COVID-19 has proven that macroeconomic events can change faster than most organizations’ modeling capability can keep up with.
With the economy facing an extraordinary range of outcomes, CFOs are called to simultaneously cut expenses while preparing to foster growth. However, most organizations found themselves responding to the toughest leadership test of a generation through a mix of aging technology, siloed profitability models and overly complex data supply chains that drive inadequate data quality. CFOs should look at COVID-19 as a wake-up call and invest in advanced profitability insights.
Financial institutions (FIs) are navigating the toughest leadership test of a generation.With the US economy on ‘pause,’ and an impending wave of defaults, asset withdrawals and business interruption insurance payouts, it is imperative for FIs to rapidly cut expenses and build reserves. However, FIs should also adjust to the operational challenges brought on by significant increases in remote working, and mobilize to manage spikes in COVID-19- related volumes (e.g., small business loans, revolving credit facility utilization and forbearances). Finally, FIs should be ready to quickly pivot back to fostering the growth agenda when the ‘whatever-it-takes’ monetary policies of central banks open opportunities for profitability.
In contrast to the great recession of 2008, FIs are in far better financial shape. However, the outlook is negative. FIs should improve their decision-making and incorporate advanced profitability insights.
FIs need to understand the real profitability of their business and product mix in order to enable portfolio optimization; understand cost dynamics in the event of product and business exits; and surgically target investment on product, customer acquisition and retention to protect stakeholder value and the institution’s role within communities.
FIs need to modernize their profitability capability to identify actionable cost-cutting levers; optimize their product and business mixes; and isolate which products, customer segments and markets to continue investing in while awaiting the economy recovery.
Leaders of FIs should follow the playbook for advance profitability insights:
- Avoid harming profitability while playing defense
- Drive consistency through a subscription-based approach
- Model cost dynamics and estimate impact of business events
- Enable finance on demand
- Build demonstrable trust in data
- Bolster the data supply chain
- Embed profitability insights into day-to-day business processes and decision-making fabric