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CFO SignalsTM: 2011 Q3 Results

CFO optimism plummets in response to global economic woes


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Results: CFO SignalsTM Q3

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Highlights: CFO SignalsTM Q3

The last six quarters of our CFO SignalsTM survey have shown that it takes a lot to dampen the optimism of CFOs from North America’s largest companies. But this quarter it happened—and in a dramatic fashion. 

The combined impacts of the U.S. debt deal, the downgrading of U.S. treasuries by Standard &Poor’s (S&P), rising sovereign debt troubles in the Eurozone, global economic malaise, and governments’ struggles to find solutions clearly rattled CFOs this quarter, turning sentiment solidly in the direction of pessimism for the first time.

That negative outlook took a toll in a number of other areas. While there was a sense of foreboding last quarter as the number of pessimists grew to nearly match the number of optimists, CFOs still forecasted fairly positive financial projections. In addition, a substantial portion of their pessimism appeared attributable to rising concerns about internal missteps as their organizations carried out growth strategies.

But the pendulum swung back this quarter with external factors, especially broader economic conditions, strongly dominating the list of CFOs’ most pressing worries. Moreover, projections for revenues, earnings, capital spending and hiring all dropped substantially this quarter.

Despite their rising concerns, CFOs appear pragmatic and focused on both near- and longer-term solutions. 

This quarter’s turmoil appears to have turned significant CFO attention back toward immediate topics like capital and operational performance management. But most are still being asked by their CEOs to focus primarily on strategic efforts—from the definition of strategy to its execution across the company.

That strategic focus has CFOs increasingly monitoring the macro business environment. Sovereign debt took center stage this quarter, and CFOs overwhelmingly said control of national deficits is essential to business success. They also appear willing to literally contribute to that success. More than half (55% of those CFOs in the U.S.) echoed Warren Buffett’s view that it would be acceptable for their personal tax rate to rise as part of a comprehensive deficit reduction solution.

Expectations finally succumb to persistent economic woes

The rise in pessimism evident in last quarter was even harder to miss this quarter. More than 60% of CFOs reported increased optimism in the first quarter of this year, but the number fell to 40% last quarter (its lowest level in the previous 15 months) and to just 29% this quarter. Moreover, pessimism rose from 16% in the first quarter to 32% last quarter, and it now registers a startling 53%. This means net optimism (the gap between those more optimistic and those less so), which fell to just 7 percentage points last quarter, fell to -24 points this quarter.

The focus is still growth–albeit with tempered expectations

For the last few quarters, a rising portion of CFOs have said their companies’ strategic focus was more on growth than cost reduction. CFOs still say about half of their strategic focus is on revenue growth, but recent turmoil may be tempering their investment plans. While expected year-over-year capital investment growth is still positive at almost 8%*, this represents a significant decline from the 10.7% and 11.8% estimates we saw over the last two quarters. Moreover, domestic hiring projections fell from a dreary 2% last quarter to a dismal 1.2% this quarter.

A slower path to growth: more blurry and more bumpy

A multitude of factors are complicating the transition to growth. Not surprisingly, economic volatility is CFOs’ primary concern this quarter. Nearly 45% say economic woes are their most worrisome risk, and one-third say their company now sees recession as the most likely scenario over the next few years. More than half say recent global economic turmoil has caused their financial expectations to decline.

Not all impediments and risks are external

While external factors give CFOs reason for concern, they are also substantially worried about their ability to set and execute their strategies. Two-thirds of CFOs say they are at least somewhat concerned that their strategies are not well enough defined and clarified—with 28% indicating strong concerns. And more than half of CFOs say they are at least somewhat worried about reaching agreement around their strategy—both within their management teams and with their investors.

Protect the base, but build for the future

Extraordinary recent volatility is clearly causing companies to cope with change and uncertainty on multiple fronts. And as these pressures create the need for broader and deeper assistance from CFOs and their finance organizations, the result is often competing demands for limited finance expertise.

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