A key part of the remit for finance leaders is looking ahead and identifying important trends that will shape the future of their business.
This helps them plan, forecast and pinpoint themes that will help support profits. At the same time, finance leaders will also isolate emerging threats and challenges in the changing economic landscape.
A new report by professional services firm EY, What's after what's next? The upside of disruption: megatrends shaping 2018 and beyond, has identified some of the up-and-coming dynamics set to shape business over the next decade. These include three major trends likely to occupy the attention of many CFOs.
1. A rebalanced global system
EY's report notes the world has been shifting to a multi-polar global order for some time, involving new rules, norms, institutions, networks and power centres, much of which are being driven by disruptive forces.
At the same time, globalisation is opening up formerly closed economies such as India, China and Russia, which are now part of the World Trade Organisation (WTO). These are the economic powerhouses of the future and local CFOs will find themselves considering how to tilt their operations towards these nations.
Economic growth in India and China is far outstripping growth in developed countries, leading to improved living standards. According to data India's annual growth rate is running at 7.7 per cent, while China's is 6.7 per cent.
Importantly, technology is supporting growth in these nations, as well as a more co-ordinated global supply chain.
Stuart Fechner, Director, Retail Research Relationships, Bennelong Funds Management, also names globalisation as one of the main megatrends that is likely to shape the Australian economy in coming years.
“Within globalisation, emerging Asia and its rising middle class is a major theme. It's important to understand few trends operate in isolation. One thing often leads to another, whether that be further challenges or added benefits and there are always related impacts," he says.
Fechner believes more Australian companies are looking to link their supply chain to Asia to access better products, improve cost efficiencies, sell to Asian consumers or attract investors. “Business are also looking to access markets that are growing faster than Australia's," he adds.
His advice to CFOs who may not yet be building relationships with Asian businesses is to become involved in industry forums and groups. “It's also important to reassess current operating practices before going offshore."
Fechner says it's important for CFOs to understand the different legal systems in any jurisdictions outside Australia with which they are doing business. “You can't always go to another country and operate as you do in Australia." He warns that it's also important to consider any currency impacts when operating offshore.
While recently there have been signs of growing trade tensions, Fechner says this is a contrast to the globalisation theme, which is a powerful force.
2. The emergence of superfluid markets
The pace with which business operates is getting faster and this trend will only continue over time. In fact, it will be one of the defining features of the global economy, according to EY.
In the future, markets will operate such that supply will seamlessly meet demand, and excess capacity and inventory will be eliminated.
This new way of operating will be supported by extremely lean companies, some of which will be autonomous. This means they will be run by smart machines, rather than people, according to EY's predictions.
This will necessitate a re-think of how resources are managed. Many businesses will no longer own assets, rather businesses will pursue an 'asset-as-a-service' model, effectively renting assets when they need them, rather than owning them outright.
The way businesses staff themselves will also change. They will increasingly form teams of freelancers to work on specific projects, rather than have a slew of permanent staff.
For CFOs, this shift to a more frictionless way of doing business will prompt a rethink of how their organisations are managed. Right now, many CFOs will find it advantageous to consider how their own business can create markets and products to fit a superfluid environment.
3. Renewed social contracts
In a capitalist world, many businesses have not traditionally paid much attention to their social license to operate. But this may be something all companies must pay attention to if they wish to continually harness the support of their consumers and other stakeholders.
According to EY's report, this is known as a social contract, which it defines as, “the collection of implicit or explicit agreements that enables citizens to live together in a civil society."
Social contract includes things like businesses' commitment to not damaging the environment, thinking through the lifecycle of its products to ensure they can be recycled as much as possible and ensuring they are not exploiting workers.
This is a new demand on CFOs, who may previously have been more concerned about how the company's numbers stack up than the impact it has on the wider community.
A better approach now is to fully appreciate the influence the business wields on everyone it touches, to ensure it is not doing undue damage and is in fact contributing to society.
In summary
These are just three of the mega trends that will increasingly influence CFOs' work over time, and require them to develop new ways of working and measuring the organisation's financial and non-financial effects on its people and surroundings.
Key takeaways on mega economic trends
- China, India and Russia are the new economic giants and most finance leaders are looking for ways to ensure their businesses are ready to engage with these influential nations.
- Business will likely become more fluid, aided by frictionless markets, autonomous companies and advances in technology.
- Consumers are more cognizant on the social impact of a business. Businesses may need to adjust operations to respond to this new demand.