Despite a high volume of economic and political uncertainty across the past 18 months, companies’ shareholders have still got high expectations for growth. Those holding shares in companies listed in all the major market indices expected revenue growth to double, triple, or more between last year and this (see chart 1).
Unfortunately, managers are struggling to keep up, even with their own expectations. The average returns from large companies’ corporate growth investment portfolios lag behind the expectations in the business cases of those investments by 25% or more. For the typical Fortune 500 company, this sizeable gap translates into 200 basis points of foregone growth every year. So in the context of heightened shareholder pressure, it’s crucial that corporate finance teams pay closer attention to getting the best returns from their company’s major growth investments.
Helping the right projects in the investment portfolio achieve a strong rate of return requires finance teams both select the right investments and manage investment performance correctly. While most companies are good at investment selection, this is no longer enough — even companies that excel at pursuing the right bets still sacrifice 100 basis points of growth per year, according to CEB data. So to close the growth investment return gap, companies need to get better at managing investment performance.
Chart 1: Great expectations 2017 expected growth versus 2016 actual revenue growth; n=4,350 Source: Bloomberg; CEB analysis
Inflexible Investment Resourcing Inhibits Growth
The major barrier to good investment performance is managers not being flexible enough about the way they provide resources to investments. Almost one third of in-progress investments have a strong case for receiving significantly more resources than originally planned. Unfortunately, only 23% of finance teams can easily allocate resources to projects between budgeting cycles, and only 15% reserve sufficient funds for strategic growth investments.
As a result, almost two-thirds of business leaders say that a lack of available resources delays the pursuit of attractive investments. In today’s fast-paced business environment, companies can’t afford corporate function drag, which can cost up to 20% of revenue growth.
How to Increase Growth Investment Resourcing Flexibility
To add more flexibility into the way that companies resource their investments, finance teams need to figure out when the planned level of funding for a growth investment must be adjusted, and have sufficient funds reserved to allocate to in-progress investments.
To identify growth investments whose funding might need to be adjusted, a digital device insurance company that CEB, now Gartner works with estimates the probable performance of growth investments using leading indicators like retail store foot traffic and mobile handset sales. The finance team uses this more timely information to reallocate resources from lower-potential to higher-potential in-progress investments.
To protect funding for growth investments, a large financial firm uses rigorous criteria to identify top priority projects, and brands them as “strategic initiatives.” The finance team then sets aside funds in a special pool only for these selected initiatives. By establishing clear guidelines for funding eligibility, the Finance can consistently provide resources to support high-priority, in-progress growth investments.
When finance teams introduce more flexibility into the investment management process, investments are most likely to exceed business case expectations.