It’s Week 4 of our blog series ‘7 emerging trends that are changing finance’. This week we take a look at New Growing Pains. As finance professionals grow their business many have to manage new challenges, from managing business growth in a complex economic environment, to managing businesses that are more global than ever before.
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4. New Growing Pains
Challenges in managing growth
As many businesses have enjoyed growth, this success has not come without its challenges. Many of these new growing pains have fallen on the shoulders of finance professionals, from managing business growth in a complex economic environment, to managing businesses that are more global than ever before. On top of this, they need to manage customer trends and preferences that are evolving with the growing economic power of the Millennial generation.
M&A is changing
Finance leaders are being tasked with the difficult challenge of managing business growth. Many businesses have looked to M&A to grow their businesses, but in a post-recession economic environment, the M&A landscape has changed, creating new challenges for these business leaders.
Between 2010 and 2013 there was a major shift in corporate acquisition types. Transformational deals have experienced a 52% increase from 29% to 44% between 2010 and 2013, respectively, while absorption deals have seen a 28% decrease, from 40% to 29%. Smaller tuck-in deals have decreased from 18% to 15%, as have stand-alone deals, from 13% to 11%, over the same period.
This shift did not occur by chance. Analysts suggest this change is due to a surge in absorption deals following the 2007-2009 recession. Now, as technology is causing major disruptions to existing markets, businesses are seeking deals that can lead to more fundamental business shifts, such as entering new markets or establishing new operational capacities.
These changes have not come without challenges. Because of the complexity of transformational deals, compared to absorption, tuck-in, and stand-alone deals, many businesses are struggling to achieve their pre-acquisition goals. Business leaders listed integrating technology and systems, and aligning operational and business procedures as the two biggest post-close challenges, with 45% reporting difficulties with each. These challenges, commonly associated with transformational deals, may be due to a lack of experience. Only 24% of companies reported a core competence in transformational deals.
Managing a global workforce
In today’s global work environment, more companies are opening offices abroad in search of new talent, resources, and lower labor costs, but with all the benefits comes new risks, perhaps the most prominent of which is IP theft.
IP theft cost U.S. businesses more than $300 billion in 2013, according to The National Bureau of Asian Research, with China accounting for roughly 80% of all IP theft from US headquartered companies. As businesses move into these new markets, they often fail to fully understand local laws and legal systems, and how IP is viewed in the local culture. In China, for example, IP theft and imitation is widely accepted, as it is viewed more as “adoption” than theft. The Chinese government has even coined the phrase “re-innovation” in describing this practice. Companies who set up offices abroad may also face new security risks, particularly if these offices reside in parts of the world where technology and infrastructure is less advanced or less controlled.
Businesses need to be deliberate in their approach to risk mitigation in foreign countries. This starts with gaining a firm understanding of the local culture. Don’t assume that local employees are familiar with your perspectives with regards to IP and security. Be explicit with your policies and expectations, particularly as it relates to IP and security. Also, wherever possible, disaggregate knowledge, particularly if it pertains to proprietary processes or confidential information.
Additionally, the sheer logistics of man aging a global workforce can be a challenge for finance leaders, from managing various time zones and languages, to collaboration and productivity. Many financial professionals have turned to technology solutions that allow them to aggregate and centralize information across all of their global business units, and productivity tools supported by the cloud help ease the burden of collaborating with employees on the other side of the world.
The demand for sustainability
Over the last few years, there has been much debate over the growth in consumer demand for environmentally and socially friendly products. While many people say they want responsible products, purchase behaviors haven’t always supported that. That trend is starting to shift.
While there has been a decline in individuals saying they’d pay more for responsible products, there has been an increase in the percent of individuals stating that a business’s social and environmental record is important to them.7 A 2013 study by Cone Communications and Echo Research reported that 87% of global consumers consider CSR when making a purchase decision.24 Interpreted another way, good CSR is the new baseline, and while consumers may not reward those for doing extra, they will certainly turn on those who fail. Businesses need to consider CSR both as a defensive strategy and an offensive strategy.
Today, information is easy to obtain and spreads quickly. Exposed unethical business practices have resulted in swift backlash from consumers. This has forced many businesses to revisit their own practices, as well as the practices of vendors in their supply chain, to become more socially responsible organizations. It has also pushed many organizations to improve transparency. In 2015, CorporateRegister.com has aggregated CSR reports from over 12,000 companies, up from a mere 20 in 1994.
Additionally, an increasing number of businesses are using CSR to grow their businesses, from American Eagle, who recently reported a 10% increase in sales of their lingerie, Aerie, after a pledge to stop Photoshopping models in their ads,to Goldman Sachs, who is investing in training and education for 10,000 female entrepreneurs. Improving internal business practices can have a positive impact as well. Research by the World Green Business Council has shown productivity gains of 8-11% in businesses that have taken initiatives to improve air quality in their offices. The research also suggests that companies with a strong CSR record have an easier time recruiting and retaining workers, and a 2011 study between Harvard Business School and the London Business School showed that businesses with strong CSR performance had easier access to financing.29 While CSR initiatives have gotten a mixed bag of reviews in the past, the waters are shifting and the importance — both ethically and financially — of investing in CSR is becoming clear.