Digital Transformation

Digital-transformation budgets are at risk in a recession

Finance professionals will need to be laser-focused on strategic decision-making if digital transformation investment tightens.
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· 4 min read

It’s practically gospel now that companies need to go digital or die, but digital transformation can become an expensive line item to justify in a business environment wracked by inflation, key talent shortages, and pressure to cut costs.

CFOs help create and shepherd investments as the leaders of digital-transformation efforts at most organizations, and that job could get a lot harder in a recession. They’ll need to focus deeply on business needs and acquire technology that supports strategic decision-making, two experts told CFO Brew.

“The key is to really know, at any point in time, what is your key competitive priority? What is the real differentiating factor?” said Dr. Nada Sanders, distinguished professor of supply-chain management at Northeastern University, and author of an upcoming study on digital investment. “Then, acquire technology that is going to accelerate you in that dimension.”

Buy right. Getting the most out of your digital budget could be challenging in a recession. And there’s at least one sign that digital investments might get a second look if the economy falters. In a recent KPMG CEO survey, 40% of CEOs said that while they are still prioritizing digital transformation, their organizations “have paused their digital-transformation strategies and 37% plan to take such steps in the next six months” in the face of economic uncertainty and recession fears.

But cutting costs by slashing digital-transformation budgets wholesale or putting off projects might be counterproductive. The smart bet is to focus on technologies—especially financial planning and analysis (FP&A), financial modeling, and scenario-planning tools—that can help navigate a recession, according to Wouter Born, managing partner at Born Capital, an investment firm specializing in CFO tech.

“They’re almost like a no-brainer for these companies,” he said. “There shouldn’t be any discussion about it.”

A lot of CFOs agree. The most recent PwC CFO Pulse survey found that 53% of CFOs are looking to “accelerate digital transformation” in order “to facilitate agile, data-driven decision-making.” The Global CFO Survey 2022 by Everest Group found that CFOs are moving digital transformation higher up on their priority lists and that “judgment-intensive” investments are high on the list, with FP&A leading the way.

Size matters. If digital budgets get squeezed by recession, finance professionals should look to smaller projects that show more immediate results over big, long-term investments, says Born.

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Big tech investments, like company-wide enterprise resource planning (ERP) or enterprise risk management (ERM) projects, can take years to show a justifiable ROI. These types of projects require long demo periods and shadow runs and are often an easy target for budget cutting in tough times.

Justifying a large expense on a replacement project may be a tough sell internally when there is already a tool in place doing the job effectively and it probably makes sense to postpone them as well, Born said.

“There’s a big distinction between the enterprise markets where, indeed, you could see a budget freeze on expensive projects without immediate result,” he said. “However, they’re always ‘best of breed’ smaller solutions that have much better ROI. An FP&A tool might be a $10,000 investment for a year and that immediately has a positive business case.”

A recession may also be an opportunity for smaller businesses facing staff reductions or difficult financial situations to invest in new technologies that improve their current processes, according to Born.

Mind over matter. Finance professionals will also need to adopt a new mindset when it comes to digital transformation during a recession. The days of investing in new technology just because everyone else is doing it are over, and organizations need to have a much more exacting view towards technology spending during a recession, according to Sanders.

“I think that rather than just saying, ‘We’re not going to do digital,’ [or] ‘We’re going to go less,’ I would say rather…‘We’re going to be a lot more critical,’” she said. “‘We’re going to be a lot more demanding in terms of accountability, in terms of what the digital capability can do for us.’”

Organizations should make an effort to maximize the technology they already have to be “more surgical,” she added.

No matter what happens, digital transformation investments during a recession will require a more considered approach and there are no easy answers, according to Sanders.
“I don’t think it’s one or the other. I think there’s just a greater caution,” said Sanders. “And perhaps that caution should have been there to begin with.”—DA

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