Executives forecast recession into 2010; turn to new strategies to navigate the storm
New York, NY -- The world's senior finance executives are focusing on aggressive new methods to reduce and control ...
New York, NY — The world’s senior finance executives are focusing on aggressive new methods to reduce and control costs in the face of the worst economic downturn since the Great Depression. At the same time, many businesses are continuing to invest in areas such as technology, marketing, and research and development to generate revenue and improve their operations once the recovery begins.
These findings were released this week in the second annual American Express/CFO Research Global Business & Spending Monitor, a survey of 285 senior finance executives from the United States, Canada, Mexico, Europe, Asia, and Australia.
“While companies are clearly focused on cutting where they can, they are spending when they should to become more efficient and keep revenue flowing,” said Gunther Bright, senior vice-president, Global Client Group at American Express. “They’re also measuring themselves against new metrics that reflect today’s market reality, as well as a post-recession global economy.”
Companies in all regions remain pessimistic about the prospects of rapid economic recovery, with nearly 70% of respondents expecting to see recovery begin sometime in 2010. Over two-thirds of respondents predicted modest to substantial economic contraction over the next 12 months, and 63% reported that their companies’ capital investments will decrease in 2009.
When asked about changes in their workforce, 59% of respondents anticipate a decrease in headcount. But companies are also taking actions now to avoid layoffs. Half the executives polled reported plans to freeze salaries and bonuses, while 32% plan to reduce benefits and 29% plan to cut salaries and bonuses. Twenty-four per cent plan to reduce employee work hours or give furloughs and 16% plan temporary office or plant closures.
Cost control strategies also dominated finance executives’ sentiments as they continue to deal with the recession:
-85% are tightening controls over employee spending.
-82% are placing greater emphasis on measuring and monitoring company financial performance.
-71% are improving internal financial controls.
Despite the weight of the economic downturn, many companies are taking proactive steps to ride out the storm and position themselves for recovery. The research revealed a clear divide between investments that companies feel are vital to controlling costs or increasing revenues, and those that may be delayed until a recovery begins.
When asked where it would be important to sustain spending, companies identified information technology (69%), employee benefits (64%), marketing/advertising/PR (57%), and research and development (54%). Other areas of investment, such as merger opportunities and third-party consultants, were much less likely to be rated as important categories to sustain spending.
Finance executives’ attitudes toward business travel told a similar story. Overall, 87% of respondents reported that their companies plan to spend less on business travel this year, with 44% expecting a decrease of more than 10%. Yet the corporate travel mix is shifting toward a heavy focus on revenue-generating travel:
-82% are likely to maintain or increase travel for meetings with new clients or for business development.
-66% plan to maintain or increase travel for meetings with existing clients.
New performance metrics steer decision making
The precipitous decline of economies around the world, combined with the expectation that the recession will not reverse itself quickly, have led companies to explore new ways to measure success.
Many respondents reported using or considering new metrics for financial performance (55%), operational efficiency (54%) and cash flow/capital spending (54%).
– 77% of companies reported that they have completed, are executing, or plan to revise their forecasting methods.
– 70% of respondents said their companies had adopted a formal program to improve employees’ understanding of their contribution to business performance.
– 64% said they are working to refine or develop new business models to deal with the downturn.
One finance executive reported creating a financial early warning system by using forward-looking projections linked to performance benchmarks his company must hit to maintain access to credit. Another said, “We are measuring return on sales, capital employed, days of working capital, etc. These are all areas (and several others) that were previously neglected.”
Emerging measurement strategies also included:
– Emphasizing return on investment over earnings per share.
– Focusing on direct impact on company profitability by line of business.
– Measuring customer profitability.
– Creating a ‘corporate dashboard’ to track changes among a company’s key assets.
– Examining employee productivity measures such as sales per employee and value-added per employee.
“Companies are adopting measurements that relate to productivity, profits and ROI,” added Bright. “As we’ve heard from our own clients, a smart mix of data and insight can help executives make better decisions about strategy and investment in this challenging economic environment.”
About the survey
CFO Research Services surveyed 285 senior finance executives at large global companies across a wide range of industries in the United States, Canada, Mexico, Europe, Asia, and Australia. Company revenues ranged from $500 million to more than $20 billion. The research program, which included an online survey and interviews with senior financial executives, was completed in April 2009.