Although the reporting cycle is a little unusual – the chancellor George Osborne only made his interim report in December – the parallels with, and potential lessons from, his private sector peers are interesting. Since he took the job (and it was a pretty senior post for a first board position) this young CFO has been struggling to explain exactly how UK Plc would achieve the more difficult half of balancing the books, i.e. growing revenues.
Somewhat predictably, the focus has therefore been on the slightly easier side of the equation, i.e. cutting costs. Thus far this approach seems to have done enough to appease watching investors and analysts. Partly due to problems being experienced by most of its major competitors, and the resulting lack of alternatives, UK Plc has been able to hang on to its investment and top credit rating. But the tough market conditions don’t appear to be easing and the outlook remains bleak. Thus Osborne, like most CFOs, will have to work extra hard to convince those watching that he has a credible plan to get UK PLC’s finances back on track.
As most experienced CFOs would confirm, it is not possible to cut your way out of a slump
Having already had to admit he will miss several key targets he set himself for getting the financial house in order, Osborne now needs to rethink his strategy for achieving growth. As most experienced CFOs would confirm, it is not possible to cut your way out of a slump. A sudden bout of reckless spending would be equally disastrous. But when results keep going against you (and last week’s ONS figures, showing we’re heading for a likely triple dip recession were not what Osborne projected) then it’s time to acknowledge the current strategy needs a rethink.
If it costs political capital – and risks the ire of the bond markets – to announce a move away from Plan A to Plan B, then so be it. Ultimately further economic stagnation would be worse. It is not hard to find senior “board-level” support within UK PLC (including some fellow “directors”) who would like to see a more active, interventionist strategy. The IMF has also joined the chorus calling for a change in emphasis and a more aggressive and clearly defined growth strategy.
Today’s figures from the US, showing GDP falling there in the fourth quarter, highlight how the global economy is continuing to stutter. Part of being a good CFO is to help the rest of the leadership team agree and communicate a sensible and achievable financial strategy that includes clear goals and performance expectations. It’s then a matter of policing and measuring performance and making sure everyone is doing the right things to achieve those goals.
When outside factors and market conditions change things, then those goals and strategy need adjusting. This is what the management texts call organic strategy or strategic agility.
Few FTSE 100 CFOs (or CEOs) would survive having to report several sets of poor results and missed targets without facing pressure to explain how they intend to change things and without calls for a new strategy. If those poor results were explained away by endless excuses about “factors beyond our control”, there would be pressure for a change in personnel. The first thing most turnaround investors do when they take over a failing business is fire the management.
Budgets are often presented as “make or break” for the chancellor, but this time there might just be something to the hype.
Richard Cree is editor of economia