It’s been a tumultuous 12 months, but with declarations that a bull market is looming, is your organization ready for the growth that could be headed to the US economy? As it turns out, only 5% of companies typically achieve what Gartner describes as “efficient growth,” a measure of “a balanced growth profile that combines both top-line and bottom-line growth” as the economy returns to growth.
For Gartner’s purposes, a company is considered to have successfully achieved “efficient growth” when, compared to its peers, it is in the best 25% of companies in three areas: compound annual revenue growth, median total costs, and then number of years expanding both revenue and profitability at the same time. For their study of the S&P 1200, only 5% of companies achieved this.
“As we look at how S&P 1200 companies have recovered in other parts of the cycle, it’s very easy to drive the growth again—you turn on the marketing spigot, you turn on the sales spigot, you start allocating more headcount to areas of the company that will drive growth; that’s not hard,” said Alex Bant, Gartner’s chief of research for CFOs, told CFO Brew. Instead, “the hard part is…how do we do that in a way that preserves the profitability gains that we’ve made during the last 24 months?”
It turns out that companies achieving efficient growth make a consistent set of decisions, some of which might seem counterintuitive.
“The winning companies focused on removing growth anchors,” Bant said, explaining that success there is defined by “removing processes that make it difficult to fund innovative ideas.”
Companies achieve efficient growth in part by not worrying too much about certain categories of expenses according to Bant. As an economy starts to enter a growth stage, CFOs should focus on “removing processes that make it difficult to fund innovative ideas,” Bant said, which includes shifting tactics with a focus on “reducing the burden of putting forward the business case, and flipping your operating reviews to focus less than less on cost and more on how the consumer is changing.”
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In the case of one company that Bant studied, they told him, “As we get ready for the growth phase, in our operating reviews, instead of starting with the financials, which would take up 90% of the meeting, because everybody’s debating the numbers and looking backwards, we actually flipped the agenda to talk about opportunities in the market.”
Instead of emphasizing low overhead in a sales operation, efficient growth companies invest, “focusing less on mandating expense controls and instead, spending time with customers understanding how their behaviors are shifting,” according to Bant.
Surprisingly, companies that don’t set high efficiency targets are the ones that outperform on efficiency, according to Gartner research. Bant said that companies that shun targets for so-called “hurdle rates”—the ROI required on a new effort—and that instead, “what they do is they actually say, ‘we’re not going to set a minimum hurdle rate, you tell us what’s actually possible.’”
The shift there creates an environment that “actually brings forth the game-changing innovations and big growth bets that the company will need to succeed on the other side of the cycle,” Bant said.