Finance leaders can’t take their eyes off the bottom line, but they need to adopt a broader view of their organizations’ capabilities to weather turbulence now and in the future. That need has been highlighted by the recent public health and economic crises.
Business continuity and supply chains have been top of mind for CFOs. Prior to the pandemic, global political events such as trade wars and Brexit were having a significant impact on corporate strategies. The pandemic has only added to those challenges, as the coronavirus has restricted business and cross-border trade.
According to a Vistra-sponsored CFO Research study conducted in January, just prior to the pandemic declaration, nearly nine out 10 respondents said they were considering expanding into new markets. Only one in four respondents said the trade war between the U.S. and China had not affected their strategy. And when asked about Brexit, only on in five respondents said the UK exiting the EU had not affected their strategy.
Despite adapting their strategies to the challenges of the moment, CFOs — not known for taking unnecessary risks — reported that global upheavals had not deterred them from international expansion. They were even considering investing in regions commonly associated with economic and regulatory challenges. Brazil and other Latin American countries, for example, were targeted by 47% of companies that were surveyed before the pandemic.
This appetite for international expansion in the face of uncertainties has persisted. In April, CFO Research conducted another survey of senior finance executives about the effects of the coronavirus crisis on their businesses. Those responses indicated that only 20% of businesses were shutting down some operations or idling business lines, and only 2% were selling businesses or assets to raise cash.
Together, the surveys show finance leaders are delaying international expansion plans or pausing some operations rather than abandoning them.
Pain Points of Cross-Border Expansion
While global expansion is expected to continue essentially unaffected in the wake of the pandemic, there are some challenges for CFOs as they navigate the new normal. “When entering a new market through expansion or M&A activity, it is important to do your due diligence well in advance, as each country has its own immigration laws, legal entity regulations, tax obligations and other requirements. Further, work-from-home initiatives present some unique global mobility challenges that have introduced new risks into cross border operations,” said Ed Novak, Managing Director, North America, Vistra, on a recent webcast. “It can be challenging to understand all the risks of cross-border operations, as you don’t know what you don’t know.”
CFOs certainly have a varied list of challenges when it comes to global expansion and operations, including compliance risks and related expenses. As CFOs forge ahead with expansion plans, most respondents (54%) do not believe their tax departments are well-equipped to handle cross-border expansion. These and other compliance hurdles can be difficult to overcome in a time of global economic contraction and uncertainty. Even before the pandemic, finance teams were being squeezed to meet increasing demands on margins, and the market effects of the pandemic only elevate those concerns.
When asked about the cross-border expenses they expect to increase most significantly in the next three to five years, the top answer was maintaining supply chains, cited by 35% of respondents. 22.2% said they will update their supply chains in the next three to five years to address these concerns.
Among compliance pain points, data protection and privacy were the top concerns at 26.5%. Difficulties increase when companies expand into unfamiliar jurisdictions. “It is critical to keep up with what you’ve already been doing in terms of compliance while keeping an eye to upcoming regulations,” said Saul Howerton, Vice President, Advisory, Vistra, on a recent webcast.
Despite ongoing compliance challenges and economic headwinds, the state of international expansion remains strong. An overwhelming majority (87%) of organizations surveyed were considering expanding into a new market.
As we enter a new phase of global business, CFOs need to overcome evolving challenges, such as those related to supply chains, evolving global mobility requirements and tightening regulations. Corporate leaders are looking beyond the current news cycle when developing strategies to address these challenges. They understand the world is flat, and in many cases are delaying rather than scrapping their international expansion plans to achieve long-term growth.