CFO’s Role Changes with Economy

CU360
July 27, 2009 | COMMENTS

The credit crisis and its shocks to the economy have put chief financial officers (CFOs) on the front lines as they implement emergency measures to help their companies survive the recession. Now, as a recovery starts to take shape, the CFO's task could become more complex. Capital and management resources are available for only a few major moves, and a new appreciation of risk accompanies each opportunity.

The CFO's judgment will be critical to push the management team's thinking on pending opportunities—and to weigh in on the costs, benefits, and risks of pursuing them. The McKinsey Quarterly recommends all CFOs ask themselves and their colleagues the following questions:

What shape will a recovery take? The exact nature and pace of the recovery remains uncertain. A steady recovery over 12 to 18 months would pose challenges very different from those of a five-year recovery. What weight are you giving to the possibility of wage and price inflation, high unemployment, or more turmoil in financial markets? CFOs must help managers understand what they should expect after the crisis has passed and to set appropriate performance targets.

Have you restructured enough? A weak economy makes it easier to implement unpopular operational changes. Companies have more leverage over suppliers. Regulators are sometimes more cooperative, and most employees understand the need for change. When the economy strengthens, these advantages will quickly vanish. CFOs should challenge their colleagues to examine how much more restructuring might be undertaken to position a company for growth.

Should you restart conversations with potential partners? Last year, many companies put discussions about strategic alliances and joint ventures on hold. This year, if the underlying logic of those deals remains sound, many potential partners are finding themselves under pressure to follow through on those partnerships. Businesses that emerge from the recession at a competitive disadvantage could find a quick and effective solution in a joint venture or merger.

Do you have the financial resources needed for an upturn? Growth requires capital. Companies may require more working capital or find ways to finance the development of additional products, distribution channels, and marketing programs. To finance growth, CFOs should prepare a battle plan—including ways to line up new resources that can be activated if necessary.

Have you invested in talent and other resources? In a recession, most companies focus on cutting costs—head counts, discretionary marketing expenditures, R&D, product development, and capital spending. But all of these components now cost less than they have in a decade, especially hiring new finance professionals. Research of previous recessions shows that the winners made investments in talent, marketing, R&D, and capital spending at exactly this point during the recession.

Do you know what risks a recovery might bring? Risk management and contingency planning are typically better at addressing day-to-day issues than at anticipating major shifts. But an economic turnaround could bring structural changes, some relatively predictable but with far-reaching effects. Do you know whether the health of channels, customers, or suppliers might create substantial structural change? Are you prepared to deal with high levels of volatility that could continue even as a recovery builds?

A few big ideas that become realities will be worth much more than a dozen that don't quite get off the launching pad. Thoughtful CFOs will ask themselves which handful of bets could have the biggest payoffs and then mobilize the bulk of their time, capital, and resources to make those bets succeed.