Prepping The Contingencies In A Rollercoaster Economy

CFOs are leveraging data science and analytics technologies to interpret economic headwinds and alter their plans and budgets accordingly. Here’s how top finance chiefs are stress-testing the moment.

Inflation is up, unemployment is down. Interest rates are up, consumer sentiment is down. “Up, down, turn around and clap,” go the lyrics from the old nursery rhyme, except there isn’t much to clap for these days. Plotting a strategic course when the headwinds and tailwinds shift this way and that is playing Pin the Tail on the Donkey. To improve their odds, CFOs like Sheamus Toal, Alex Amezquita, Paul Rouse and Ryan Lockwood have doubled down on data science.

Sheamus Toal, CFO, Saatva

“Contingency planning is like three-dimensional chess, where you’re thinking three moves ahead, based on your opponent making this move or that move,” said Toal, CFO at Saatva, an omnichannel retailer of luxury mattresses and home furnishings with revenues approaching $500 million and 300 employees. “To help figure out the scenarios, we’ve invested in AI (artificial intelligence) tools and in a growing team of data scientists.”

Also getting an edge in his continency planning is Lockwood, CFO at public company CarParts.com, an online provider of aftermarket auto parts, with $582.4 million in 2021 revenue. “We’ve put together a team of data scientists that pull in data from our data warehouse for pricing, sourcing, inventory forecasting and other detailed analyses assisting our contingency planning,” he said.

Prior to joining CarParts.com in 2020, Lockwood spent nine years as a portfolio manager and head of fixed income at Private Management Group, a registered investment advisor. “We did a lot of financial modeling, working off of imperfect and partial information gleaned from the 10Q and the 10K,” he said. “Today, it’s so much easier to build out the forecasting models. You’re able to rapidly gather and filter data to produce more precise outcomes.”

Ryan Lockwood, CFO, CarParts.com

These outcomes are generated by eight people in the company’s expanding data team, led by Elena Ivanova, PhD, vice president of data science and advanced analytics. “Elena’s PhD is in computational chemistry with an emphasis on machine learning; her team turns real-time data into information, which helps me and the finance organization do more detailed and much faster `what if’ analyses,” he said.

The analyses involve projecting the impact of a potential future incident or situation on the company’s present-day income, labor, expenses and budget. These insights guide Lockwood in his contingency planning. “This way, when things go wrong, a backup plan is in place,” he said.

With economic headwinds whipping up into a possible tornado, making it difficult to guess what will happen if and when it forms, contingency planning has become a front burner issue for CFOs.

“Certainly, the period we’re in right now is fraught with tremendous uncertainty and volatility,” said Ishaan Seth, global coleader of the strategy and corporate finance practice at McKinsey & Co. “Since the start of the year, I’ve had probably a hundred conversations with CFOs across industry sectors about how to improve their performance management, to lead their organizations through challenging times.”

These times include the aforementioned ups and downs, along with the prolonged supply chain debacle, steep labor shortages and related recruitment and retention issues, a higher cost of capital, vigorous regulatory actions, and growing concern over a recession. Making sense of these shifting winds is the task of the CFO. Whereas an anemometer measures actual wind speed and direction, many finance chiefs are leveraging predictive analytics technologies to gauge the speed and direction of today’s headwinds.

These technologies range from basic software programming tools to others used for data preparation, mining, manipulation, visualization and querying, followed by machine learning algorithms that sift through internal and external data looking for patterns and anomalies, from which to draw perceptive insights for contingency planning purposes.

“The goal is integrated business planning, where data from across the enterprise and outside it is pulled together and merged to help finance visualize what’s up ahead,” said Tim Bulman, managing director in the business performance improvement practice of global consulting firm Protiviti. “The CFO then turns this information into metrics that figure into the financial plan, budgets and forecasts.”

Seth concurred with this process, citing the value of data science and analytics as a way to avoid the analysis paralysis caused by people manually putting together a forecast, a surefire way to prolong and impair decision-making.

“The long pole in the tent is figuring out the six or eight metrics that are really important to the business, which technology is great at doing, pulling everything together to do the data visualization,” he explained. “The CFO can then prepare the contingencies, such as triaging the investment portfolio, reconfiguring the supply chain, asking teams to re-justify a level of spend, or reallocating budgeted capital from one area to another, depending on the plan.”  

Bringing these insights to the forefront is the work of a company’s data scientists, engineers and analysts. “Not long ago, the contingency planning involved modeling out the assumptions using time-consuming, labor-intensive spreadsheets,” said Seth. “Today, you push a button, put in the assumptions, and out pops a 10-page chart with in-depth analyses. This is what we call the `insight edge.’”

Sharpening the Edge

In mid- to late-2021, Alex Amezquita, CFO at public company Herbalife Nutrition, went into “full on thinking mode,” he said, after the Federal Reserve announced it might raise interest rates to cool the economy and suppress inflation. “Alarm bells were going off,” Amezquita said. “I immediately went into contingency planning mode.”

Alex Amezquita, CFO, Herbalife Nutrition

Herbalife, a global leader in meal replacement protein shakes and dietary supplements with 10,500 employees, was poised to report the largest annual net sales in its history, a 5 percent year-over-year increase to $5.8 billion. Amezquita didn’t like what he saw ahead, however. “I felt we had some headwinds whipping up that didn’t look like they were going to go away in the near term,” he explained.

In April 2022, the CFO identified inflation as the primary headwind affecting Herbalife’s prospects. The price of commodities used to make its products skyrocketed around 65 percent, as did its transportation expenses, up some 40 percent because of higher oil and gas costs. Factory floor wages increased around 21 percent.

“Input costs massively escalated, well beyond the CPI (Consumer Price Index),” he said. “The amount of profit we were losing…got to a point where we couldn’t fund the activities core to our long-term strategy, chief among them our digital transformation. We had to recover some profit to keep the lights on what we see as our most important strategic project.”

This project is called Herbalife One, a digital initiative focused on the development of a single platform offering a simplified and integrated experience for the company’s global distributors and their customers. The aggregate cost of the platform, which will be built over the next three years, is $400 million, the largest single investment in the company’s history.

Drawing from Herbalife’s real-time sales pipeline and what the CFO called a “lot of brainpower from the data scientists here using AI and machine learning models to help predict (sales) channel behavior,” a tiered contingency planning strategy was put forth.

Tier One involved the price of Herbalife’s products. “Normally, most companies price along the lines of the CPI, but we decided to price higher to alleviate the inflation pressures,” he said. “We then monitored the sales on a day-by-day basis to gauge the reaction. If we saw sales weakness or strength, we analyzed the reasons.”

Tier Two in the contingency plan called for a “ruthless prioritization of what we cannot fund right now,” Amezquita said. “If something doesn’t drive the top line or support our business around the world from a sales perspective, we’re pulling the investment.”

A close examination of Herbalife’s real estate portfolio fit this profile. As a direct-to-consumer brand through distributors, the company does not own or lease retail stores that carry its products; it does own manufacturing facilities and leases office space. To conserve expenses, the company rationalized its office footprint in June 2022, renting out its corporate headquarters in downtown Los Angeles and moving employees to its other LA-area campus.

Similarly sharpening his ability to project the impact of whirling headwinds is Paul Rouse, CFO at public company Thryv Holdings, an all-in-one subscription-based business management software platform for companies with two to 50 employees ($246.9 million in 2021 revenue).

Paul Rouse, CFO, Thryv Holdings

“I rely on a team of data scientists to evaluate our revenue trends and give me the stats on engagement, churn and growth—who’s buying from us, who’s staying and who’s not; we then think through the scenarios that can affect these small businesses,” Rouse said. “The faster we have this information, the more time we have to review it and think through the contingencies. Since this is all real-time or close to it, we have time to zig and zag this way and that.”

Asked what the vital signs are for small businesses at the moment, the CFO responded that high inflation, rising interest rates and the possibility of a recession have people’s nerves on edge. “With costs rising, consumers being more careful in their spending, and the inability to hire enough people, success or bankruptcy can come in a week,” he said.

Rouse credits the company’s investments in an integrated planning solution combining the service offerings of cloud-SaaS providers Workday Adaptive Planning and Workiva and data science and analytics company Alteryx for pointing a way forward. “It takes time to set this all up, but it’s worth the effort; we’re able to look out and plan for the next two years, as opposed to the next quarter. It’s all done automatically, without throwing a bunch of fact checkers at the task.”

At Saatva, the data science team is busy analyzing the ecommerce company’s internal data using Google Analytics, economic forecast and industry trend data, and competitive information through various industry reports that deconstruct credit card data.

“Once the team identifies the risks up ahead, it’s up to me and the finance organization to develop multiple scenario plans in response to the exigencies,” said Toal, Saatva’s CFO since April 2021, following 16 years as the finance chief at clothier New York & Company.

Asked what’s in sight, he said the data team has identified pressures suggesting a dampening in consumer spending patterns. “Obviously, with inflation, consumers need to divert more funds into higher food and gas prices,” he explained.

In response, Toal is capitalizing on increasing Saatva’s brand awareness to capture more market share. “With our peer competitors slowing down, we saw an opportunity to step on the gas and invest in driving greater brand awareness,” he said. We’re investing more in advertising and the opening of brick-and-mortar viewing rooms. “We have six open at the moment and plan to have 20 ready by the end of 2023.”

At CarParts.com, Lockwood’s contingency investments include building a trusted platform similar to the applications running on Zappos and Warby Parker, providers of shoes and eyeglasses online and in brick-and-mortar stores, he said.

“We recently increased our $30 million five-year revolving credit facility (with JPMorgan Chase Bank) to $75 million, and have the option to increase it another $75 million,” the CFO said. “Aside from being cash flow positive and ending the second quarter with $15 million in cash and no debt, we have this facility as a contingency, just in case.”  

If things don’t work out as hoped, have another backup plan ready. As Toal puts it, “I’ve been a CFO for almost 20 years and remember a board member early on in my career who said, `I like the strategy. Now what are the contingencies?’”


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