In 2021, 60% of organizations were experiencing wage inflation. Since then, mentions of inflation on earnings calls have increased eightfold. There’s little question that inflation will be a big theme in 2022 or that it will present challenges.
“CFOs have little control over inflation itself, but it adds cost pressure that they must navigate their businesses through,” says Alexander Bant, Practice Vice President, Finance at Gartner. “When faced with challenges that could harm profitability, the instinctive CFO response is to reduce costs near-term or delay spending until inflation subsides.”
In a recent Gartner survey, 74% of CFOs ranked profitability as their top concern, the highest of any inflation impact. In many areas, the instinctive approach to control costs will be the right one to mitigate inflationary margin pressures. Simply trying to spend your way out of inflation is not going to work.
However, digital initiatives should be seen through a different lens. Well-planned and implemented digital initiatives must have a long-term deflationary effect on business costs and, subsequently, the price of products or services.
“We call this digital deflation — investing in technology to permanently reduce the cost of doing business,” says Bant.
Digital investment is not the only way that you can mitigate inflationary pressures, but it may be a route you haven’t considered. Gartner experts recommend a two-pronged approach to this:
- Continue to fund the right digital enterprise growth bets, even if margins seem tight.
- Apply technology to deflate the cost of finance.
Continue to place long-term bets when funding the enterprise digital strategy
“CFOs must try to lead the C-suite to drive a unified enterprise digital strategy,” says Bant. “Inflation can be a catalyst for organizations to drive key digital and cost reduction initiatives across the whole business.”
When thinking about how to fund digital bets in an inflationary environment, it’s key to avoid traditional, rigid funding models that prevent flexible resource allocation. Do as activist investors do and regularly assess the organization’s value creation strategy, divest business lines to bring the portfolio in line with a coherent vision and drive down the costs of products or services.
It is vital to fix systemic data governance and literacy issues across the entire business to maximize the effectiveness of digital bets. Select the right metrics to assess digital initiatives across their entire life cycle to fully understand their impact.
An important last measure: explain your digital initiatives to investors in terms of a digital inflation story. Leverage the right metrics to show how you will reduce costs near-term while driving costs out long-term with digital investments.
How to deflate the cost of finance
“It’s important to have a methodology to predict finance spend, such as the Gartner Cost Curves™, to put together a digital deflation plan,” says Bant. “Once the key drivers of cost in the finance function are understood, you’ll clearly see the areas to focus your attention.”
Our experts have identified key focus areas to cut costs for a typical finance function:
– Streamline processes via automation, which is vital to digital deflation efforts and allows the finance team to focus its efforts on high-value work and increased productivity.
– Shift the right work to business process outsourcing (BPO) providers to reduce expensive labor costs.
– Leverage machine learning and artificial intelligence (AI) to get the most out of your organizational data and improve predictive business insights.
– Hire the right digital talent that aligns to your digital transformation efforts.
– Select vendors that will help scale products and meet customer expectations.