Pandemics and war are currently keeping the world on tenterhooks. The negative economic developments are causing uncertainty in many areas. But what does this mean for the CFO? We have taken a look at the future agenda.
The COVID-19 outbreak was first identified in Wuhan, Hubei Province, China, in December 2019 and was recognized as a pandemic by the World Health Organization (WHO) on March 11, 2020. Since then, COVID-19 has spread around the world in several waves. Mutations that can overcome previously acquired immunity have forced the reinstatement of anti-pandemic measures over the last two years.
Covid-19 puts the world in a state of shock
Die weltweit eingeleiteten Maßnahmen haben in Verbindung mit der Angst vor Infektionen zu mehreren wirtschaftlich negativen Entwicklungen beigetragen:
- A dramatic reduction in international trade and travel
- A dramatic reduction in all kinds of activity that require physical presence (“brick-and-mortar” shopping, live entertainment and sports, drinking and eating out, personal care, and wellness)
- Disruption of supply chains, resulting in shortages of production inputs
- Lay-offs and furloughing of staff
Several of these developments have reinforced each other and led to a severe recession with repercussions for the stock markets. Governments and central banks reacted with both fiscal and monetary easing on an unprecedented scale. The US Federal Reserve increased the money supply. The federal government agreed to a $2 trillion stimulus package, approximately 10 percent of the US GDP. The US Federal Reserve lowered its key interest rates to 0-0.25 percent and instituted a range of other supporting measures. European and Asian governments as well as central banks have acted similarly, including bail-outs of companies unable to cope with the drop in demand, emergency loans, and furlough schemes for workers who otherwise would have been unemployed.
With the current easing of restrictions, some of these developments have reversed direction, and economic growth is on the upswing. Many governments have started winding down their support measures. But several macro-economic consequences remain, and CFOs should take them into account for the foreseeable future:
- The loose money policy of the past, injections of stimulus money, and supply chain disruptions have led to price increases and surging inflation.
- These circumstances will in turn lead to a tightening of monetary policy and an end to the ultra-low interest rates common throughout the last decade.
Even if economic growth has begun to revive, COVID-19 has caused structural changes that will remain. There will be no return to the pre-COVID status quo — the shock that is abating will yield to a new normal:
- Workers leaving the job market, re-orientation towards jobs that do not demand face-to-face activities with potential health risks, and migrant workers being prevented from returning home have led to a labor shortage and concomitant increases in wage demands.
- Disruption of supply chains and shortages have led to a search for alternative input sources and for near- and onshoring of production.
- COVID-19 has prompted a shift to digitalization and a greater proportion of remote activities and e-commerce in overall commercial and consumption activity.
- Lockdowns and travel restrictions have led to a significant increase in remote working and use of remote collaboration tools. Although some degree of business travel will return, remote collaboration has proven its effectiveness. Both business travel and office work will stay significantly below pre-COVID levels.
New uncertainties due to outbreak of war in Ukraine
Several of these effects have been exacerbated by Russia’s recent invasion of Ukraine. Sanctions against Russia and the disruption caused by war have led to further effects:
- Shortages of fossil fuels such as oil, gas, and coal and of agricultural products, increasing the inflationary tendencies and choking off the return to growth
- Additional disruption of supply chains involving suppliers in Russia and Ukraine
- Disruptions to the market presence of foreign companies in Russia and Ukraine
Many CFOs are aware of the economic disruption caused by the war in Ukraine. A recent survey in Germany found that 90 per cent of CFOs surveyed expect negative consequences for the German economy and 57 per cent expect negative consequences for their own company.
Adaptation to the CFO agenda
IIn the past, efficient use of financial resources was often equated with minimizing costs and ensuring a maximum level of lean operations. Disruptions like the pandemic and the war in Ukraine have revealed the risk of concentrating on that approach. This puts several points on the CFO’s agenda:
Emphasise on resilience over short-term efficiency:
- Build buffers instead of relying too heavily on lean supply chains and lean production.
- Source from several alternative suppliers, preferably from different regions, and preferably close to your production facilities and main sales markets, to safeguard from disruptions. This potentially includes in-sourcing or near-shoring of financial services.
- Cultivate reliable long-term relationships over short-term price efficiency to secure supplies. This includes securing longer-term contracts. This may also necessitate accepting higher prices and deliveries of inputs currently not needed instead of cancelling orders and later being at the back of the queue as happened (for example) with chip supplies to the automotive industry. Embed your business in partnerships and ecosystems that help you withstand shocks.
- This also includes investing in a relationship of mutual trust with employees that will secure the loyalty of staff who could be tempted to leave for better offers in the current employee-friendly job market. A more diverse workforce that brings a wider range of perspectives on opportunities and risks and a culture that is favorable to the free flow of ideas are also important contributors to a company’s resilience.
Prepare for a more complex world:
- Determine the risks — efficiency cannot be measured in costs alone anymore, but must be risk-adjusted. Multiple scenarios must be analyzed and your operations and business must be tested for their resistance to stress so that the optimal degree of diversification of suppliers and production facilities and the outcome of short-term changes such as lockdowns and emergency measures on customer behavior and sales can be determined. Besides being a sound general policy, this is also the subject of increasing requirements from investors and regulators (e. g., the demands for energy companies to test the resilience of their assets to stress arising from the impact of current and future decarbonization targets).
- Being able to calculate the risks and to analyze scenarios requires CFOs to take a leading role in turning their companies into data-driven organizations (see Chapter 3.4 “The role of the CFO in a data-driven organization”).
- Adapt to the New Normal of operations — leverage the potential of remote cooperation to reduce travel expenses, to cooperate more effectively, and to offer your employees a better work-life balance. The opportunity to work remotely will be an important factor for retaining and attracting talented people.
- Decrease the dependency on low-skill employees with growing wage demands by automating your processes, using bots, robotics, and AI.
Seize the opportunities:
- Diversify into markets that are less prone to disruption.
- nvest in your online presence as a sales and marketing channel, but do not neglect its importance for customer service and as a tool for cooperation with your suppliers and partners. As the experience from COVID-19 has shown, digitally mature business models demonstrate better adaptability to disruptions, so check and increase the digital maturity of your company.
- Examine sectors that are in the midst of consolidation processes and select troubled companies whose assets can contribute to your business.
- In growing sectors, scout for attractive startups that can contribute to your strategy, capabilities, and portfolio.
Secure the financing:
- The measures on the agenda will require investment, and resilience will lead to higher OPEX. These requirements must be funded. As both the bull market at stock exchanges and the period of low interest rates are coming to an end, it is advisable to lock in available funding as soon as possible.
- In a situation that sees funding from the market becoming more expensive, an alternative strategy is to retain more of the earnings from the business.
- Both approaches make it necessary to convince investors that the measures are based on a sound strategy and solid planning and will ensure the long-term viability of their investment.