Seek ing Efficient Growth by Encouraging Riskier Investments
ARLINGTON, Va., Nov. 18, 2016 /PRNewswire/ — In an effort to grow the bottom line by controlling costs and keeping margins in check, CFOs have been limiting their companies’ growth potential, according to CEB (NYSE: CEB), a best practice insight and technology company.
To achieve sustained long-term revenue growth with simultaneous margin improvements, CFOs need to identify the areas of their business still anchored by risk-averse operating strategies and push investments that grow the top line.
“Corporate performance has been slowing, and CFOs’ playbook of strict financial discipline is partly to blame,” said Tim Raiswell, Finance research leader, CEB. “The companies that have excelled over the past two decades aren’t the ones who have savagely cut costs, but those that instead learned to make better – and often riskier – investment decisions.”
CEB found that, over the past 20 years, only 60 public companies from the Fortune 1000 and S&P Euro 350 demonstrated improvement in revenue and margin each year and simultaneously outpaced industry growth. This “efficient growth” is difficult, but not impossible – and the outperformance is substantial.
Efficient growth leaders generate a total shareholder return (TSR) premium of seven percent over companies in the same industry with similar products and revenues. Additionally, although efficient growth is a winning strategy for all stages of the economic cycle, these companies fare particularly well against their peers in slow growth periods, much like the current economic environment.
Safeguards Don’t Generate Returns
Seventy-seven percent of finance professionals say that leadership teams were more risk-averse when funding projects and allocating capital in 2016 than they were in 2015. This return to risk aversion as a dominant management posture has prompted most finance teams to create additional controls that weigh down the business and cause them to move resources and attention away from large growth projects.
Finance teams at efficient growth companies, however, eliminate these anchors and build programs, initiatives and incentives that provoke business leaders into becoming innovative risk-seekers, even during less than ideal market conditions.
“Without realizing it, Finance teams are creating an environment that makes it difficult or unattractive for business managers to propose riskier, more transformative growth projects,” said Raiswell. “Efficient growth organizations have removed those processes that weigh the business down. Finance teams at these organizations encourage risk taking and enable the business to go after fewer but riskier innovations, regardless of the economic cycle.”
CEB’s analysis shows that efficient growth leaders excel over others in one critical way – they focus on making better capital allocation and investment decisions, rather than necessarily doing a better job of managing overhead costs. There are four things these organizations do differently during slow growth periods:
- They channel capital toward bigger, riskier growth bets and innovation: Efficient growth companies bet on large innovations and were more likely to be first movers on major industry advancements. As a result, these companies had more volatile cash flows than their peers did. Notably, they did all of this without spending more overall than their peers on R&D.
- They focus on managing businesses for asset efficiency, not just profit and loss performance: The Finance teams at efficient growth leaders engage in a range of practices to better track and manage asset returns across their businesses and keep that central to their performance management efforts. This led them to have leaner, lower-debt balance sheets than their peers overall across the 20-year period studied.
- They place more scrutiny on acquisition and partnership opportunities: Efficient growth companies divested one company for every six acquisitions they made, while the control group did this for every two acquisitions. Efficient growth companies also impaired goodwill less frequently, and when they did it was for $300 million less on average despite having the same average deal size as their peers. Furthermore, they engaged in far less joint-venture/strategic-partnership activity and purchased far fewer minority and majority stakes in companies.
- They communicate with investors effectively and update them on strategy changes: In their annual reports, efficient growth companies made twice as many changes to the strategy, management and analysis sections as did their control group peers. They also announced major strategic changes to investors more often.
CEB has documented innovative strategies and ideas from several of the 60 efficient growth leaders and is sharing these approaches with its member network.
CEB’s efficient growth leaders list was compiled by analyzing public companies from the Fortune 1000 and S&P Euro 350 with at least 20 years of consecutive public financial data. From that dataset, CEB identified 60 companies – 4.4 percent of the total pool – that simultaneously demonstrated improvement in revenue and margin each year and outpaced industry growth in the 20 year period between 2004 and 2014.
To view the 60 efficient growth leaders and for more information on how to encourage efficient growth, visit CEB.
CEB is a best practice insight and technology company. In partnership with leading organizations around the globe, we develop innovative solutions to drive corporate performance. CEB equips leaders at more than 10,000 companies with the intelligence to effectively manage talent, customers, and operations. CEB is a trusted partner to nearly 90% of the Fortune 500 and FTSE 100, and more than 70% of the Dow Jones Asian Titans. More here.