CFOs rank ‘retention, retention, retention’ as top priority for 2022: Deloitte

Gartner's 2022 Top Strategic Technology Trends. Old Problems. Old Trends.  New Names.

Dive Brief:

  • CFOs rank the challenge of attracting and retaining employees far above other internal risks for 2022, citing labor shortages and the difficulty of crafting a balance between remote and in-office work, Deloitte found in a quarterly survey.  
  • “The number of times CFOs cited talent/labor and related issues heavily outweighed other priorities for 2022,” Deloitte said Thursday in a report on the survey of Fortune 500 CFOs. “‘Retention, retention, retention’ was a resounding refrain, including through wages and incentives.”
  • Eighty-eight percent of the 130 respondents said they will use a hybrid work model next year, 92% will increase automation and 41% expect to shrink their companies’ real estate footprint, Deloitte said.

Dive Insight:

The slow return of workers from coronavirus lockdowns has led to labor shortages, competition for hires and an increase in wages.

Employees are switching jobs for higher pay at a near-record pace. The quits rate, or the number of workers who left their jobs as a percent of total employment, rose from 2.3% in January to 2.8% in October, the second-highest level in data going back to 2000, the U.S. Labor Department said. The quits rate hit a high of 3% in September.

Attracting and retaining employees vaulted to the No. 2 ranking of business risks for 2022 and the next decade, from No. 8 a year ago, according to a global survey of 1,453 C-suite executives and board members by Protiviti and NC State University. (Leading the list of risks for 2022 is the impact on business from pandemic-related government policy).

Companies are trying to hold on to workers, and attract hires, by raising pay. Private sector hourly wages rose 4.8% in November compared with 12 months before, according to the Labor Department.

Tight labor markets and the highest inflation in three decades have prompted companies to budget 3.9% wage increases for 2022 — the biggest jump since 2008, according to a survey by The Conference Board.

The proportion of small businesses that raised pay in October hit a 48-year high, with a net 44% increasing compensation and a net 32% planning to do so in the next three months, the National Federation of Independent Business said last month.

CFO respondents to the Deloitte survey said they plan to push up wages/salaries by 5.2%, a nine percentage point increase from their 4.3% forecast during the prior quarter.

“Talent/labor — and several related issues, including attrition, burnout and wage inflation — has become an even greater concern of CFOs this quarter, and the challenges to attract and retain talent could impinge on their organizations’ ability to execute their strategy on schedule,” Deloitte said.

The proportion of CFOs who feel optimistic about their companies’ financial prospects dropped to just under half from 66% over the same time frame.

“CFOs over the last several quarters have become a little more bearish,” Steve Gallucci, managing partner for Deloitte’s CFO program, said in an interview, citing the coronavirus, competition for talent, inflation and disruptions in supply chains.

CFOs have concluded that the pandemic will persist for some time and that they need to “build that organizational muscle to be more nimble, more agile,” he said.

At the same time, CFOs expect their companies’ year-over-year growth will outpace the increase in wages and salaries, estimating revenue and earnings next year will rise 7.8% and 9.6%, respectively, Deloitte said.

“We are seeing in many cases record earnings, record revenue numbers,” Gallucci said.

Describing their plans for capital in 2022, half of CFOs said that they will repurchase shares, 37% say they will take on new debt and 22% plan to “reduce or pay down a significant proportion of their bonds/debt,” Deloitte said.

CFOs view inflation as the most worrisome external risk, followed by supply chain bottlenecks and changes in government regulation, Deloitte said. The Nov. 8-22 survey was concluded before news of the outbreak of the omicron variant of COVID-19.

UPMC CFO Edward Karlovich advises peers to ‘look beyond the challenges of today’

David B. Yoffie Quote: “The first rule demands that CEOs and entrepreneurs look  beyond the immediate

Edward Karlovich serves as the executive vice president and CFO for UPMC, a $23 billion provider and insurer based in Pittsburgh. 

Since joining UPMC in 1990, Mr. Karlovich has served in several financial leadership roles. Most recently, he was vice president, CFO and chief of staff for UPMC’s Health Services Division. He became CFO of the entire integrated system with 40 hospitals in October 2020, after serving on an interim basis for about a year. 

Here, Mr. Karlovich shares with Becker’s the skills he thinks CFOs need to succeed today, some key capital projects in the works at UPMC and his organization’s top financial priorities. 

Editor’s note: Responses were lightly edited for length and clarity. 

Question: What is the most pressing issue facing hospital CFOs due to COVID-19?

Edward Karlovich: I would say the most pressing issue for me is disruption. COVID-19 has done many things to disrupt the way we think about our organization and business. Some disruptions we faced in the last year include staffing and supply chain challenges. UPMC did a great job weathering through the supply disruptions and labor challenges. We always had adequate personal protective equipment for our folks here. We also really made a conscientious decision last year to keep our workforce intact; we didn’t lay off workers, and we took care of people who needed time off because of COVID-19. We also made sure employees knew they had the support of our executive leadership team. In summary, COVID-19 has created a disruption, and we must think about how things are different now coming out of the disruption. 

Q: What are some things you are doing to work through the change/disruption?

EK: From an organizational perspective, we embarked on what we call the “UPMC experience” a few years ago. We looked at the way we are doing things to understand the experience of our employees and patients. This prepared us to be more creative in our thinking as to how we address challenges and disruption. We also learned through this the importance of interdependencies. Our business, both provider and insurance side, discussed a need to tackle the disruptions in an integrated way and discussed a need to communicate changes effectively. This year, we provided about 40 news conferences to get the standard message out across all of our regions. We also have a 90,000-plus employee organization which allows you to move around resources to deal with some challenges and disruptions. 

Q: What are UPMC’s top financial priorities for 2022?

EK: From a financial perspective, we want to maintain a positive margin to support our capital investments and employees. To do this, we are focused on a few things. First, supporting our operating employees to ensure they can perform to the best of their ability. They are the ones who make the difference each and every day. Second, we want to make sure we, as a finance team, can provide the things that the organization needs to be successful. This includes, but is not limited to, making sure supply chain folks can get all needed supplies and ensuring we have the cash collections needed to fund our organization. Another priority is making sure we provide the advice and guidance needed to invest our dollars effectively so we can prepare for the next challenge.

Q: What are a few key capital projects UPMC has in the works?

EK: UPMC is a premier provider in our community, and we operate a number of specialty hospitals in the area. We are the primary pediatric, psychiatric, women’s health and oncology provider in the region. Over the past couple of years, we’ve embarked on a journey to provide new facilities in western Pennsylvania for these major programs. We are also investing heavily in a vision and rehabilitation institute, which is a $500 million project that will put our clinicians, researchers and other providers together to drive breakthroughs in vision care and rehabilitation.  

We also are going to embark on a new tower for UPMC Presbyterian Oakland Campus [in Pittsburgh]. It is going to be the largest capital project we’ve embarked on since I’ve been here. This project will be more than $1 billion and is so important to the community. 

The third thing we are looking at is enhancing our oncology services and product at UPMC Shadyside [in Pittsburgh]. What we’ve recognized is that we are the provider and insurer of choice in western Pennsylvania, and we have to invest in this community for the next 50 to 100 years. 

Q: What skills are essential for hospital and health system CFOs to thrive in today’s healthcare landscape?

EK: The technical skills are given as CFO. To get in that leadership position, you have to be able to perform the necessary tasks. However, to make your organization better, I could boil it down to four things. First, you have to be a partner to your other senior leaders. Finance doesn’t exist in a vacuum. You have to be in the room with those folks, helping them manage and drive the business. The second thing is flexibility. If you think about what we experienced as an industry over the last two years, if you weren’t flexible, you were going to be seriously challenged.  Flexibility is such an important attribute because the pace of change is going to accelerate in our industry. Third, I’d say talent recognition is a key skill. It is important to be able to find talent as well as mentor and develop them as employees who can provide a great service to the organization. Fourth, you have to embody integrity. There is no doubt in my mind that integrity is a core value that is essential to everything you do as a finance leader. You have to maintain your integrity at all times. Those are essential skills. If you’re going to be a successful CFO now, you have to have those skills outside of the technical.

Q: What is one piece of advice you would offer to another healthcare CFO, and why?

EK: I’d say, look beyond the challenges of today. It’s not just about what you can actually see and envision in front of you. Try to look at the implications that are not necessarily top of mind. What the future holds is uncertain for all of us in healthcare now. You need to be thinking about what things might be coming down the road that will change our business and commitment to our communities dramatically. Try to brainstorm around that. Trying to think forward and speculate about what might happen is very valuable.

5 new responsibilities for the beyond-finance CFO

https://www.cfodive.com/spons/5-new-responsibilities-for-the-beyond-finance-cfo/607630/

The Urgent Need to Redefine the Office of the CFO

For years, pioneering CFOs steadily extended their duties beyond the boundaries of the traditional finance and accounting function. Over the past year, an expanding set of beyond-finance activities – including those related to environmental, social and governance (ESG) matters; human capital reporting; cybersecurity; and supply chain management – have grown in importance for most finance groups. Traditional finance and accounting responsibilities remain core requirements for CFOs, even as they augment planning, analysis, forecasting and reporting processes to thrive in the cloud-based digital era. Protiviti’s latest global survey of CFOs and finance leaders shows that CFOs are refining their new and growing roles by addressing five key areas:

Accessing new data to drive success ­– The ability of CFOs and finance groups to address their expanding priorities depends on the quality and completeness of the data they access, secure, govern and use. Even the most powerful, cutting-edge tools will deliver subpar insights without optimal data inputs. In addition, more of the data finance uses to generate forward-looking business insights is sourced from producers outside of finance group and the organization. Many of these data producers lack expertise in disclosure controls and therefore need guidance from the finance organization.

Developing long-term strategies for protecting and leveraging data – From a data-protection perspective, CFOs are refining their calculations of cyber risk while benchmarking their organization’s data security and privacy spending and allocations. From a data-leveraging perspective, finance chiefs are creating and updating roadmaps for investments in robotic process automation, business intelligence tools, AI applications, other types of advanced automation, and the cloud technology that serves as a foundational enabler for these advanced finance tools. These investments are designed to satisfy the need for real-time finance insights and analysis among a mushrooming set of internal customers.

Applying financial expertise to ESG reporting – CFOs are mobilizing their team’s financial reporting expertise to address unfolding Human Capital and ESG reporting and disclosure requirements. Leading CFOs are consummating their role in this next-generation data collection activity while ensuring that the organization lays the groundwork to maximize the business value it derives from monitoring, managing and reporting all forms of ESG-related performance metrics.

Elevating and expanding forecasting – Finance groups are overhauling forecasting and planning processes to integrate new data inputs, from new sources, so that the insights the finance organization produces are more real-time in nature and relevant to more finance customers inside and outside the organization. Traditional key performance indicators (KPIs) are being supplemented by key business indicators (KBIs) to provide sharper forecasts and viewpoints. As major new sources of political, social, technological and business volatility arise in an unsteady post-COVID era, forecasting’s value to the organization continues to soar.

Investing in long-term talent strategies – Finance groups are refining their labor model to become more flexible and gain long-term access to cutting-edge skills and innovative thinking in the face of an ongoing and persistent finance and accounting talent crunch. CFOs also are recalibrating their flexible labor models and helping other parts of the organization develop a similar approach to ensure the entire future organization can skill and scale to operate at the right size and in the right manner.

CFOs might find PCAOB evidence-quality guide a useful auditor check

An opinion that’s supported by irrelevant or unreliable data might not be accurately capturing company performance.

How well is the opinion of your company’s performance supported by the evidence the auditor’s using?

Public Company Accounting Oversight Board (PCAOB) staff have released guidance on what constitutes relevant and reliable evidence for supporting audit opinions.

If evidence auditors are using isn’t relevant or from a reliable source, or if the reliability of the evidence itself is questionable, that can call into question the soundness of the opinion.

“In some cases, information that was determined by the auditor to be more relevant may not be the most reliable, and vice versa,” the guidance, released October 7, says.

Data availability

PCAOB was created in 2002 as part of the Sarbanes-Oxley Act to help ensure auditors don’t allow accounting problems in public companies to get past them and put investors at risk. 

The new guidance tries to put guardrails around auditors’ growing use of external evidence to support their opinions. 

The use of external evidence, like so many things today, is fueled by the widespread availability of data that companies, regulators and other entities collect and release. The question the guidance tries to answer is which data is relevant and reliable and which isn’t.

“Advancements in technology in recent years have improved accessibility and expanded the volume of information available to companies and their auditors from traditional and newer external sources,” the document says. 

Reliability

In general, data generated by regulators or entities that are themselves regulated — stock exchanges are mentioned — can be counted on to be more reliable than data generated by other types of organizations. 

Similarly for data that’s generated by organizations vs. data that is derived through analyses of other organizations’ data. The more raw the data is, in other words, the better chance it’s reliable.

Relevance

Relevance is the other big issue, and the guidance provides several use cases for thinking about that. For example, weather data can be relevant evidence for assessing the accuracy of a company’s sales data, presumably because bad weather can reduce brick-and-mortar sales, but only if the data is used correctly. 

“Before using the weather data in developing certain expectations – e.g., for substantive analytical procedures related to product revenue – the auditor would need to understand the relationship between weather data and company activities,” the guidance says.

A company’s year-end stock price, obtained from an exchange, is another example. That data can be used to compare against the price the company is using to support its valuation of an instrument.

“The exchange price would represent the fair value of the instrument,” the document says. 

The guidance is directed at auditors, but it’s relevant to CFOs for checking whether their auditor is using external evidence appropriately in its assessment of company performance.

CFOs working around cost pressures, labor availability

Labor Shortage, Rising Costs, Supply-Chain Hiccups Hit Manufacturers -  Bloomberg

Dive Brief:

  • While CFOs, on the whole, remain optimistic about an economic rebound this year, they’re concerned about labor availability and accompanying cost pressures, according to a quarterly survey by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.
  • Over 75% of CFOs included in the survey said their companies faced challenges in finding workers. More than half of that group also said worker shortage reduced their revenue—especially for small businesses. The survey panel includes 969 CFOs across the U.S.
  • CFOs expect revenue and employment to rise notably through the rest of 2021,” Sonya Ravindranath Waddell, VP and economist at the Federal Reserve Bank of Richmond said. “[But] over a third of firms anticipated worker shortages to reduce revenue potential in the year.”

Dive Insight:

As many companies struggle to find employees and meet renewed product demand, it’s unsurprising CFOs anticipate both cost and price increases, Waddell said.

About four out of five CFO respondents reported larger-than-normal cost increases at their firms, which they expect will last for several more months. They anticipate the bulk of these cost increases will be passed along to the consumer, translating into higher-priced services.

Despite labor concerns, CFOs are reporting higher optimism than last quarter, ranking their optimism at 74.9 on a scale of zero to 100, a 1.7 jump. They rated their optimism towards the overall U.S. economy at an average of 69 out of 100, a 1.3 increase over last quarter. 

For many CFOs, revenue has dipped below 2019 levels due to worker shortage, and in some cases, material shortages, Waddell told Fortune last week. Even so, spending is on the rise, which respondents chalked up to a reopening economy.

“Our calculations indicate that, if we extrapolate from the CFO survey results, the labor shortage has reduced revenues across the country by 2.1%,” Waddell added. “In 2019, we didn’t face [the] conundrum of nine million vacancies combined with nine million unemployed workers.”

Consumer prices have jumped 5.4% over the past year, a U.S. Department of Labor report from last week found; a Fortune report found that to be the largest 12-month inflation spike since the Great Recession in 2008. 

To reduce the need for labor amid the shortage, many companies will be “surviving with just some compressed margins for a while, or turning to automation,” Waddell said.

Colonial hack a wake-up call to CFOs with legacy systems

What is a cyber attack? Recent examples show disturbing trends | CSO Online

CFOs whose finance and accounting functions are built on legacy computer systems got a stark reminder last week from the Colonial pipeline hacking of what’s at stake if their system is breached.

The hack to Colonial’s system led to widespread gas shortages throughout the East and reportedly forced the company to pay $5 million in ransomware to get the instructions for reclaiming its data. 

“For finance departments, the cybersecurity risk is huge,” Samir Jaipati, a finance solutions leader with EY Americas, told CFO Dive in an email. “Something built on outdated technology won’t be able to keep hackers out.” 

Security specialists generally agree legacy, on-premises systems starting from about 10 years ago typically have solid cybersecurity features built in, but those that are older might require significant upgrades if they’re going to stand a chance against today’s sophisticated hackers.

The risk for CFOs who must manage their processes on an outdated system is they’ll try to get by with short-term fixes that won’t solve the systemic problems they face. 

“These temporary fixes aren’t as dependable and in the long-term may cost more,” said Kaipati.

Best effort

For CFOs who don’t have the time or budget to implement the system overhaul they need or to transfer their processes to a more secure on-premises system or to a cloud-based system, the best step is to do a comprehensive review of their end-to-end finance processes to audit for consistency and reliability, said Steve Adams, Gartner finance director. 

He suggested reviewing the organization’s record-to-report process from start to finish to understand where non-secure platforms are used, whether there are audit trails that don’t exist, and if exogenous data is incorporated. By eliminating these and other red flags, CFOs can go a significant way to clean up their processes and reduce risk without making system changes, Adams said. 

CFOs taking this approach should first engage their IT business partner and ask for a full audit of the cybersecurity capabilities of the suite of financial applications and to use that review as a starting point to making improvements, he said. 

Wider integration

Legacy systems pose a broader problem than just security risk; they can impede company growth because CFOs aren’t generating the data or producing the analytics that can help them identify ways to make more money or reduce costs in the same way they can get from sophisticated cloud-based solutions. 

Nor can legacy systems be expected to be as good at integrating data throughout the organization in the same way as cloud systems.

For CFOs who can do it, switching from an old on-premises system to the cloud can be a game-changer, said Manish Sharma, an Accenture operations group executive.

“CFOs that are agile and able to overcome these restrictions by scaling digital and cloud-powered technologies have been able to break down data silos and siloed ways of working to support the ever-evolving business strategy with speed and flexibility,” he said. 

The importance of using up-to-date IT was emphasized in a recent Accenture report that found “future-ready” leaders are emerging ahead of the pack with higher efficiency and profitability by scaling digital capabilities in ways to improve operational maturity.

“These leaders use better, more diverse data to inform decision-making as part of a cloud-powered continuous feedback loop,” said Sharma.

Flexible categorization

Another benefit of moving to the cloud or a hybrid cloud-on-premises arrangement is cost flexibility. 

On average, the cost of managing an outdated IT system can cost a business around $3.61 per line of code or over $1 million for an application with 300,000 lines of code, said Kevin Shuler, owner and CEO of the Quandary Consulting Group, a Denver-based IT firm. 

“It accounts for customizations, maintenance, reporting, server and hardware, etc.,” he said. 

While replacing the old with the new might appear to be prohibitively expensive at first glance, Shuler noted what can put a CFO more at ease is the costs are more transparent than maintaining a legacy system.

“Better, they can be categorized as either an operating expense or a capital expense since a lot of software is classified as a service rather than software,” he said. 

This gives flexibility to the CFO’s finances and forecasting. It also means more resources can be available for modernized systems. 

“That means you can get superior resources at a lower cost than trying to pull from a pool of highly specialized and competitive contractors who work mainly with legacy systems,” he said.