It must seem welcome in the boardroom to refocus on profitable growth as opposed to going all out for fast expansion. Companies are honing in on getting their operation ship shape and boosting those profit margins rather than just ta chasing after more and more revenue. And you know what’s driving this change? Inflation. It’s affecting everyone, whether you’re selling products or offering services. I’m joined by Anthony De Candido financial Services senior analyst partner and co-leader of Sustainability service solutions at R-S-M-U-S-L-L-P to discuss what boards can do to help senior executives. Anthony, what strategies and initiatives can boards undertake to enhance profitability and drive optimization of their operations? Yeah, I think growth will always be paramount for boards. Um, things like accessing new markets, accessing new products or services, enhancing their client or people experiences will all come in favor. You know, we’re seeing a greater level of interest in profitable growth as of late, and we’ve now left this era of, uh, zero to nominal interest rates where, which were pervasive and spending was very loose. So this resulted in a greater number of failed initiatives organizationally, that I suspect that boards would want to tolerate in this current business climate. So instead, I think the boards today will need to prioritize those initiatives that drive the greatest ROIs. Um, and I think the pressure to do so is much greater because the cost of capital has grown exponentially. Uh, just a short list of the things that we’re seeing most often here amongst our middle market clientele is, is one, investing in technology. You know, because customers are increasingly using generative ai, AI in their daily lives, this changes their expectations on how they’ll choose to engage with some of their favorite brands.
Um, traditional office services within an organization, things like secretarial duties, diary management, communications, even resource management, all those things have been automated. Uh, we’re seeing a lot of spend within enterprise risk tools, uh, particularly in the areas of security and privacy, as well as with regard to climate reporting, which has some regulatory implications here in the states and globally. Uh, more of in the long term, seeing a lot of spend with digital marketing and customer experiences. And then lastly, with overall automation, everything from, you know, OCR readers for invoices within a finance department to warehouse, robotic process automation. Um, you know, another one that comes to mind is around financing. Uh, we just put out a really neat study as of late, uh, called our middle market business index, and there was a special report around some of the financing trends amongst middle market executives. And roughly 82% of executives said that rising rates would have anything from e either a minor to a critical operations impact their business. So in other words, that’s only 18% expect to have no impact. So when we’ve been in this environment of a zero interest rate policy, I think it’s masked a lot of the operating inefficiencies while an environment with higher rates and higher inflation on the other hand would, would reel them. So firms that have relied upon, you know, low cost leverage will face challenges with everything from financing, payroll to expansion, and as rates remain high compared to recent standards and real rates continue to rise. So interest rates are one part of the, the story, uh, but inflation itself is, I think an another part of this story. How, how has inflation, uh, affected board decision making processes?
Yeah, I mean, I think it, with regard to capital spend, I think it’s being managed much more tightly and only the highest priority initiatives are being undertaken. Um, we haven’t spent a lot of time talking about workforce, but another key, uh, board priority in this environment is workforce alignment. And I think it’s especially critical given the scarcity of resources within most industry segments. So that’s gonna be, um, we’re seeing that especially within banking as of late. So things like alternative staffing solutions has grown, prevalent, whether that’s either with outsourcing and contracting to offshoring. We spoke a little bit about automation earlier. Um, boards are spending a lot more time, uh, with regard to training and development of their own people. So preparing those employees for the roles that will become in their organization instead of the roles that are, is gonna be important, especially as we move into more of a digital economy. So things like, um, data analysis and coding, even climate sciences are all much more in favor seeing a lot of, um, focus also on benefits and compensation. So things like paid time off, uh, different leave policies, whether that’s maternity, paternity, uh, mental health, bereavement.
There’s just overall a greater number of instances where we’re seeing, um, companies rejiggered some of their, their policies that way, as well as, as in, um, like with providing some equity upside early in one’s career to remediate any of the issues around attrition. Hmm. Okay. So what kind of key performance indicators or other financial metrics are you seeing being used by boards as they look at whether the growth that they’re seeing is profitable or optimized? Yeah, I, I think there’s a number of different KPIs. I mean, the financial KPIs are always gonna be in favor. So just start with some of the basics. You know, revenue growth, margin growth, net income, things like AR and inventory turnover, uh, debt financing, return on equity. I think what’s different in this market, you know, particularly with the spend that’s been made in technology areas is your ability to disaggregate that data on a community or micro level. So that could be, uh, in, in a revenue category, it could be revenue growth by person or by department or by market. Um, many boards today have the ability to drill down to determine where might there be any blemishes within their business. And that helps in driving better accountability within the organization.
You know, stakeholder engagement scores or have become very important, whether that starts initially with the board, this thing called ISS scoring, that helps, um, reveal some of those issues impacting boards. It could also be, uh, with regard to customers, so satisfaction scores, um, it could be average transaction value or account value, uh, customer returns. And the list goes on and on, whether you’re talking about, you know, boards or customers or suppliers or even employees in that way. Um, what we’re also seeing a lot of interest around some of internal scorecards, um, and especially in the operations field. So whether that’s in quality and efficiency or production yield, things relating to defect rates or order fulfillment as well as other areas of the business, like marketing impressions. So whether it’s an organization that puts out a heavy degree of thought leadership or insights, you know, the outside world’s engagement with what that company is saying from a brand perspective is, is also important. But I’ve also seen some, you know, wildly different metrics lately with things like, you know, face-to-face meetings and, you know, sales growth derived from particular programs. Um, even things like RFP success rate, uh, on a micro level by person or community within the firm. Um, I, you know, because of the environment we’ve been in for the last number of years on human capital, you know, turnover and training hours per employee, PTO diversity scores, those are all things that, um, have had long shelf life and remain important amongst boards.