3 Essential Profitability Strategies & Guide for CFO Success

Rising cost and uncertainty create pressure for today’s CFOs to balance profitable growth priorities with cost realities and business strategy.

Externally, geopolitical events, supply chain disruptions, more frequent insurance events, inflation, failed or stalled transformation efforts, and demand for talent in key markets continue to compress margins.

Internally, the following CEO priorities are likely to incur higher costs:

• Digital transformation. In a profitability-challenged landscape, digital investments often miss the mark on ROI and fall short of closing profitability gaps. By 2027, only 20% of CFOs will amass 80% of the total revenue and efficiencies that organizations gain through digital investments.

• Marketing, sales and pricing. In the next three years, CFOs will grapple with substantially lower profitability as consumer debt, pricing, and material and borrowing costs converge.

• People management. As labor costs rise in developed economies, organizations might be tempted to cut salary and benefit expenses. Underfunding these areas will not only lead to higher attrition and turnover but also increase overall personnel costs.

• Sustainability and environmental, social and governance (ESG). By 2028, climate change effects will increase enterprise structural costs by 10%. Organizations will be required to spend significantly more on mitigation efforts and adapting current operations to increase resilience against climate-related disruptions.

To deliver on executive priorities amid these pressures, focus on how to manage costs while maximizing investment returns. 

• Recalibrate stakeholder expectations around financial models and stress-test financial assumptions around run rates for revenue, volumes and costs. Reassess business units’ contribution margins, the “margin of safety,” and increase cost transparency through driver-based cost allocations.

• Navigate acute labor cost growth by determining appropriate wage and benefit increases, factoring labor intensity as a criterion as you evaluate strategic investments, prioritizing digital capabilities to remove labor burden, and identifying labor shortage and skill deficits across the organization. By 2028, organizations that competitively raise total compensation will spend 50% less on total personnel cost growth than those actively suppressing wages. 

• Reduce future climate change and extreme weather costs by modeling business disruption risks and related expenses; then craft a financial transition plan to steer budgeting and bolster investor confidence.

• Prioritize digital investments that focus on high-complexity, high-visibility business problems. This will lead to meaningful and business-oriented digital ROI, in part by consistently removing underperforming investments.

Recent social, political and economic shifts and events bring new and unique challenges to today’s CFOs. Navigating five key challenges can dramatically improve your organization’s performance trajectory and profitable growth.

Challenge 1: Zero-sum growth. In a low-demand economy, it becomes harder to grow top-line revenue and profitability without stealing market share from larger competitors. To maintain profitable growth, today’s CFOs have to deaverage segmentation of markets, customers and value chains to identify growth opportunities and customers that are underserved by industry giants.

Challenge 2: Waning pricing power. Steep, persistent inflation has driven price sensitivity and consumers’ propensity to switch products and brands to new highs — a pattern consistent across industries.

Challenge 3: Expensive productivity malaise. Faced with margin pressure, worker shortages and high turnover, many organizations have sped up digitalization efforts to automate processes and transform business models. But more than two-thirds of CFOs believe digital spending has underdelivered in terms of productivity and time savings. 

Challenge 4: Institutional knowledge cliff. The demand for digital talent exceeds supply — and expensive digital talent requires institutional knowledge to deliver on ROI expectations. But many of the employees who have that institutional knowledge are nearing or above retirement age, and their younger colleagues who grew up with automation have less grasp on how underlying processes really work.

Challenge 5: Bank lending squeeze. Higher interest rates and hybrid work have decreased the demand and value of commercial real estate. This has weakened the balance sheets of small, regional banks and diminished their ability to lend. Higher fee structures and loss of negotiating power with large banks amplify the issue. Many CFOs now have to consider alternative financing to maintain profitable growth and cash reserves. 

To maximize the impact of capital allocation, digital performance management and budgeting/spending decisions, adopt the following strategies for sustainable growth and profitability: 

• Focus on points of differentiation. Impress upon executive peers the criticality of driving spend and resource allocation toward capabilities and technologies that will help ensure your organization’s products, services, talent acquisition, retention efforts and delivery models outperform competitors. 

• Become a capital activist. To position the organization to pursue profitable growth, evaluate multiple sources of nontraditional funding, and diversify based on market conditions and capital availability. Adopt the mindset that “nothing is sacred but the strategy” — and only fund a shortlist of most-critical strategic initiatives. 

• Drive digital cohesion. To realize productivity gains that drive profitability, assess interdependencies between and across digital initiatives, enterprise capabilities, data and skill sets. Work with the CIO and chief data and analytics officer (CDAO) to understand digital interdependencies. Use that knowledge to inform funding and project performance management decisions.