As the lessons of the recent past take hold, these and other leaders believe that “business needs to adjust its expectations and behavior to a new, post-recession world.”3 This new world will be characterized by basic shifts in entire industries such as housing and automotive, which were hit hardest by the recession. It will also be a world that depends less on financial leverage and pays greater attention to risk.
Perhaps nowhere will this new reality be felt more strongly than in the office of finance. CFOs and other senior finance executives will have to “reset” the expectations of management where necessary, and “cast a dispassionate eye over the costs, benefits and risks of pursuing [opportunities].

After a typical economic recession, people look forward to things returning to normal. This time, however, the very definition of “normal” may change. Business leaders such as General Electric’s Jeffrey Immelt1 and Microsoft’s Steve Ballmer2 have spoken of the economy—and even capitalism itself—undergoing a fundamental “reset.”

As the lessons of the recent past take hold, these and other leaders believe that “business needs to adjust its expectations and behavior to a new, post-recession world.”3 This new world will be characterized by basic shifts in entire industries such as housing and automotive, which were hit hardest by the recession. It will also be a world that depends less on financial leverage and pays greater attention to risk.

Perhaps nowhere will this new reality be felt more strongly than in the office of finance. CFOs and other senior finance executives will have to “reset” the expectations of management where necessary, and “cast a dispassionate eye over the costs, benefits and risks of pursuing [opportunities].”4

The McKinsey Quarterly addressed this altered economic landscape by suggesting 10 questions that CFOs should be asking themselves as they prepare their organizations for the post-recession environment.5 We’re looking at some of those questions in this issue of Performance Perspectives.

The rising cost of assets
Along with macro-economic trends such as inflation and currency fluctuations, issues of widespread price volatility and variability will challenge the post-recession marketplace. As CFOs plan for renewed growth, they will need to consider how their cost structures will be affected by the general rise in prices that typically accompanies recovery.

One obvious example is the price of oil and its impact on transportation. Here in the summer of 2009, the price of oil is only half what it was a year ago. But the long-term trend is inevitably upward and another price shock could come at any time. Any initiative or investment proposal that has a significant exposure to a spike in energy costs should get extra scrutiny by finance.

Other commodity prices have seen dramatic swings as well, affecting everyone from dairy farmers to processors of scrap metal. These prices are also likely to change unpredictably as demand grows.

A related question has to do with the supply chain. McKinsey asks, “Is your supply chain sufficiently flexible?” Over the past two years, companies have been pushed and pulled by plummeting demand on the one hand, and cash and credit pressures on the other, putting intense pressure on suppliers.

As the recovery begins, we can expect inventories and supply chains to remain lean. Yet, in order to increase production to meet increasing sales, CFOs should examine their working capital requirements and “consider whether their companies may have stretched the supply chain a little too thin.”

Bargains on the big board
Acquisitions deserve special attention from CFOs now that equity prices are starting to rise. Confidence in the future may signal the right time to make an acquisition. But attractive deals may be snapped up quickly, so the office of finance needs to lose no time in consulting with management on the strategic risks of buying or not buying other businesses while the cost is still relatively low.

The other side of the acquisition coin is divesting business units that may no longer be a good fit. Here, it’s a matter of comparing the potential return on a sale with the potential cost of fixing problems in a business unit when capital and management attention might be better spent elsewhere.

Bargains at the job fair
In addition to affecting the cost of assets, the recession has also, of course, had a major impact on employment. So, McKinsey asks, “Have you taken advantage of the buyers’ market for talent and other resources?”

During the recession, quite a few companies reduced head count in the areas of marketing, R&D, and even in the finance department itself. While cuts in these areas may have been necessary, they are among the most valuable parts of the organization when the business climate starts to improve.

With a larger than normal pool of talent to choose from, and experienced professionals willing to accept more modest compensation packages, now could be a very good time to allow human resources to expand in these vital areas.

Scoping out the future
The above represent just a few of the issues that companies will need to address in a post-recession, “reset economy.” And for all of these issues, the capability to do scenario planning and “what-if” forecasting will be extremely valuable for the office of finance. (In fact, GE’s Jeffrey Immelt specifically mentioned the importance of scenario planning in the 2008 letter to shareholders in which he introduced the idea of a “reset” in the global economy.)

A complex array of factors must be considered if companies are to make the right choices at the right time.

It would be a mistake for financial analysts to apply the same performance metrics and assumptions that governed corporate behavior in the past. Assumptions must be tested and re-tested rigorously. Forecasts should be more frequent and should be driver-based.

IBM offers the tools that can help finance perform that kind of in-depth, multidimensional analysis. IBM Cognos TM1, for example, can handle huge volumes of data in-memory, giving finance analysts the power to adjust variables on the fly and run different scenarios rapidly.

Finance can use IBM Cognos 8 Planning to model prices levels, revenue, profit margins, ROI—any number of factors that might enable or inhibit a specific course of action. Budgets can be created with input from the front lines of the organization, and automatic aggregation can display the impact of new forecasts or plan contributions in real time to let you pinpoint gaps at a glance.

For decisions involving hiring, talent development or compensation, IBM Cognos 8 Workforce Performance is an analytic application that can help finance work with human resources to decide when it’s time to bring more people back into marketing or R&D.

Brighter days on the horizon
With welcome signs of recovery finally on the horizon, business leaders around the world are asking what’s next, where the new opportunities lie, and how to avoid the dangers that remain.

IBM can help organizations prosper in a post-recession economy with solutions that will help you reduce risk, increase profitability, and assess those valuable new opportunities. Now is the time to invest in the systems and processes that will give you the guidance you need.

Sources
1 Jeffrey R. Immelt, GE 2008 Annual Report, February 6, 2009
2 Nicholas Carlson, “Ballmer Expects ‘A Fundamental Economic Reset,’” The Business Insider, February 7, 2009
3Maria Baritomo, Inside a Company Resetting for Recovery, BusinessWeek, July 13 & 20, 2009, p.15
4 David Cogman, Richard Dobbs, and Massimo Giordano, "What next? Ten questions for CFOs," The McKinsey Quarterly, May 2009
5 Ibid.

Article taken from IBM Cognos Performance Perspectives, August 2009