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Inflation and the Modern Company

Inflation hits everyone but not equally. Those who depend on personal automobiles for work are complaining about the rise in gasoline prices eating away any salary benefits they may have gotten recently. Manufacturers worry about costs of parts for assembly and contractors about raw material costs. They all have reason to see inflation as a challenge.

Annual inflation rate in the U.S. accelerated to 7.9% in February of 2022, the highest since January of 1982. Energy remained the biggest contributor, with gasoline prices surging 38%. Government agencies are acting, too slowly some say, to rein in the escalation and the Federal Reserve, the national bank in effect, is taking steps to increase interest rates, a reaction to the pressure to bring down inflation.

Companies are also being tasked, by executives and shareholders, to act. According to Gartner, CFOs should move beyond short-term, reactive moves to counter inflation and identify opportunities to build long-term competitive advantages.

After making quick, cautious responses to immediately defend margins, CFOs are seeking further steps, so that their organizations can better weather persistent inflation and use the right strategies to drive competitive advantage. Key to this will be the concept of digital deflation, but beyond using technology to permanently reduce the cost of doing business, Gartner experts have identified three additional areas for CFOs to focus on as they shift from short-term inflation responses to longer-term strategies.

1. Align Costs to Points of Differentiation – CFOs have an opportunity to use this environment to both reintroduce and reconsider costs in a manner that addresses deeper issues in their organizations that may have been undermining profitability for years. CFOs can identify the right areas to scale costs by identifying true points of differentiation and then allocating disproportionate investment levels to them. Investments that directly contribute to customer loyalty or assets, such as patents or proprietary technologies that support competitive advantage, are examples that warrant elevated investments now.

2. Right size their Supply Chain to Minimize Disruptions – In the wake of initial inflation pressures, organizations sought to identify and mitigate individual supply chain disruptions. The next step for CFOs managing supply chain related inflation concerns over the long term is to right size their organization’s supply-chain surface area to limit the number of costly disruptions to the organization. Organizations that do this gain a competitive advantage because they experience fewer unfamiliar, high-impact disruptions per year compared to their peers.

3. Conduct Ongoing Pay Monitoring to Continuously Adapt to Market Conditions – While organizations have budgeted for increased salaries this year, much of that work was likely completed at the end of 2021, which may not reflect current and evolving realties as wage inflation persists. It’s critical for finance and HR to work together to monitor and dynamically adjust the organization’s pay practices and total rewards strategy throughout the year. CFOs should partner closely with the head of HR to make sure that any subsequent increases to people costs prioritize the business units and roles that generate the most value to the company, while continuing to differentiate offers from competitors.

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