Large companies are continuing to recover from the last recession, an economic tsunami that remains relevant even though it happened almost a decade ago. At the same time, “recovery” doesn’t necessarily equate to robust growth.
The fact is, sustained growth has proven elusive for a majority of such companies in recent years (see chart below) — so much so that they’ve lately been looking into whether they can learn anything from smaller, younger, high-growth outfits.
“In about the last 18 months, there’s been a lot of interest from giant-sized companies in getting in touch with executives at organizations like those in Silicon Valley, and giving their teams exposure to that kind of entrepreneurial experience,” says Tim Raiswell, finance research leader at CEB, a provider of research, advisory, and networking services that was recently acquired by Gartner.
“It seems that a lot of the opportunity that’s out there is [supported by] funding models like those used by venture capitalists and getting into project and business areas that [large companies aren’t] experienced in,” Raiswell adds. “They want to think and behave more like start-up organizations.”Since the recession, functions like finance, risk management, and procurement have been “in ascendancy,” says Raiswell. One effect of that: People generally don’t get fired for being too careful, for cutting back on spending, or for not spending in new areas. Those are “default behaviors” now at a lot of companies, he notes.
So, what prevents the larger companies from taking the actions necessary for growth? CEB, which has been looking at this for years, has identified four major categories of what it calls “growth anchors,” in the sense that an anchor weighs down a ship and prevents it from moving.
In a CEB research effort with both quantitative and qualitative elements, 93% of 103 participating senior finance leaders reported a strong presence at their companies of at least one of the following growth anchors.
How easy is it, at your company, for somebody with a good idea to get it funded? How many hoops do they have to jump through?
Some ideas require action fairly quickly, a need that is compromised where there’s a lot of bureaucracy in the system. At such companies, some of the problem can be traced to the finance organization, according to Raiswell.
A big problem, sometimes, is the concept of hurdle rates, he says. A project has to promise a certain level of return before finance will even start talking about it — and even then, a few percentage points likely will be added to the targeted return because the project meets a certain risk profile.
Requiring that kind of “false precision” slows things down tremendously, Raiswell says, because calculating a hurdle rate for a new project is “incredibly difficult to do.”
“If the idea is in a completely green-field, you probably should relax the hard math you use to evaluate some investments and use softer, more strategic vetting processes that recognize there is often a data gap that can’t be closed,” says Raiswell. “Insufficient data doesn’t mean you should completely abandon thinking about the project.”
This is an age-old problem for publicly held companies, of course. Panic sets in near the end of each quarter and year, and everyone stops looking at the big picture and the longer term.
“Finance is responsible for a lot of the calendaring that goes on inside organizations,” says Raiswell. “As such, finance is also responsible for the timeline of management’s focus.”
Short-termism is an inevitable mindset when, for example, business-unit managers are incentivized on a quarter-to-quarter basis, and the CEO and CFO continually want updated quarterly forecasts. “Anybody who tells you short-termism is an avoidable component of public-company existence doesn’t know,” Raiswell says. “It dominates management bandwidth.”
One way companies can partially mitigate the effects of short-termism is the use of rolling forecasts. It can get managers out of the quarter-to-quarter mindset. Every month, the forecast is updated, looking forward 12 months.
Even a very simple adjustment, such as flipping the order of agenda items in forecasting meetings so that non-quantitative assessments of results come first, and then wrapping up with a financial discussion, can help. “It’s amazing how de-emphasizing the financial diagnosis with something simple like that can influence the next steps and actions coming out of the meeting,” says Raiswell.
It’s not easy to counter human nature. So, is it reasonable to expect managers to take risks that could stimulate growth if the penalty for failure is harsh?
“Executives feel they have to hold people accountable, but there should be a way to do that without sending a cultural message that it’s one or two strikes and then you’re done in the organization,” Raiswell says. “Some organizations get into very difficult conversations that feel like public trials.”
In some cases, a CFO or CEO may pay a price themselves for a project that goes awry. But Raiswell says accountability typically is swifter and more material further down in the organization, “where it’s easier to draw lines between a project failure and human agency.”
If a project or growth investment isn’t performing as desired, consider whether the causes are controllable. That type of evaluation requires infrastructure processes that help track progress over time and whether the original assumptions about why a project would win were accurate.
“That takes discipline to do, and maybe some additional financial resources to capture that information,” says Raiswell. “Once the leadership team has that information, they can do a post-audit to talk about what was learned and what to [change] in the future. And the idea is then to reward people for putting their best foot forward on the project that failed. That’s how you start to build the right muscle.”
If you’ve never felt you and your team were overstretched, you’re in a small minority. You may have the ability to plan and execute large, transformative growth projects but insufficient time and resources to do so.
Finance people sometimes don’t “get” the human element of investment and growth success, Raiswell observes. “As a CFO, you’re concerned that a growth project will succeed,” he says. “You want your managers to be asking all the right questions. But what you might do is set margin or cost targets with one hand and fund with the other.”
On the whole, finance executives need greater understanding of the business environment in which a project is being executed, Raiswell says. Budgets are merely cost-accounting tools that don’t enable an understanding of “what can often be fairly complex human capital dynamics in the business.”
Further, budgets don’t reflect the reality that a lot of work gets done by cross-functional and virtual teams, he says. Therefore, “you’re often understaffing in key project areas, when what you should be thinking about is a team’s ability to execute: Do they have all the technology they need? Do they have all the people with the right qualifications they need?
“The guidance here,” he adds, “is not that you just need to spend more. It’s about focus. If you’re going to fund a project, how will you make sure it gets the running room to succeed?”
While CFOs are the sources of all the insights Raiswell raises about growth anchors, he’s not convinced that they fully understand where the responsibility lies.
“It is interesting hearing them discuss it among themselves in meetings with us,” he says. “They try to keep it at arm’s length, like, ‘Yeah, I see this in my line finance people and business partners all the time,’ but not ‘Yeah, I see how finance is directly responsible for some of it.’ And finance may not, in fact, be directly responsible, but it’s within the range of things finance can influence, control, or change.”
He concludes, “Finance has a hammer, so everything going up before it is going to look pretty much like a nail. And lo and behold, as CFOs are thinking about growth investments, they’re interested in things like cash flow. But those aren’t always the things that will tell you if a project will win or lose.”