CFO SignalsTM: 2010 Q4 Results
Despite broad-based concerns, optimism is still driving business activity
Last quarter, high variability in CFOs’ expectations made it difficult to generalize about what was happening across North American economies – and even harder to anticipate what might happen next. Although pessimism was on the rise with 36% of CFOs less optimistic about their companies’ prospects, 47% were more optimistic and average projected year-over-year performance expectations were still rising.
This quarter’s results are similar in their mixed messages. Expected sales and earnings dropped substantially this quarter, suggesting CFOs’ sentiments in the third quarter were ahead of their projections. However, despite this quarter’s declining performance expectations, optimism resumed its rise and pessimism appeared to recede.
Overall, this quarter’s findings are again dominated by high variability in CFO perceptions and expectations, both across and within sectors.
While the reasons for the diversity are many, our findings from this and previous quarterly surveys appear to support two dynamics in particular.
- By virtue of differences in industry conditions, market reach and resources, companies are experiencing and planning for very different realities.
- Remarkable uncertainty around the state of the economy, unemployment and government policy drives difficult and uneven interpretations of what the future holds.
Both - summary and full report documents (PDF) are available for downloading, under "Attachments," at the bottom of this page.
Stabilizing Optimism and Expectations
CFOs’ optimism rebounds on improved assessment of the business environment
After a surge in the second quarter, own-company optimism seemed to be abating in the third. Driven by worsening assessments of employment, government policy, and economic growth, 36% of CFOs claimed declining optimism in the third quarter, up from 17% in the second.
This quarter, optimism rebounded. After suppressing optimism last quarter, assessments of the business environment buoyed optimism this quarter. The proportion of “no change” reached a new high, suggesting sentiments may be settling.
One of the most notable developments in the broader economy since last quarter is the new Republican majority in the U.S. House of Representatives. This leaves the question as to how much the election results are contributing to current optimism, and polling conducted at our mid-November “CFO Vision 2010: Staying Agile” conference suggests they are a significant contributor.
- Nearly 60% of the 164 large company CFOs polled believed election results would have a positive impact on their industries (33% expected no impact)
- Nearly one-third said their companies had not benefited from government policy during the financial crisis and recession
- A substantial 39% said government policy had actually made it more difficult to weather the storm
All suggesting that the mid-term election results (and their presumed impact on policy) are largely seen as a positive outcome for business.
Stagnation Drives Competition
CFOs’ projected performance and spending trends are positive, but competition in the face of slow growth is dampening expectations
As many markets stagnate, companies are expecting increased competition for near-term growth and profitability. Market growth and pricing trends are both top challenges for more than half of all companies. New competitive tactics are a rising challenge on the whole, and factors like overcapacity and foreign competition are on the rise within specific industries.
Some of last quarter’s pessimism appears evident in this quarter’s projections. After two quarters of rising expectations, CFOs now project lower year-over-year sales gains. Capital spending estimates rose slightly this quarter.
Universal Concerns: Health Care and Corporate Taxes
Despite concerns about business impacts of tax and health care policy, CFOs say their companies are not yet making major strategic changes
Government-related factors remain a top concern for respondents. While companies’ specific regulatory focus in the aftermath of the mid-term elections is broadly distributed, two areas are a major concern for most CFOs: corporate tax policy and health care reform.
Corporate tax policy is a top economic concern for over one-third of CFOs and is a top lobbying focus for two-thirds. Health care policy is also top-of-mind, with half of surveyed CFOs rating it a top lobbying focus and 30% of CFOs polled at Deloitte’s November CFO Vision conference naming it their most pressing regulatory issue.
The reason for CFOs’ focus on health care reform is clear: they expect it to substantially impact their resourcing and costs. More than 90% expect benefit cost per employee to rise. Half expect the quality and/or breadth of offered benefits to decline, and one-quarter expect their number of domestic staff to fall as a result of policy changes.
Spending is Not Expected to Resolve Unemployment
Structural shifts in staffing needs are making hiring more difficult and exacerbating unemployment
Based on the persistence of above-normal unemployment levels, government and business leaders have begun to speculate that a structural shift in companies’ human resource needs is at work. At least for the large companies in this survey, significant shifts do appear to be taking place.
Consistent with their view that economic growth will not fix unemployment, CFOs shun further government spending.
Mixed Decoupling of Companies from Home Economies
CFOs indicate reliance on domestic demand, but ties to unemployment and growth plans do not appear as strong
Strong performance of many North American corporations in the face of slow economic growth and high unemployment has raised speculation that many are not substantially dependent on their home economies. Survey findings around customer demand, unemployment and foreign markets appear to indicate that the dependency is mixed.
CFOs say dependency on domestic demand is strong. Nearly two-thirds say their company’s performance is highly or very highly dependent on domestic consumer demand (less than 15% indicate low dependency), half are highly dependent on business demand, and nearly half are dependent on government buyers. But dependency on unemployment levels may not be as strong.
Companies’ growth plans show that, while home markets are still a major focus for many large companies, investment in foreign markets is on the rise. And according to CFO polling at Deloitte’s CFO Vision conference, nearly half of companies are already investing and operating in emerging markets.
Pioneer CEOs and Driver CFOs
CFOs’ typing of themselves and their CEOs shows that dominant working styles and CEO-CFO pairings may be changing
Over the past decade, CFO roles have changed markedly and many new CFOs have been added to the ranks. Given these changes, it is perhaps not surprising that the dominant working styles of CFOs appear to be changing as well. The stereotype of the driver or pioneer CEO working with a guardian CFO, while still applicable in many cases, is by no means the modern norm.
CFOs say one-third of their CEOs are drivers and another third are pioneers. Although these proportions suggest that the most common CEO/CFO pairing should be pioneer/driver and driver/driver in roughly equal proportions, the pioneer/driver pairing is most common by a substantial margin.
Overall, several pairings of CEO and CFO working styles vary considerably from their expected prevalence, suggesting that some may tend to be more effective than others.
Optimism Despite Uncertainty and Concerns
Although CFOs appear to be living in and preparing for very different realities, optimism is still the dominant sentiment
While high variability in CFO sentiments, expectations and focus again makes it difficult to find clear trends around specific issues, a few broader dynamics do seem prevalent.
- Most companies seem to be gradually coming to grips with the realities of structural changes that are altering the business landscape –especially around unemployment, regulatory changes (especially health care and corporate taxes) and the relative prospects for home market and international growth.
- Companies appear to be increasing their diligence around their investments and other commitments. With less margin for error in a tough economy with considerable uncertainty, companies are becoming increasingly careful in deciding how and when to lend money, invest in new markets and infrastructure, and hire new people.
- Despite high uncertainty and disparity of expectations, the overall tenor of CFOs has remained positive for the past three quarters. Optimists have outnumbered pessimists every quarter, year-over-year performance expectations have stayed positive (even at an industry level), and companies are still making investments in pursuit of growth.
About CFO SignalsTM: 2010 Q4 Survey
This is a virtually unparalleled survey group. Ninety-two CFOs responded during the two weeks ended November 30. Seventy-five percent are from public companies. Eighty percent are from companies with more than $1B in annual revenue.
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IMPORTANT NOTES ABOUT THIS SURVEY REPORT:
All participating CFOs have agreed to have their responses aggregated and presented.
Please note that this is a “pulse survey” intended to provide CFOs with quarterly information regarding their CFO peers’ thinking across a variety of topics; it is not, nor is it intended to be, scientific in its number of respondents, selection of respondents, or response rate – especially within individual industries. Accordingly, this report summarizes findings for the surveyed population but does not necessarily indicate economy- or industry-wide perceptions or trends. Except where noted, we do not comment on findings for segments with fewer than ten respondents. Please see the appendix in the attachment for more information about survey methodology.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, tax, legal, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decisions that may affect your business, you should consult a qualified professional advisor.
As used in this document, “Deloitte” means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.