CFO Signals™: European Financial Woes Take a Toll

It takes a lot to rattle the chief financial officers (CFOs) of North America’s largest and most influential companies, but according to the latest CFO Signals™ survey, they are rattled. CFOs who identify themselves as increasingly optimistic are now outweighed by the number of CFOs who are increasingly pessimistic. What’s driving this mood shift, and what does it tell us about the economic recovery? Tune into this episode of Deloitte Insights as we examine CFOs’ perspectives on the end of 2011 and their projections for 2012 to learn more.

Speakers

Sandy Cockrell, Managing Partner, U.S. CFO Program, Deloitte LLP; Global CFO Program Leader, Deloitte Touche Tohmatsu Limited

Greg Dickinson, Director, North American CFO Signals Survey, Deloitte LLP

Transcript 

It’s time for Insights, a video news production of Deloitte LLP. Now here’s your host, Sean O’Grady.

Sean O’Grady (Sean): Hello and welcome to Insights where today we will be examining the views of the chief financial officers, their perspectives on the end of 2011 and their projections for 2012. Now this information was derived from Deloitte’s CFO Signals Survey. It is a quarterly report, which began in 2010. Joining us today on the broadcast to review the latest findings is Sandy Cockrell. He is the managing partner of the U.S. CFO Program, Deloitte LLP, and the Global CFO Program Leader, Deloitte Touche Tohmatsu Limited. We are also joined remotely from Los Angeles by Greg Dickinson. Greg is the Director of the North American CFO Signals Survey with Deloitte LLP. Greg, we will get back to you in just a moment, but I would like to begin my questioning with you here in New York, Sandy. And when I had the opportunity to review your survey, I noticed right up front that the number of CFOs who were identifying themselves as increasingly optimistic were outweighed by the number of CFOs who were saying they are increasingly pessimistic. So, right out of the gate, I would like to know what’s driving that pessimism and why do you think that matters?

Sandy Cockrell (Sandy): Sean, a couple of things. First of all, that is a big shift. We have just seen that in the last two quarters. Prior to that, in the earlier days of our survey, the optimistic CFOs really outweighed the pessimists by a fair amount. But I think the thing that is really driving it more than anything now is when you get behind the numbers and peel the onion, the number of pessimistic CFOs — they are pessimistic for a reason — they are very frustrated that they are really not able to pull the levers within their companies to make change today. So, they are really worried about the external influences, macroeconomic trends, those kinds of things that are really beyond their control, and that is really what is driving that high level of pessimism today.

Sean: We are going to kick this back over to Greg Dickinson in LA, and Greg, I am interested to hear your thoughts on this shift back to pessimism.

Greg Dickinson (Greg): Well, I think Sandy is absolutely right here. It is all about the economy. We are coming of the heels of two pretty tough years from an economic standpoint, both within the U.S. and in and around the world. So, the last two quarters have only added to that. If you look at just what has happened in the U.S. over these last two quarters when we saw the pessimism really rise, we had a stagnating economy, we had the employment picture not getting much better, we had gridlock in Congress and in government, we had the downgrading of the U.S. debt by S&P, and we had, at that point, just Greece in trouble in Europe from a sovereign debt standpoint, and then that’s a lot and that was really just the third quarter and when you look at what we have added on the fourth quarter with escalating debt issues with the rest of Europe and the real possibility of a recession there, it is pretty understandable that these will be the quarters when CFOs would really start to decide that the recovery was going to be slower than they might have hoped and that some of the steps that government is taking aren’t going to take effect as soon as they might have liked.

Sean: Thank you for that Greg. Sandy back over to you here; as I mentioned off the top, this survey has been around since 2009, so you have about seven quarters of data. I am interested to know if you are seeing any trends that have been developing throughout the lifetime of the survey.

Sandy: Yes, we are. There are number of trends that we track in a survey, as you know, but when you look at sales or revenue growth, when you look at earnings growth, and you look at dividend capacity or the intent of paying dividends, all three of those metrics over the course of the survey in the last couple of years have really declined. Now, it is interesting that when you try to figure out what is going on, our view is that there were some low-hanging fruit so to speak. As the economy began to turn around and companies basically seized opportunities in markets, it has gotten a lot tougher now, but those three have declined over the last couple of years.

Sean: So there has been some contraction in the elasticity. Greg, do you agree with that?

Greg: Sure. We are seeing it in companies’ priorities particularly. I think we are seeing a bit more defensiveness and some conservatism that we really didn’t see a year ago, and Sandy touched on this a little bit earlier, really at the last quarter of 2010 and going into the beginning of 2011, there was a lot more optimism that the economy was on its way to recovery. And I think as things have stalled a bit, we have seen companies a bit retrench and focus a little bit less on the growth and new markets and the new geographies and products and services, and really pay a lot more attention to their current revenue streams that they are relying on to stay healthy. So understandably, they turned a little bit more defensive to make sure that they are going to weather the rest of the storm, however long it lasts.

Sandy: And then one thing I would add is another metric that we follow that is actually quite important because it’s really an indicator of overall macroeconomic health, especially here in the United States, is employment growth, and there we have kind of divergent views. Over the last couple of years, the expectation for employment growth in the United States for domestic employees has actually gone down to basically a 1% growth rate now. So, that does not bode well for our longer term unemployment rate. At the same time, the employment growth rate for offshore employees has significantly risen. So, there is a dichotomy there, but it doesn’t bode well when we think about just our overall economic health here in North America.

Sean: Greg for a moment, I would like to come back to you because given the findings from Q4 2011, what do you expect the CFOs to be focusing on now in Q1 2012?

Greg: Yeah, great question. I think most of what they are going to be focused on is a function of all those broader economic factors. So, I think we are going to see a continued focus on monitoring risks that are related to the U.S. and global economies, so certainly there. I think as we have stagnation or may be some contraction, we will see a big focus on competitive pressures and CFOs helping their organizations figure out how to handle pricing and business in a slow growth environment, and then certainly for the extent that they are making investments, making sure that those investment are really focused on where they are going to get a positive ROI and where they are going to get the benefits they are hoping for. And I think one thing as we talk about the optimism, and I know that was sort of the lead story in this, is it is important to put it in context because I think the optimism numbers the way we look at them do a good job of tracking sentiment and especially emotion and frustration that CFOs feel about where they are now relative to where they might have thought they would have been if you had asked them a year ago. Something that is also indicative of where they think we are going in the future are the projections that Sandy started to refer to, and if you look at the projections for revenues and earnings and capital investment and employment growth, those are still positive. They are not as positive as they were a year ago, but they are still positive. So that might be the silver lining that at least gives us some hope that things will get better reasonably soon.

Sean: Sandy, your view. Do you you agree with that silver lining?

Sandy: Yeah, very much so. I think one thing to put this in context, we at Deloitte view a modern day CFO as having four faces so to speak. They operate a finance function, they are steward of financial data, but then they are also a catalyst in the organization to drive growth, change, and that kind of thing, and ultimately they become a strategist with a CEO. And two of the questions that highlighted that this time around was over 50% of the CFOs felt like revenue growth was the number one company focus and the number one company challenge – two different questions – that they were facing, and that really demonstrates the modern day CFO’s role as a catalyst to drive change in an organization and to help drive new strategy. And that is really something that I expect they are focused on right now in Q1 2012, as well as the rest of this calendar year.

Sean: My final question is going to be for both of you, and Greg, we will pitch it back over to you in L.A. in just a moment, and that is, as the principals of this survey, what data points are you looking to most as this continues to evolve in the coming quarters?

Sandy: I really do think this optimism index, as we have coined it, is the one that we are really focused on continuing and monitoring because it is a pretty good indicator of where the economy is and where the economy is going. CFOs are really good people when it comes to determining where the economy is going to go, how it affects their companies, and gathering that type of data over a period of time only gets more reliable, and then the metrics around, as Greg said, sales, dividends, earnings - key company metrics that can be used in so many different ways and looked at especially among peer groups is very valuable data for anybody to have.

Sean: Okay. So optimism and metrics. Greg, how about you out there in LA? What are the metrics or what are the data points that you are most interested in going forward?

Greg: Really the same ones that Sandy mentioned. I’d add that one of the interesting things about those optimism numbers is where they are coming from, and these are not the CFOs of the midmarket companies who are a single line of business or geographically narrow in their scope. These are the CFOs of very large, well-resourced, very diversified companies, and it takes a lot to rattle their confidence and to shake their view of what is coming in the near term. So the fact that they did a big turn like that, that is something we haven’t really seen before. So even through other difficult periods, we saw a lot of maintained optimism, and it is only recently that we see that turn. So, it will be interesting, as Sandy said, to see how that develops. In particular, around the metrics that Sandy was talking about, the capital expenditure and the hiring projections I think are going to be really interesting because they are going to tell us when CFOs and their companies believe that we are out of the woods and especially the hiring numbers. If the offshore hiring continues to outpace domestic hiring, we will learn a lot about where companies see their growth actually coming when they do start to hit the gas again.

Sean: Well, gentlemen, thank you very much for your time and discussing the results of Signals, and I’m looking forward to having you both back on the program sometime soon.

Sandy: Absolutely. Thank you.

Sean: You’re welcome. Alright, we have been discussing the latest findings from CFO Signals, Deloitte’s quarterly CFO survey with Sandy Cockrell in New York and Greg Dickinson in Los Angeles.

If you would like to learn more about Sandy, Greg, or CFO Signals, you can find that information on our website. It’s www.deloitte.com/insightsus. For all the good folks here at Insights, I am Sean O’Grady. We will see you next time.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

 

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