Finance chiefs say their capital allocation strategy needs an overhaul, new EY study shows

- Eighty percent of CFOs say their capital allocation process needs to be improved, and more than half (56%) say their strategy needs to be completely rethought.

- Only 47% say their capital allocation process effectively meets total shareholder return goals.

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Mar 11, 2021, 08:45 ET

NEW YORK, March 11, 2021 /PRNewswire/ -- Chief financial officers (CFOs) agree that the COVID-19 pandemic's effects on companies have catalyzed a major shift in capital allocation strategy. According to the 2021 Global Capital Allocation Survey by Ernst & Young LLP (EY US), in partnership with Oxford Economics, more than half (56%) of CFOs say their capital allocation strategy needs to be completely rethought, and 80% concede their existing capital allocation process needs improvement. The survey, which fielded sentiment from 1,050 global CFOs, found that, to improve long-term business performance, CFOs and their companies must:

Define the future state of their business with greater accuracy and align their strategy with their investment road maps
Use the capital allocation process to drive business agility
Focus on the right metrics in the post-pandemic era

Loren Garruto, EY Global and Americas Corporate Finance Leader, says:

"Finance chiefs say their capital allocation strategy needs an overhaul to promote business agility and long-term growth. CFOs should develop a capital allocation process fit for a future that may be radically transformed by the impact of digital technologies, a changing workplace and evolving business models. Striking the right balance between rigor and agility will enable companies to achieve their value creation goals while navigating short-term disruptions and capital constraints."

Aligning investment road map with corporate strategy

As capital spending rebounds, CFOs are deciding which investments best support their corporate strategy. This poses challenges, especially given the need to keep up with rapidly evolving customer demands and competition, the difficulties of securing the necessary capital to fund all projects and finding the right balance of qualitative and quantitative metrics to track success.

With continued uncertainty, CFOs need to determine which of the many business model changes will stick moving forward. For example, the pandemic supercharged digital capabilities and remote work, and it is reasonable to conclude that businesses will continue to invest in these areas for future growth. In fact, CFOs point to digital technology as the area where investment increased the most from 2019 to 2020, and 62% say accelerated digital transformation will impact capital allocation going forward.

Garruto says, "As finance chiefs weigh various future market scenarios, they must align their strategy and capital allocation accordingly. Not all assets or business lines will fit the future; CFOs need to identify what is necessary to meet customer and competitive demands in the future state."

Utilizing capital allocation to drive business agility

Funding the future requires companies to make timely, unbiased decisions about how to reprioritize. However, less than half of CFOs say they can quickly assess market threats and opportunities and reprioritize planned investments accordingly. This can hinder long-term shareholder returns – only 47% of CFOs say their capital allocation process is effectively helping them meet their total shareholder return goals.

When considering obstacles, more than half (52%) of CFOs say access to data is the primary barrier to optimal capital allocation, with 42% pointing to a lack of data analysis capabilities. Advanced data and analytics tools, such as data visualizations and dashboards, can provide companies with the firepower needed to manage the vast amount of data and produce usable insights for decision-making.

"The importance of continuous improvement in the capital allocation process cannot be understated," says Garruto. "Given the speed of market change, CFOs should continually track progress to understand if decisions are being implemented effectively, make in-flight changes if necessary and conduct postmortem reviews. At the same time, CFOs should employ advanced technology, data and formalized, yet agile, governance frameworks that allow for rapid capital decision-making."

Rethinking metrics in a post-pandemic age

Companies are also being evaluated on a greater variety of metrics than in the past, creating profound effects on how performance is measured. CFOs note that a host of metrics have become more important in the capital allocation process in the past year, with qualitative metrics, such as safety and regulatory requirements, workforce impact and alignment with corporate strategy, leading the way (64%).

This may be an indication that the disruption from the pandemic is forcing more discipline in decision-making and that a broader set of stakeholders – including employees, customers and regulators in addition to the board and investing public – is demanding to understand more about the rationale behind each business decision.

"The way companies are evaluated is changing and tracking the right quantitative and qualitative KPIs are critical for creating long-term value," Garruto says. "We anticipate that businesses will increasingly leverage a balanced scorecard approach – which combines financial metrics with quantitative non-financial metrics and qualitative metrics – to make investment decisions and track progress."

Notes to editors

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About the survey

In January and February of 2021, Oxford Economics and EY surveyed 1,050 CFOs or equivalent titles worldwide and across industries. Respondents came from companies with revenues more than US$500m, with 33% having revenues US$500m-US$4.9b, 33% with revenues US$4.9b-US$14.9b and 33% with revenues more than US$15b.

Industries were evenly mixed (about 10% each) among advanced manufacturing, retail, technology, telecom, automotive, life sciences, health care (payers and providers), media and entertainment, consumer products, transportation and mobility as a service. More than half (60%) of respondents came from publicly traded companies; 40% came from privately owned companies.

Respondent companies are headquartered in the United States (50%); Canada (10%); Western Europe (20% in the United Kingdom, France and Germany); and Asia-Pacific (20%, in China, India, Japan and Australia).

About EY Strategy and Transactions

EY Strategy and Transactions teams work with clients to navigate complexity by helping them to reimagine their eco-systems, reshape their portfolios and reinvent themselves for a better future. With global connectivity and scale, EY Strategy and Transactions teams help clients drive corporate, capital, transaction and turnaround strategies through to execution, supporting fast-track value creation in all types of market environments. EY Strategy and Transactions teams help support the flow of capital across borders and help bring new products and innovation to market. In doing so, EY Strategy and Transactions teams help clients to build a better working world by fostering long-term value. For more information, please visit ey.com/StrategyandTransactions.

SOURCE EY