CFO Outlook 2023: Leading through instability

Tech, workforce and ESG demand attention in turbulent times

As 2023 gets underway, the good news for CFOs is that their considerable skills will be in high demand to keep their organizations driving toward profitability.

The bad news is that the demand is due to an environment of uncertainty and instability that has continued unabated since the COVID-19 pandemic delivered a bruising blow to the global economy in early 2020. After battling through health and safety concerns, supply chain disruptions, workforce shortages, historic inflation and rising interest rates over the past three years, finance leaders are well accustomed to leading through crises.

It seems likely that they will need to continue using those problem-solving skills in the near future, as 2023 seems destined to create more challenges. If there’s anything encouraging in this environment, it’s that some of the same strategies that have preserved profitability in recent years should continue to produce strong results:

Smart technology investments can improve efficiency and deliver customer experiences that can differentiate organizations from their competitors. Trends to watch this year include increased spending on digital transformation as well as cybersecurity improvements to protect those investments.
Companies that make the right investments in their workforce will remain market leaders, even if job openings are reduced as the Fed aims to tame inflation. That will mean investing in employees’ career growth and promoting a great culture in the interest of retention.
The demand for environmental, social and governance (ESG) initiatives and reporting will grow as the SEC’s final rule on climate reporting is expected to be issued early this year. Although the SEC regulations are aimed at large public companies, this is likely to spark a demand for similar reporting by other companies in the supply chain.

Budgeting: Focus on strategy

A CFO’s most basic operational role of helping the finance department support the business becomes much more precarious when the economy turns sour. At this time, it’s more important than ever to stay laser-focused on the company strategy, with the finance team’s goals aligned toward delivering on strategy.

This is where it pays dividends to have an effective finance operating model, the right people, and well-designed processes and systems in place. It’s also important for the CFO to communicate to the finance staff.

Tip: Get solid on liquidity, cash flow

Maintaining cash for the most important initiatives is a key objective for CFOs. More than one-third (37%) of finance leaders identified liquidity as one of their top three business challenges in Grant Thornton’s CFO survey for the fourth quarter of 2022.

The top areas identified by CFOs for potential cost cuts in 2023 were external consulting fees, long-term strategic investments, and vendor and supplier costs.

Some of these people may be worried; in some sectors there have been layoffs recently that have affected finance departments. Some of these conversations could be difficult. Late in 2022, some technology companies were laying off workers, finding they couldn’t get the books closed with their shrunken teams, and then hiring temporary help to get the job done, said Lisa Heacock, Partner and Finance Transformation West Region Market Leader for Grant Thornton LLP.

As much as it’s possible, the CFO needs to reassure and motivate these people and help them understand the strategy of the organization and their role in supporting that strategy.

“CFOs and their team leadership report down and cascade that message to their people,” Heacock said. “They need to get everybody together on a regular basis, whether it’s virtually or in person, because in uncertain times, people wonder about their jobs. So making sure you’re communicating on a regular basis is key.”

Succeeding in an environment with a high cost of capital may require a greater focus on the most pressing, core initiatives that will lead to organizational success. Investments in less critical activities may need to wait for sunnier days.

Human capital: Tread carefully

Although CFOs may be looking to cut costs, they need to tread lightly with human capital cuts after spending much of the past two years trying to attract and retain quality workers.

“In this market, with continued shortages of talent and exits of talent from one industry to another, they need to be careful not to eliminate headcount at the cost of productivity and the ability to meet business goals,” said Margaret Belden, Director, People and Organization at Grant Thornton.

Tip: Highlight diversity, equity and inclusion

Many companies lost ground on diversity, equity and inclusion during the COVID-19 pandemic. But DEI remains critical for growth and employee satisfaction. Employers need to look at every aspect of their talent management strategy — from recruiting to compensation to professional development— to drive progress in this critical area.

Important human capital considerations for CFOs for 2023 include:

Prioritize essential positions. As funding gets limited, CFOs and CHROs will need to preserve and hire talent first in the most essential areas that drive their organizations’ productivity and growth. “Evaluate all the strategic and operational activities and goals, and prioritize those of the highest and greatest value to the organization,” Belden said. “What can you afford to wait on until the economy shows greater promise? Conduct deep dives on operational models and effectiveness. Leverage technology and digital capabilities and eliminate unnecessary, non-value-added work.”
Make your space a fit for your people. Vast quantities of empty desks and chairs in offices throughout the country attest to the fact that real estate has not been optimized since the start of the pandemic. Many employees don’t want to return to the office for more than a couple days a week. “There is an opportunity to move real estate spend into other employee satisfaction efforts that will increase attraction and retention,” Belden said. “There are interior designers and wellness companies that are reinventing what space looks like and how it gets used to entice workers to visit and engage.”
Go beyond pay in retention. Although competitive salaries and benefits are important, money isn’t everything and companies have financial limitations in this economy. “This is the year of getting in touch with your people and what matters, motivates and will entice them to stay,” Belden said. “Do they like what they do? What is the culture like? Do they feel supported? Do you foster a sense of health and wellness? Are you investing in their career growth and development?”
Throw out the playbook in recruiting. Organizations can attract talent more easily if they get creative about the types of skills and educational backgrounds they seek. Some companies are moving away from requiring standardized college degrees and instead developing skills through training and on-the-job experience. “Some are redesigning jobs to be more attractive, taking away the administrative aspects,” Belden said. “Others are amplifying their great culture to attract and retain.”

ESG takes center stage

In terms of regulatory pressure and investor/customer demand, ESG will be one of the most important issues CFOs address in 2023. Investors and customers increasingly are rewarding companies that perform well on ESG issues, and the SEC is expected to issue new climate disclosure requirements early in the year.

These disclosures are expected to be required in public companies’ 2024 annual reports.

Tip: Find your sweet spot for ESG

Business leaders who aren’t sure where to start on ESG can undergo a materiality assessment to inform their decision.

This could start with a question — what do the people you most count on expect you to do with respect to ESG? The answer should go a long way to determining your initial area of focus.

“CFOs are likely going to be asked to sign off on the information in the annual and other reports, so they need start in 2023 to ensure they have confidence in the data,” said John Friedman, Managing Director, ESG & Sustainability Services for Grant Thornton. “The data has to be complete, comparable, accurate, timely and decision-useful so that when they sign off on it in 2024 and beyond, they have the confidence that it is all those things that they need it to be with the same controls, rigor and professionalism that they currently expect for the financial figures.”

The proposed rules would require public companies to disclose, for example, the greenhouse gases associated with their purchased electricity. Companies may have to figure out who has that data within their organizations (facilities management, accounts payable, etc.) and how to get that data, and they may need to build systems to collect that data across multiple locations.

Companies will need to make sure that data is complete and calculate their emissions correctly using factors accepted in the Greenhouse Gas Protocol. With all these new requirements, company leaders may wish to undergo a readiness assessment to make sure they are prepared to report properly after the rules are issued.

While this would satisfy the minimal regulatory compliance aspects of ESG, many companies are reporting much more because their investors or customers demand it. In addition to climate and environmental metrics, many companies are reporting on metrics that may make them an attractive employer related to worker safety; diversity, equity and inclusion; and employee training and benefits.

In addition to reporting on these metrics, many companies are working to improve upon them. To make progress on ESG, Friedman suggested that companies:

Look for credits and incentives in the 2022 Inflation Reduction Act and other legislation that present opportunities to get reimbursed for ESG investments.
Invest in ESG initiatives that can produce efficiencies and cost savings that offset some or all of the investment. This is where a CFO’s skill set is particularly helpful.
Find the specific ESG initiatives that make sense for your company and leverage them for all they’re worth.

Get ahead with smart tech spending

Technology spending is sometimes a place where CFOs look to cut during economic hard times, but that can be a mistake because this may be a time to get ahead of your competitors if they’re being cautious about their spending. Just as companies that bought property at bargain prices during the real estate downturn of 2008 and 2009 benefited handsomely from a subsequent rise in value, the right technology investments at this time can provide CFOs with a chance to capitalize when the economy makes a positive turn.

“Those organizations that are thought leaders are investing in technology and leveraging that capital spin to improve their overall efficiencies,” said Chris Unruh, National Managing Principal, Technology Transformation for Grant Thornton. “They’re bringing in technology, going digital, bringing in automation, bringing in other workflow-enhancement type tools and capabilities. That’s something we'd see CFOs on the leading edge doing during slow times.”

Tip: Don’t scrimp on cybersecurity

Reducing spending or emphasis on cybersecurity at a time of high risk may result in a breach whose cost could far outweigh any savings realized.

The good news is that implementing controls such as multifactor authentication, privilege access management and endpoint detection and response tools can lower cyber insurance premiums. So by spending on cybersecurity, CFOs might save overall.

For companies that don’t yet have a cloud-based, fully integrated enterprise resource planning (ERP) system, Unruh said that this is an ideal time for assessing and potentially doing an implementation.

Companies with legacy ERP systems that aren’t in the cloud will be at a disadvantage compared with competitors that do possess these tools. The best cloud-based systems integrate financials with supply chain management (SCM) and human capital management (HCM) for a seamless approach to management, operations and planning.

“With HCM plus an enterprise performance management, there's specific functionality around workforce planning and management, so you're really understanding your cost structure, the workforce that you need to support your operations and your business,” Unruh said. “That’s an area where we see a lot of software companies are releasing new capabilities and making sure they can help organizations through lean times.”