Leadership

2022 Outlook: CFOs’ 4 realms of risk

2022 is a pivotal year for CFOs. A mixed economic bag and the impact of COVID-19 leaves finance chiefs with big challenges to navigate.
Vincent Ryan
Vincent Ryan
January 18, 2022
2022 Outlook: CFOs’ 4 realms of risk
Photo: Santje09

2022 is a pivotal year for CFOs. Unemployment is low, and, according to Moody’s analysts, the omicron COVID-19 variant  is “unlikely to derail” the economy’s “solid expansionary path.” So, why did the optimism of chief financial officers fall late last year, per the Federal Reserve Bank of Richmond’s CFO survey. In part, it may be the looming combination of inflation, rising interest rates, and a seller’s market for labor. A large number of CFOs may be running that gauntlet for the first time in the upcoming year.

Fortunately, there’s an upside: those challenges exist because markets are filled with opportunities — and capital. Where will the obstacles and opportunities lie in 2022? Read on.

Interest rate liftoff

The Fed is ready to move away from “emergency settings.” But there’s still time for companies to lock in lower interest rates on debt and invest in productivity enhancements, but they also need to ensure continued access to capital.

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Successive quarter-point rate hikes from the Federal Reserve Open Market Committee this year, whether there are two, three, or four, will tamp down aggregate demand and allow inflation to cool off,  said Robert Hartwig, Director, Risk and Uncertainty Management Center at the University of South Carolina.

His advice to CFOs is to borrow and invest while rates are low: “The cost of debt capital remains very low and, in my view and the views of other economists, is the preferred form of financing.”

“Take the capital and spend it on M&A and necessary productivity enhancements, which makes sense if the protracted labor shortage is permanent,” Hartwig said. “You’ll spur growth and profitability over the next two years, even with slightly higher costs.”

In reality, short-term interest rate moves typically don’t stress out CFOs. “They only have a small proportion of debt coming due every year. So unless you’re 100% floating, It’s not like rates go up, and all of a sudden you have double the interest expenses,” said Reuben Daniels, founder and CEO of EA Markets

The bigger concern will be the Federal Reserve slashing its balance in 2022, said Daniels. Reducing the Fed’s balance sheet “is going to hurt ten times more than it felt good putting it on,” Daniels said. “The market is totally addicted to the Fed being the lender of last resort.”

With a possible strain on access to capital, with the banks being first affected, Daniels said CFOs should be strengthening their company’s creditworthiness and credit ratings, extending debt maturities, maximizing revolvers and increasing covenant flexibility.

The one hovering dark cloud from interest rate increases would be for startups with stratospheric valuations. “They should be prepared for an extended period in which their valuations fall and become depressed,” said Ernie Goss, professor of economics at Creighton University. 

“With rising interest rates, investor appetite for risk will diminish, simply because there are safer alternatives,” Goss said. 

Beating back inflation

The inflation rate may ultimately ease in 2022, but higher materials and transportation costs will linger as companies’ product prices catch up with operating expenses.

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How long will inflation run hot? Moody’s analysis says it will run into the second half  “as demand-supply issues for goods are taking longer to resolve.” 

All along, U.S. finance chiefs resisted the notion that U.S. inflation was transitory. Instead, they indicated back in November 2021 that abnormal cost increases could last deep into 2022. 

Four in 10 U.S. businesses report their product prices have risen and more than half of the 470 executives surveyed in December by S&P Global Market Intelligence expected their prices to march upward.

As supply chain disruptions like the semiconductor shortage last, CFOs are taking measures to preserve operating margins. Bob Mack, CFO of recreational vehicle maker Polaris, plans to aggressively raise vehicle prices due to increasing shipment and component costs. His team started reviewing pricing quarterly in 2021, Mack said.

 There’s little choice for some companies, as their cost increases have blown past the 7% headline inflation rate, per the U.S. Bureau of Labor Statistics. Some manufacturers have faced enormous inflation in costs of goods sold and other areas. Conagra Brands suffered gross inflation as high as 16%. The good news is companies including Conagra and 3M are increasing prices without much pushback. Others are lowering or eliminating discounts or introducing smaller product sizes.

 “So far, consumers have been willing to accept the price hikes due to the extraordinary stimulus and unemployment benefits throughout the pandemic,” according to analysts Andrew Tong and Alex Goldman of Capital Advisors Group

But 3M CFO Monish D. Patolawala said on an earnings call that defending margins is also a “self-help story,” involving measures exploring “dual sourcing and improving factory yields.” 

At information management firm OpenText, cost-cutting is not on the agenda. But the company is benefiting from lower staff travel costs and a pre-emptive, pre-pandemic dump of 40% of its office space, said CFO Madhu Ranganathan. Still, it’s difficult to offset the necessary increases in worker pay levels and the resulting wage pressure. Salary increases “are the big costs that we need to keep baking into the P&L,” said Ranganathan. 

While compensation mounts, “you can’t always count on revenue growing because of the macro volatility,” Ranganathan said.

The talent problem

2022 demands a new attack plan: Adopt a thoughtful, long-term strategy for retaining employees, filling job openings, and becoming an attractive workplace for the kinds of people you want on your team.

OpenText’s escalating pay problem is common. One-third of U.S. employers boosted their salary increase projections for 2022, budgeting an average 3.4% rise for 2022, according to Willis Towers Watson. Some HR executives forecast average merit increases of 5% due to the tight labor market, according to Grant Thornton. Board. Companies are also giving bonuses to a larger portion of their employee base and granting equity and cash retention awards. 

“Due to inflation, we did two rounds of salary review in 12 months,” OpenText’s Ranganathan said. “And we’ve never done that.”

But the issues for U.S. workers are more complex than lagging pay. Burnout from the isolation of remote work and workforces stretched thin, in addition to workers reassessing their personal priorities during the pandemic, led to high quit rates, according to Catalyst. Early retirements from Baby Boomers also took a toll.

Labor force participation, still below pre-pandemic levels, could take time to recover in 2022 as long as workers worry about omicron exposure. 

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Professional positions are seeing churn, but service-level jobs are exponentially more difficult to fill. Blue Cross Blue Shield of Massachusetts is definitely “feeling” the effects CFO Andreana Santangelo said at MIT’s fall finance conference. 

“Every time I see an Amazon commercial, I cringe, because what else are they offering [workers now], Santangelo said. Because health insurance is complicated, “It takes a long time even to train a service rep, and [then] they’re already out the door,” she said.

“I think a lot of those service jobs have been vacated because people are making different choices, particularly women, about how they want to spend their time … the stability of daycare and the stability of schools is just not there,” she said.

The “great reprioritization” of work for some people means pay raises alone won’t improve retention and increase an employer’s allure to job candidates. In a December 2021 Grant Thornton survey, half the respondents said they would give up a 10% to 20% salary boost for more flexibility in when and where they work. Additionally, people are looking for  reskilling and upskilling opportunities, mental health programs, and focus on diversity, equity and inclusion (DEI). Companies who pay attention can  build a more stable workforce in 2022, says Lesli Jennings, senior director of work and rewards of Willis Towers Watson.

The race for digital acceleration

Finance departments must find ways to double down on analytics use, migrate planning and reporting systems to the cloud, and keep systems secure.

Worldwide IT spending fell during the initial stages of the pandemic, according to Gartner, rebounding some in 2021. This year, Gartner forecasts growth of nearly 6% in global IT spend, to $4.5 trillion. And almost half of all U.S. CEOs told EY recently they are adding technology to protect profit margins, including increasing customer interaction via digital platforms, monetizing resulting data assets, and automating to reduce higher labor costs.

For finance, streamlining manual tasks with bots will continue. But the higher bar will be incorporating artificial intelligence (AI) and machine learning into functions like FP&A. 

“Despite the chatter, CFOs have been slow to adopt advanced technologies like [artificial intelligence] due to several factors, including tightened pandemic budgets, lagging transformation efforts, and a lack of prioritization,” Alok Ajmera, CEO of Prophix, said. “But as businesses emerge from the volatile pandemic period, expect to see CFOs finally taking the plunge into AI-powered finance technologies.”

Corralling all the data required to get better at planning and forecasting and timely decision-making will not be a piece of cake. A Harvard Business Review Analytic Services study found that many finance teams struggle with accurately preparing, reconciling, and accessing high volumes of information; integrating recent or real-time data into analyses; and analyzing data, forming recommendations, and communicating them.

The answer will be developing personnel with greater digital prowess. “Finance is very good at ERP systems. And they’re reasonably good at analytics. But now the world has moved forward within terms of making those analytics real-time and more intelligent,” says OpenText’s Ranganathan. OpenText is both upskilling existing staff so they can spend more time performing higher-level analysis and hiring fresh college graduates.

Digital natives fit well with the acceleration in remote work technologies and the accelerated adoption of cloud-based systems. An FTI survey found 67% of finance functions have implemented or are using cloud-based general ledgers, and ERP and enterprise performance management (EPM) systems are also migrating.

The cybersecurity protections for cloud environments and customer data will also need fortifying.

“In 2022, CFOs will be looking for comprehensive security solutions — inclusive of people, processes, and technology — coupled with third party verification and certification to identify, review, and mitigate all risk, to keep their businesses and their budgets safe from cyber threats,” Prophix’s Ajmera said. Cyberattacks were up 10% in 2021 compared with 2020 and cost an average of $4.24 million per incident, with the acquisition of data being the primary motivation for hackers, according to IBM and the Ponemon Institute.

A majority of C-suite executives are confident in their organization’s defenses against ransomware, according to research from the nonprofit training org (ISC)². But they need visibility into what is needed to restore minimal operations following an attack, including backups, identifying priority systems, and restoring essential functions. 

Finally, CFOs need to pay particular attention to the cyber defenses promised by cloud vendors. Experts advise not blindly trusting assertions of application security and stability. Attacks like December’s disabling of the Kronos private cloud payroll system stress the need for making contingency plans for when cloud apps go out.

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Russ Banham provided additional reporting to this story.