CFOs experienced in cutting costs, restructuring in high demand

Fall is typically a period of increased CFO turnover as hospitals and health systems begin searches for new executives for the beginning of the following year, but the pressures associated with high inflation, a projected recession and the continued effects of the pandemic have led to more churn than usual for top financial positions, The Wall Street Journal reported Oct. 23

Many economists and financial experts are expecting a recession to hit the U.S. in early- to mid-2023. This is pushing some executives to switch roles now before the labor market changes. Many healthcare organizations are also preparing for a potential economic downturn by searching for CFOs who are experienced in cutting costs or restructuring operations, according to the report.

Recession planning in healthcare is challenging because it can have both negative (payer mix, patient volume) and positive effects (decrease in labor and supply inflation) on financial performance, according to Daniel Morash, senior vice president of finance and CFO for Boston-based Brigham and Women’s Hospital.

The best advice I would give is that hospitals need to consider recession scenarios when making long-term commitments on wage increases, capital expenditures and planning for capacity for patient access,” Mr. Morash told Becker’s Hospital Review. “Most of our focus needs to be on the acute challenges we are facing. Still, it’s important to be careful not to overreact or overcommit financially when a recession could change a number of trends we’re seeing now.”

CFOs need to prep for healthcare’s lagging inflation

Healthcare costs are expected to jump 6.0% next year. CFOs must prepare accordingly, advises WTW’s Tim Stawicki.

CFOs need to be prepared for a “higher tail” of medical inflation — even if general inflation eases in the near future, Tim Stawicki, chief actuary, North America health & benefits of Willis Towers Watson (WTW) told CFO Dive.

With the Consumer Price Index (CPI)  rising to 8.5% in July and the recent rise in the core Producer Price Index (PPI), the Federal Reserve will probably look to hike interest rates even farther. 

“CFOS need to be prepared for the case that if general inflation eases, there may be two or three more years where they need to think about how they are managing the costs of health care plans,” he said in an interview. 

Inflation, which can more immediately impact consumer prices, works somewhat differently when it comes to costs of medical care. “Employers are paying healthcare costs based on contracts that their insurer has with providers, which are multiple years in length. So if a deal with the hospital or contract does not come up until 2023, then that provider has the opportunity to renegotiate higher prices for three years,” said Stawicki. 

The recent Best Practices in Healthcare Survey by WTW consisting of 455 U.S. employers found that employers project their healthcare costs will jump 6.0% next year compared with an average 5.0% increase expected by the end of this year.

Further, employers see little relief in sight — seven in 10 (71%) expect moderate to significant increases in costs over the next three years. Additionally, over half of respondents (54%) expect their costs will be over budget this year.

Balancing talent retention and healthcare costs

Talent retention has also remained an entrenched challenge for CFOs over recent months and continues to be top of mind. 

Given inflationary pressures and a potential looming recession, employers are having trouble finding the workers they need to run their businesses. A rise in healthcare benefit costs will make this all the more challenging, said Stawicki. “Employers are looking around and saying ‘I need to find talent to help me run my business and I can’t do that if I have an ineffective program in healthcare benefits,’” he said. 

There is a direct link between business outcomes and in particular employee productivity and employees’ ability to manage their health and financial environment, according to WTW’s Global Benefits Attitude Survey. “Losing the ability to offer programs and benefits that meet employee needs is impacting business,” said Stawicki.

It comes down to finding the balance between cost management in an environment where talent is hard to come by, he said. In order for CFOs to be successful in financing benefit programs they need to look at finding ways to partner with their counterparts in human resources, said Stawicki. 

Sixty-seven percent of employers said that managing company costs was a top priority in the company’s August Best Practices in Healthcare Survey, versus the 42% who said that achieving affordability for employees was a top priority. In the near future, CFOs need to establish a relationship with HR counterparts that can facilitate “ways to manage company costs without shifting it to employees,” said Stawicki. 

Ultimately, company costs remain paramount for employers but running a successful business will also require keeping employee affordability top of mind.

CFOs continue talent retention battle

Dive Brief:

  • CFOs looking to attract and retain the right kind of talent amidst inflationary pressures, rising interest rates and other economic tensions need to “double down on recognition and meaningful work for employees,” said Jessica Bier, managing director of Deloitte Consulting, in an interview. 
  • In order to attract and retain viable talent to keep business afloat, 71% of CFOs indicated that a flexible workplace environment was their approach, 63% said clarity around career development and growth opportunities and 62% pointed to increased salaries, per the second wave of data in the Q3 CFO Signals report.
  • The report also revealed that CFOs who took steps to alter, reduce or streamline the type of work their finance organizations performed saw several benefits throughout the enterprise — 78% said one benefit was more time spent on higher-value activities and 71% indicated greater use of technology was another. Contrastingly, only 20% saw talent retention as a benefit, and even less (10%) saw higher quality talent as one.

Dive Insight:

The managers and workforce of financial departments are looking for five main things, said Bier, per the report — those being work environment flexibility, career growth and development, salaries, meaningful work and recognition, she said.

“As we think about the workforce experience, every CFO is also the chief talent officer,” Bier said. “Your HR business partner can support you but at the end of the day the way your managers work and the way you connect people to the work that they’re doing — that’s the CFO’s job to set that tone.”

In today’s macroeconomic environment, with inflation at its highest point in nearly four decades, meeting the expectations and needs of finance employees is all the more expensive, and important. 

One misconception, Bier said, is that a recession means workers will be happy just to have a job. “The people in the workforce who are the ones you want to keep, are the ones who are always going to have options,” she said. 

Talent retention continues to be a multifaceted challenge for CFOs and remains top of mind. Over half of CFOs (54%) cited hiring and retaining staff as the most difficult task over the next 12 months, according to a July Gartner study.

Companies mull benefits of interim CFOs

Interim CFOs can cut through politics to help navigate companies through murky waters, experts say.

As they face financial difficulties, leadership crises or other inter-company developments, many firms have ceded their financial reins to interim executives over recent months.

Retailer Bed, Bath & Beyond quickly named their chief accounting officer as interim CFO following the death of their previous financial head earlier in September, for example, while real estate investment trust (REIT) Tanger’s chief accounting officer also recently served a stint as their interim financial head after the REIT ousted their previous CFO, a 28-year company veteran.

One of the reasons to tap an interim CFO is simply to provide peace of mind for the company and its shareholders while the search to find a more permanent candidate is ongoing, said Shawn Cole, president of boutique executive search firm Cowen Partners in a recent interview.

While some searches are as short as 38 days, the majority of executive searches can take between four to six months, a period where remaining without financial leadership is untenable. Firms seeking interims must still consider several key factors when choosing such an executive, however, Cole said.

Companies seeking external candidates, for example — which can be due to inter-company turmoil or, as is often the case, because the company may lack the bench strength to pull forward an internal candidate, Cole noted — should take care to consider “professional interims” for the position as opposed to an unattached CFO, he advised.

“I would just be very cautious that you are not just hiring an unemployed CFO,” Cole said. “There’s plenty of wonderful professional interim CFOs out there that are excellent at consulting. You don’t necessarily want to get yourself into a position where you are engaging just an unemployed CFO, that needs a job.”

Getting a fresh perspective

Bringing in an external interim can also grant companies benefits they may not see with internal candidates, for that matter, explained Mike Harris, CEO of Patina Solutions. Patina, which focuses primarily on placing interim executvies, was acquired by fellow executive search company Korn Ferry this past April.

It can help other executives, notably the CEO, to get “fresh perspectives and viewpoints,” he said.

“If someone is coming in for six months they can tell it like it is, they can come in and make a quick assessment,” he said. “Candidly, it does take out the politics if you’re in there on a limited basis.”

Similar to Cole, Harris pointed to a growing population of what Harris terms as “career interims,” who are working in that capacity because they enjoy the flexibility of movement — they get to go in and get critical projects done for the company, he said.

Turning to an external interim can also help companies execute on particular goals such as a restructuring, said Harris, nothing that what companies need from someone taking on the position for six months could be “very different” than what firms may be looking for out of a permanent CFO. Their short tenure means interims can be “very objective” and have a “big impact” at a company in a short period of time, he said.

“The reason [interims are] usually coming in there is because they have something in their background that’s going to be very helpful for the situation that company is facing,” he said.

Companies may also take advantage of an interim CFOs’ skills as a sort of mentorship for their existing CFO — the executive in the permanent seat may lack M&A or other key experience, for example, that an interim may be able to provide during their short-term tenure.

Tapping insider knowledge

Pulling forward internal candidates to fill the CFO gap can also have benefits for firms if possible, as such candidates have intimate knowledge of the companies’ status and needs that outside executives may lack.  

This may be the case for struggling payment processor PayPal, another example of a firm who recently appointed an interim CFO — moving Gabrielle Rabinovitch, their SVP of capital markets into the seat for a second time after the newly-minted CFO departed for medical leave.

In PayPal’s case, the company needs “stability” in its financial chair, which has been lacking since the departure of its previous CFO John Rainey to retailer Walmart, said Josh Crist, managing director for Crist|Kolder Associates.

“It may be time to think about a young internal player as an interim,” Crist wrote in an email regarding PayPal’s CFO woes. “Institutional knowledge should be key given strategic issues the company faces.”

Such a candidate may prove to be a permanent fit at the company, for that matter, he said.

“I believe the current interim might actually be correct for the full time gig! I believe they need an internal player who has seen the nuts and bolts/knows the operating and strategic plan and can help execute,” Crist wrote in an email. “I don’t believe they need a high-level strategist.”

The future of the CFO seat

While companies must carefully consider what it is they are seeking out of an interim — or even a permanent — CFO candidate, qualified executives also have their pick of potential options as the market for executive talent grows more competitive.

CFOs who would have potentially retired or left their current roles years earlier, but were stymied by the pandemic, have now begun to do so, contributing to a narrowing of the potential talent pool. For that matter, the list of responsibilities handed to modern CFOs has grown over recent years, but companies may not have fully adjusted their leadership structure accordingly, Cole said.   

“The CFO is no longer the chief accounting officer,” Cole said. “They really effectively should be the right hand to the CEO. While many companies have increased demands of the CFO, they haven’t necessarily brought the CFO into that light. And so I think companies that can show a CFO candidate that they will have a position of significance of their organization, be that strategic business partner to the CEO, I think that goes a long way.”

Companies expand CFOs’ role to retain them amid high demand

The pressure is on for boards to hold onto chief financial officers as firms face the prospect of an economic slowdown and intense competition for talent.

Demand for finance chiefs continues to be high in U.S. businesses, according to a July 4 report from The Wall Street Journal. Data from Russell Reynolds Associates indicates that CFO turnover at companies in the S&P 500 rose to 18 percent in 2021, compared to 15 percent in 2020 and 14 percent in 2019. 

Some new strategies call for broadening CFO responsibilities or elevating their positions altogether to retain top executives, according to Joel von Ranson, head of recruitment firm Spencer Stuart’s global functional practices. 

“Companies create these broader roles and titles to engage and recognize and motivate the very best of the best,” Mr. von Ranson said. 

CFOs at companies in the S&P 500 and Fortune 500 average about five years in their job, according to executive search firm Crist Kolder Associates. Expanding the CFO role allows organizations to create opportunities to retain key talent past the five-year mark. 

In 2021, just under 8 percent of chief executive officers at companies in the S&P 500 and Fortune 500 came from the CFO seat. 

Stay Vigilant, CFOs: Your Compensation Strategy Matters More Than Ever

https://www.forbes.com/sites/paulmcdonald/2022/06/15/stay-vigilant-cfos-your-compensation-strategy-matters-more-than-ever/?sh=697b638f18f7

There’s been some speculation in the news lately that wage growth in the United States might be topping out. This could be the case for some employers, especially smaller companies that don’t have much more give in their current staffing budget. However, don’t think for a moment that compensation is suddenly losing its power as a tool to help secure top talent in a market where unemployment is low, the quits rate is high, and there are nearly twice as many open jobs as there are available workers.

The suggestion that employers are becoming more conservative in their salary offers also might be hopeful thinking for those trying to control rising inflation. Federal Reserve Chair Jerome Powell, for example, recently referred to the labor market as “unsustainably hot.”

While some big companies may be considering cooling down on hiring, some are paying higher wages to median-salaried employees than they did before the pandemic. (Significantly so, in some cases — think six figures.) And although the U.S. economy has seen some job-shedding in recent months, layoffs overall are at their lowest level on record.

The takeaway for chief financial officers (CFOs) is that you can’t afford to sit back and wait on wages. You can never really be sure when or if it will “top out,” especially in this unusual economy and candidate-driven hiring market. Your business needs to be prepared to provide standout compensation packages to hire stellar candidates — and keep your best people, too.

Compensation remains the not-so-secret weapon for besting competitors targeting the same talent, including the high performers who are already part of your organization. The trick is to use compensation as an offensive strategy that gives you more control. Following are three ways to help your organization make that pivot:

1. Review Current Employees’ Compensation Levels Now

While its name has been overexposed in the media, the Great Resignation is real and still in motion. Some are even referring to the phenomenon now as the “Forever Resignation”— a cycle of voluntary turnover that may never end. Buzzy labels aside, the pandemic has fundamentally changed the way people look at work, and what it means to them. They aren’t as willing to put up with things they don’t like about their job — like a low rate of pay. They know they have options, and they will seek them out.

Nearly two-thirds of U.S. workers who left their jobs in 2021 cited insufficient compensation as a reason for quitting, according to a Pew Research Center survey. To avoid turning your company’s valued staff into part of the “Class of 2022,” don’t wait for them to ask for a raise. Make sure to review their current compensation and if needed, bump it up, or extend another financial perk, like a spot bonus or paid time off.

And, if you find that employees are beating you to the punch, encourage an open discussion about pay. For example, if this person’s job responsibilities recently expanded or they’ve gained new skills, an immediate raise (or the promise of one soon) may be in order. If the employee is just feeling the crunch from inflation, offering a flexible work arrangement to reduce the burden of a costly commute might be an alternative solution for in-office workers.

2. Designate an Expert to Oversee the Compensation Process

In addition to taking stock of staff compensation levels as soon as possible, consider putting a formal process in place to ensure these levels will be monitored and adjusted proactively.

Compensation analysis will require, among other things, keeping tabs on the latest salary research and market trends, analyzing and updating job descriptions, and setting pay ranges and communicating them to staff. Look for someone in your human resources organization who could take the lead on managing this critical process. Because the market has changed so fast, it’s critical to keep continual tabs on what’s happening with pay rates and hiring dynamics for your company’s most mission-critical roles.

3. Watch Out for Pay Compression

The need to pay higher salaries to top candidates is in many cases resulting in new hires earning more than existing staff. Even small differences in pay between employees who are performing the same job, regardless of their skills or experience, can turn into big staffing headaches — namely, turnover. Feelings of resentment and disengagement can especially rise in the workforce when new hires with less experience are paid the same as, or more than, tenured employees in the same positions, or when individual contributors are paid more than their managers.

Inflation, competition for in-demand talent and the company’s failure to keep up with current market rates for compensation can all lead to pay compression. Conducting regular pay audits as described above and quickly bringing up the base salary of underpaid employees are solutions for resolving and, ideally, preventing, pay compression.

When raises aren’t an option, consider offering compelling non-monetary perks such as upskilling opportunities, better benefits, health and wellness programs, a more welcoming corporate culture, or all of the above.

That said, you can be sure that, no matter what, leading employers will continue to pay salaries that will attract the top talent they need to drive innovation and stay competitive.

6 WAYS TO REDUCE FINANCIAL DISTRESS IN HEALTHCARE

Welcome to the second installment of Pulse on Healthcare. This month’s issue takes a look at the issues causing financial distress for healthcare organizations, and how CFOs can take action to relieve it.

According to the 2022 BDO Healthcare CFO Outlook Survey, 63% of healthcare organizations are thriving, but 34% are just surviving. And while healthcare CFOs have an optimistic outlook—82% expect to be thriving in one year—they’ll need to make changes this year if they’re going to reach their revenue goals. To prevent and solve for financial distress, CFOs need to review and address the underlying causes. Otherwise, they might find themselves falling short of expectations in the year ahead.

Here are six ways for CFOs to address financial distress:

1.      Staffing shortages: 40% of healthcare CFOs say retaining key talent will be a top workforce challenge in 2022.

How can you avoid a labor shortage? Think about increasing wages for your frontline staff, especially your nurses. You could also reconsider the benefits you’re offering and ask yourself what offerings would be attractive for your frontline staff. For example, whether you offer free childcare could mean the difference between your staff staying and walking out for another employment opportunity. Additionally, consider enhancing or simplifying processes through technology to relieve some strain from day-to-day tasks.

2.      Budget forecasting: Almost half (45%) of healthcare organizations will undergo a strategic cost reduction exercise in 2022 to meet their profitability goals.

 How else can you cut costs? One option is to adopt a zero-based approach to budgeting this year. This allows you to build your budget from the ground up and find new areas to adjust costs to free up resources. Consider some non-traditional cost reduction areas, like telecommunication or select janitorial expenses, which are overlooked year after year. Cost savings in these areas can be substantial and quick to implement.    

3.      Bond covenant violations: 42% of healthcare CFOs have defaulted on their bond or loan covenants in the past 12 months. Interestingly, 25% say they have not defaulted but are concerned they will default in the next year.

 How can you avoid violations? The first step to take is to meet with your financial advisors, especially if you are worried you’re going to default on your bond or loan covenants. You want to get their counsel before you default so you can prepare your organization and mitigate the damage. Ideally, they can help you avoid a default altogether.

4.      Supply chain strains: 84% of healthcare CFOs say supply chain disruption is a risk in 2022.

How can you mitigate these risks? Supply chain shortages are a ubiquitous problem across industries right now, but not all of the issues are within your control. Focus on what is, including assessing your supply chain costs and seeing where you can find the same or similar products for lower prices. Identifying alternative suppliers may end up saving you a lot of frustration, especially if your regular suppliers run into disruptions.

5.      Increased cost of resources: 39% of healthcare CFOs are concerned about rising material costs and expect it will pose a significant threat to their supply chain.

How can you alleviate these concerns? Price increases for the resources you purchase — including medical supplies, drugs, technology and more — could deplete your financial reserves and strain your liquidity, exacerbating your financial difficulties. You may be able to switch from physician-preferred products to other, most cost-effective products for the time being. Switching medical suppliers may even save you money in the long run. Involving clinical leadership in the process can keep physicians informed of the choices you are making and the motivation behind them.

6.      Patient volume: 39% of healthcare CFOs are making investments to improve the patient experience.

How can you satisfy your patient stakeholders? As hospitals and physician practices get closer to the new normal of care, patients are returning to procedures and check-ins they put off at the height of the pandemic. Patients want a comfortable experience that will keep them coming back, including a safe and clean atmosphere at in-person offices.

They also want access to frictionless telehealth and patient portals for those who don’t want to or can’t travel to receive care. Revisit your “Digital Front Door Strategy” and consider ways to improve and streamline it. These investments can also go toward improving health equity strategies to ensure everyone across communities is receiving the same level of care.

Ex-healthcare CFO sentenced for role in fraud scheme

The former CFO of Pacific Hospital’s physician management arm was sentenced to 15 months in prison June 24 for a tax offense related to a kickback scheme, according to the Justice Department

The sentencing came about four years after George Hammer was charged. In 2018, he pleaded guilty to one count of filing a false tax return. 

Mr. Hammer allegedly supported a kickback scheme that resulted in the submission of more than $500 million in bills for kickbacks for surgeries. He allegedly supported the kickback scheme by facilitating payments to people receiving kickbacks and bribes pursuant to sham contracts that were used to conceal illicit payments, according to the Justice Department. 

The Department of Justice notes that Mr. Hammer was a salaried employee and did not profit directly from the kickbacks and bribes. 

Twenty-two defendants, including the owner of Pacific Hospital in Long Beach, Calif., have been convicted for participating in the scheme.

The important role of the CFO in innovation

Although CFOs often hold the key to resources, acting as gatekeepers, they can also be critical allies in innovation, enabling programs and initiatives, according to an April 12 McKinsey report

While innovation is often thought of in a traditional sense, with new offerings and services coming to mind, innovation can also mean disruption and change in business models, productivity improvements and new ways to service consumers. The CFO has the perspective to see where fresh ideas are needed in the business from a financial perspective, and the power to make them happen.

Innovation also requires resources and capital, of which the CFO has control and say as to how it gets used. The CFO is an important part of determining which innovations will go ahead and is akin to a venture capitalist, deciding whether to invest in a start-up. 

As members of the C-suite, CFOs also have an important role in encouraging a culture of openness and innovation where staff members feel comfortable coming to company leaders with new ideas. By creating an atmosphere of innovation, the company can build a pipeline of innovative talent and concepts, which the CFO can help bring to fruition.