I was reading a paper over the weekend that explored the relationship between financial frictions and productivity. This does not sound like a barnstormer, I admit, but stick with me for a few minutes. This does get interesting. It turns out that CDOs, looking to exploit AI, data and analytics to drive productivity need to work with CFO’s who are looking at their firm’s debts
The research (IMF Working Paper: Financial Frictions and the Great Productivity Slowdown, Duval, Hong and Timmer, 2017) suggests that during the financial crisis of 2008, firms that entered into it with weaker balance sheets lost ground to competitors and peers through lost productivity. There were two factors involved: the credit markets and how easy was it for firms to get credit, and the debt those firms had going into the crisis. As you know then and now, the Fed has opened the credit spigot and the economy is flush with it. The debt angle is a little more fun. The researchers looked at firms who had debt that matured during the financial crisis versus those with debt that matured outside the financial crisis.
This is interesting since such a condition would require the firm to roll over the debt, if credit was available, or pay the debt off if they could generate the cash. The theory, shown in the data, was that those firms with large debt overhang due during the financial crisis had lower productivity than their peers: they lost ground. If credit was tight then this gap was magnified.
Given the current monetary policy of loose credit, we can take that off the table for now. Let’s keep this simple and lets assume firms can get credit today. The point is that firms who have to dabble with such things won’t have the flexibility of firms that don’t. If a sizable amount of your corporate debt comes due during the economic reset (see Video: Postpandemic Planning Framework) that has come about due to Covid-19, this will impact your ability to fund survival, stability and growth.
From the CDO and executive level perspective we know there are several phases we are experiencing in this Covid-19 reset:
- Cash saving cost optimization decisions; cut immediately to free up cash to keep the operation going
- Cash (value) generating cost management investments; keep initiatives going that generate revenue, value or SLAs, to help stabilize the firm
- Productivity (added value) driving investments; invest in those other initiatives that create increased productivity to drive growth
- Opportunity (new value) investments; such as M&A or new business opportunities that will soon emerge as cash-strapped or debt-laden firms fail
The economic and social reset we are living right now has a good plan. But unless you know about the debt topic at the start of this blog, you really don’t know where to put the emphasis on the plan! You might be shifting to phase 2 or 3, and all the while the CFO or treasurer is fretting over some debt roll over. The key here is that your CDO, or senior most Executive leader that leads or oversees your AI, data and Analytics increment, needs to sit with the CFO on your emergency response leadership team. Your D&A investments will have material impact on your financial prospects; and have a huge impact on all other initiatives across marketing, sales, HR, supply chain, operations, and finance, as a means to help either make smarter business decisions or automate same.
If your CDO and CFO are not in sync, your Covid-19 reset response plan might already be in trouble.