“Focused on efficiency” B-13.
“Steadily reducing overhead” I-28
“Holding the line on spending” G-55
“Leaning on attrition” G-55
“Managing non-labor expenses below inflation” O-73
Congratulations, you’ve won CFO cost-cutting BINGO! The latest round of public company earnings conference calls was a study in penny-pinching buzzwords about not overspending.
Be it manufacturing and trucking leaders or their peers in the energy and healthcare sectors, the signal they’re sending about how they’re approaching 2023 has been loud and clear.
Concerns and chatter about last year’s main pain points—clunky supply chains and historically tight labor markets—have largely given way to a focus on resuming nearly-normal operations in an economy that continues to grow. And that means looking across the organization for ways to control costs and protect margins while preserving the flexibility to grow via capital spending or acquisitions.
Sean Denham, national audit growth leader at Grant Thornton, said finance leaders spent much of last year tackling questions around labor, the largest dollar item on their expense statements, as economy watchers fretted about a looming recession. That work made lots of headlines in January: Search firm Challenger Gray & Christmas Inc. reported that layoff announcements popped more than fivefold from January 2022.
“That pendulum has shifted pretty dramatically,” Denham said of where finance leaders are paying the most attention while noting that recession again looks a relatively distant prospect. “Now, CFOs are asking what else they should be focused.”
And they’re doing so with greater confidence than last fall: A recent Grant Thornton survey of CFOs of all stripes showed that 61% are forecasting profit growth in 2023, with two-thirds of that group looking for a lift of 6% or more. A big factor in that optimism, Denham said, is a belief that a methodical approach to costs in all corners of an organization will produce results.
“It looks like executive teams are going right down the P&L,” he said. “They’re looking at wants versus needs, at advisors or consultants they may not need as much and they’re asking if certain spending can be deferred.”
A case in point is Duke Energy Corp., where CEO Lynn Good and CFO Brian Savoy are looking for demand growth to retreat from the levels of recent years to a more traditional pace. To help the Charlotte-based utility cope, they’ve been pushing a $300 million cost- and job-cutting plan through many parts of the company’s corporate and support functions. Savoy recently told analysts that Duke has, for instance, reworked how it maintains its hundreds of IT systems.
“Not all are mission-critical and don’t need to have the same level of support as others,” Savoy said. “So we really stratified our support levels. And we did that across IT, HR, legal, finance. We looked across the corporate areas and found really structural opportunities that will remain for the long term.”
Commentary like that from big publicly traded firms filters out across the economy, Denham said. Boards and executives of private companies “absolutely do follow suit” when blue-chip listed names discuss such moves. They, too, are looking at leading indicators and working through many of the same exercises.
In one way, it shows a groupthink mentality that can metastasize into a significant downturn. But in another sense, the enduring strength of the U.S. economy—the Atlanta Federal Reserve Bank’s GDPNow tracker estimates Q1 growth will be 2.5%—has bought CFOs the time to, after several years of rapid-fire reactions to wild macro swings, properly consider their options. A soft landing or a recession that may not hit until 2024 means leadership teams can be more clinical with their options; slashing 15% across the board is rarely required.
“I don’t think there’s going to be one big fix,” said Henrietta Fuchs, the co-leader of the manufacturing and distribution practice at accounting and advisory firm CohnReznick. “The economy’s strength has been advantageous because it has allowed people not to rush into their decisions and instead make the right moves to improve efficiencies here and there.”
That measured approach also shows in some metrics focused on growth rather than cost-cutting. No fewer than 82% of the CFOs Grant Thornton surveyed plan to invest more this year than last in “demand-generating capabilities.” Similarly, more than half of respondents to the most recent monthly Equipment Leasing & Finance Foundation confidence index expect their companies to increase business development spending between now and mid-summer. Only 6.5% believe such spending will be cut.
Other tools CFOs are preparing to invest more in are data analytics and forecasting services. A study by FTI Consulting listed both sets of technologies as among executive teams’ top strategies for 2023 and beyond. There will be no more—or at least far less—getting caught flat-footed by external factors.
“For many companies, managing financial performance in 2023 will be tied directly to streamlining operations to gain efficiencies, gaining better insights from [financial planning and analysis], and improving overall forecasting accuracy,” FTI analysts wrote.
CohnReznick’s Fuchs said many smaller-scale investments on a shop floor, at a warehouse dock or in back-office operations also can help on the workforce front—that No. 1 expense item. New tech tools or equipment can, assuming they’re smoothly implemented, provide a boost to morale and job satisfaction and thus lower turnover and its associated costs.
Cut a little here, spend a little there. It’s a bit of a dance and not the most glamorous of business strategies. But it might be the winning one in the uncertain economy of 2023.
