by Andrew White | November 5, 2019 | Comments Off on Understanding your CFO/CEO’s Investment Strategy
If you are a chief data officer (CDO, or equivalent) or CIO, you know full well that budgeting is a fraught time: strategies are updated, value propositions explored, and investments prioritized. You know the drill: some of your expectations will be met, many may not. And all of this may rest on the ability you have to sell the business case (or story, as we now say). But where does the money come from to pay for IT, data and analytics and other capital investments? Does the source really matter that much to you?
It turns out that the source of funding used for capital investment does matter a great deal, and in different ways to different roles. In the last 10 years the US economy (and many others) have lived with near record low or even negative interest rates; the hope was that such low interest rates would encourage firms to ramp up investments in capital projects to then drive productivity and growth. If you have been keeping up with the news, you’ll know this didn’t quite work out. Yes, some firms have taken advantage of the cheap money, but much of that money has gone into different kinds of investments:
- Capital investment has not increased as expected
- Many firms have taken on increased debt however
- Productivity has remained slow or tepid and not grown as expected or hoped
- GDP has not responded (i.e. grown) as much as everyone had hoped
Much of the cheap money has gone towards share buy-backs to drive EPS; some has gone to fund M&A that would not have been closed during ‘normally’ priced debt. In fact, I just read a book that captures some of these issues: Productivity and the Bonus Culture, by Andrew Smithers. I recommend the book.
Back to you budget cycle and next years’ potential investments.
It turns out that firms have choices over how to fund their investment needs. Beyond initial finding and profit reinvestment, more mature firms may sell equity (i.e. stock) and some may issue bonds (i.e. debt). Does this matter? In today’s US print edition of the WSJ there is an article: Newell’s Bonds Decline. Newell Brands, maker of Rubbermaid and Elmer’s glue, is learning to cope with the situation where it’s bond holders lose confidence in the firm’s ability to meet its objectives, and so the value of the bond falls, and the yield has to go up in order to offset the drop in value and keep the bond holder happy, lest they sell the bond and the price falls further or the firm has to pay the holder. Such firms may seek to re-finance its debt, pay down some debt, or increase the payment on the debt maturity. This is all natural and not new.
What is new is the rate at which some firms have raised funds through bonds due to the long period of low interest rates. Many firms have taken advantage of the situation and loaded up on cheap money/debt; others have not. The article in question highlights how business leadership might end up concerned with their funding model given certain event. Should interest rates go up, should faith in the firms’ ability to meet its objectives fall, the cost of servicing debt will increase. Unless the investments have already paid off and started to generate cash, the ability of those highly indebted firms to reduce or service their debt will be hampered. If there ever were an economic downturn, highly indebted firms could be at risk since more of their profits or cash would need to go to servicing that debt and less is therefore available for investment going forward.
So, the question emerges: we budget, we prioritize spending, we fund expenditure. Where does that money come from? A CDO or CIO won’t likely be involved with such funding decisions: the CFO and if there was one, the Treasurer, are going to be central to the effort along with the CEO. But it would be useful to know where the money comes from. At least that way you can understand the CFO/CEO concerns should the firm be highly leveraged. Knowing this and the relevant dynamic (interest rate, capital markets, bond and debt markets) and how they change will influence your firms’ ability to raise subsequent funds. You could get an inside track on what might happen during the next budget cycle, whenever that takes place.
If you believe interest rates are going to nudge up, or if you believe your organization will be trying to support a higher debt burden, business leaders will seek improved cash flow operations near term and may not be so interested in longer term investments that might drive productivity in a year or three. So maybe you can alter your priorities for investment accordingly. If you see a more stable financial front, longer term investments might be better supported.
Related topic: a few years ago, I offered some research for our IT Symposium/XPO that explored the similarities between the CIO/CDO role and that of the CFO/Treasurer function in relation to data and money: they both steward assets and both kinds of assets, cash and data, were or are becoming synonymous with value. Only the Australian market picked up the material as interesting. I wonder if that says anything about market maturity, or perhaps willingness to explore new ideas?
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