Like many senior executives, CFOs have to constantly strike a difficult balance between fulfilling their functional priorities and helping the entire business prosper. But what distinguishes them from their colleagues is that their two – often conflicting – mandates are at the core of any company’s successful performance: sustaining long-term growth while containing costs and hitting quarterly targets.
This is an incredibly difficult balance to strike, and indeed only a handful of companies have managed it consistently across the past few decades. When it comes to the long-term growth side of the equation, CFOs commonly – and rightly – focus time and resources on making sure the right growth opportunities are funded but they are less likely to then look at what might then harm the success of these all-important projects.
These “growth anchors” are the unintended effects of processes or policies that inhibit growth by redirecting attention or resources away from growth projects, and so hinder the potential returns. There are seven anchors that CFOs and their teams should look to remove; these break into four categories (see chart 1).
“Bureaucracy” anchors: Before making growth decisions, finance teams and their colleagues elsewhere in the firm rely on a host of complex financial models to make decisions. The problem is that too much emphasis on business cases and hurdle rates can lead to lengthy and tiresome debates over whether or not the project meets specific criteria, or if that criteria should even apply to the project at all.
While managers need to conduct thorough analysis, overly complex calculations that aren’t consistent or widely understood can hurt a decision maker’s ability to come to a succinct conclusion. In addition, publishing hurdle rates and setting stringent internal-rate-of-return requirements will limit a business manager’s ability to propose more transformational growth projects. Instead, take steps to simplify your growth project return on investment calculations and eliminate hurdle rates.
“Short-termism” anchors: Often companies use short-term incentives to motivate line managers, and use variance-focused operating reviews to gauge consistency. However, both of these approaches can inhibit a business’s ability to grow over the long term because managers solely focus on hitting quarterly targets.
Rather than only using targets based on internal performance, use external targets tied to industry peer benchmarks so that business leaders are driven to make decisions based on the firm’s strategic and competitive interests. What’s more, efficient growth companies introduce equity-based compensation at lower levels of the organization to encourage long-term thinking and incentivize managers to make larger growth bets. In addition, consider adopting “finance light” operating reviews, which focus on strategy execution and progress rather than specific finance-based metrics.
“Dangerous-to-fail” anchors: The wrong environment can make employees too afraid to go after growth projects and abandon them at the first sign of failure. Often times, companies penalize project sponsors for project failures that are the result of uncontrollable factors. These practices fail to inspire employees to find new creative growth techniques.
Instead of shutting down a project at the first sign of trouble, establish set “exit triggers” that set specific thresholds for when a project must be abandoned. Also, establish learning-focused objectives that don’t penalize past failures, but help employees learn from past experiences.
“Capacity” anchors: Finance teams often have to protect small margins, but it can be harmful to growth efforts if teams are attempting to run as lean as possible with cost controls that are too tight.
Finance teams should instead allocate discretionary spend to the business based on the nature of growth targets and the strategic importance of their growth to the enterprise-wide portfolio.
Chart 1: Common growth anchors that prevent bigger growth bets Source: CEB analysis
Click chart to expand