4. Establish confidence intervals for each assumption?
You may end up with 10-15 assumptions with clear underlying documentation. Now you need to establish confidence intervals around each of them. That is the high and low value of the assumption in which you’re comfortable for reality to move between and still think you’ve made the right strategic choices.?
An example could be inflation where you assume it should be at 2%. As long as it’s within 0.5-4% you’re not worried that your plan won’t hold anymore. This is your confidence interval. If reality moves outside this interval you may need to alter your choices.?
5. Develop alternative scenarios for each assumption?
Already when you’re deciding on and planning for the execution of the strategy you can discuss alternative scenarios. Ask “what happens if” and “what would we do then” i.e. what happens if inflation is 5% and what would we do if it was.?
This allows you to develop action plans (or a Plan B) in case you need them and become proactive towards the unexpected. You may not need these plans but if you do and you don’t have them that can be the difference between thriving or merely surviving as a company.?
6. Set up real-time tracking of each assumption?
You will need to track reality vs. the assumptions and ideally in as close to real-time as possible. Depending on the nature of your business real-time may mean once per month or every second. Using the inflation example, you’re likely only getting monthly data, however, there will be many underlying indicators pointing in a specific direction. You then decide if once per month is enough or if you need to track the underlying indicators that are released more frequently.?
7.? As soon reality moves too far from assumptions take action?
Since you’re tracking assumptions in real time, you’ll know as soon as your confidence interval has been breached. When that happens, it should trigger a strategy action conversation. Depending on the nature of the breach it may be a discussion between the entire executive team or something that can be handled further down in the organization.?
You will most likely need to act; however, you need to make a holistic assessment and not just look at one assumption in isolation. Perhaps you have other data points suggesting you’re performing well despite the circumstances. If inflation is 6% and you’re able to raise prices with 10% you likely won’t need to action, the confidence interval breach.?
Action or not, there should be a clear conclusion from the strategy action conversation. Make sure to set roles and responsibilities and have clear timelines and accountabilities. In this way, you keep your strategy on track or change it proactively ahead of the competition.?
It’s time for CFOs to review the strategy?
This provides a straightforward and logical approach to strategizing and managing the Next Normal. Most companies though are not at a starting point right now where they can simply go through this process and start a new strategy.?
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Instead, CFOs should take the initiative for a strategic review or at the very least a retrospective on their latest strategy process. Each of the steps lends itself to some clear-cut questions to ask.?
You will likely need to ask more questions about each of the steps, but this should help to illustrate the process you should plan for now. You can do this as an internal exercise in Finance first as it will be a great learning experience for the finance leadership team to conduct a strategic review of the company.?
Then present the results of your discussions to the management team and align on your understanding. Ideally, you have considered most of these steps and your strategy is on track. However, as we know, most strategies fail to create the expected value. Hence, you’ll likely uncover critical insights to help your company better manage the Next Normal.?
What’s your approach to managing the Next Normal?
This was the second blog post in our new series "The Top 10 Priorities for CFOs in 2024". Starting from this series we go even deeper into the issues, bring you candid perspectives from the frontlines, and share actionable advice on what the Office of the CFO should do to create more value. Read the previous articles in the series below.
Catch the insights from our latest series "The Modern Finance Function" here.
You can read all blog posts in our previous series "Demystifying AI in Finance & Accounting" below.
Continue reading below for more articles about trends in finance and accounting.
Anders Liu-Lindberg is the co-founder and a partner at Business Partnering Institute and the owner of the largest group dedicated to Finance Business Partnering on LinkedIn with more than 12,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk . I am the co-author of the book “Create Value as a Finance Business Partner ” and a long-time Finance Blogger and Top Voice on LinkedIn with 320,000+ followers.
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9 个月Gartner also reported that EBITDA margins will drop 30% by 2027. In your view, what can CFOs do to prepare or counter this projected drop, as reported by Gartner? https://www.gartner.com/en/newsroom/press-releases/2024-02-14-gartner-predicts-cfos-will-be-challenged-with-ebitda-margins-that-will-shrink-by-more-than-thirty-percent-by-2027
? Lead UX Designer at Medl | ?? Crafting global experiences with scalable design and GenAI
9 个月Adapting to the Next Normal is indeed a challenging task for CFOs, but with the right insights and preparedness, the journey can be conquered successfully! ????
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9 个月It was useful . . .