Spooked: How CEOs Are Handling Their Cash Differently

The challenge for many CEOs is the pressure placed upon them to increase revenues. “You’ll often hear that this particular CEO has a reputation for being a good capital allocator or not a good capital allocator,” says Tim Koller, a partner in management consultancy McKinsey & Company’s strategy and corporate finance practice. “Activist investors have influenced the language.”

With the economy riding high, investors expect CEOs to make big decisions capable of driving big jumps in shareholder value. Interestingly, many CEOs aren’t caving in to their demands. Stephen Hall, a senior partner and co-leader of McKinsey & Company’s strategy practice, reports that in the last five years, most businesses were no more active in their capital allocations than they were during the recession. “There are a whole set of challenges that [CEOs] face internally in doing what they know they need to do and what they’re being pressured to do,” he reports.

BUYING INTO DIGITAL TRANSFORMATION

What many CEOs “need to do” and are, in fact, doing is investing internally in transformative digital and data cloud-based technology solutions that offer enhanced operational efficiencies. Purchased on a subscription basis from software vendors, these systems, platforms and applications also are seen as a way to relieve the financial impact of the next downturn.

“We’re using more and more cloud-based tools to do what we do better. It makes it easier and less expensive to run the business, making us more profitable.”—Jeff Pedowitz,
CEO, The Pedowitz Group

“You’re insulated if the economy turns,” Dhillon explains. “The CEO isn’t saddled with all that technical debt from over-investing on expensive hardware. This goes instead to the vendor. The company has the option to simply stop paying the monthly fee.”

Many CEOs are dining at the table. “Last year, we eliminated 30 different technology solutions as part of our operational transformation,” says Pedowitz. “We’re using more and more cloud-based tools to do what we do better. It makes it easier and less expensive to run the business, making us more profitable.”

Other CEOs also are eyeing investments in cloud-based solutions. “The capital allocation opportunities on my plate that I find most interesting are all cloud-based,” says Dan McDade, president and CEO of PointClear, a provider of account-based marketing tools. “For instance, we’re experimenting with a cloud tool that gives us insight into the intent of a customer to buy our services. The technology uses algorithms to analyze a customer’s digital footprint to predict their possible interest in buying something.”

Wayne Johnson, CEO of Accuform, a manufacturer of industrial safety signs, tags and labels also reports betting on big data cloud solutions. The company just signed a subscription with Salsify, a provider of a content management platform in the cloud centered on improving online product page sales conversions.

“We’re loading all our data from multiple sources, including our ERP (enterprise resource planning) system, web system and manufacturing system, into the platform, which aggregates this big data to get our products into the market and within each sales channel faster,” says Johnson. “Whenever our customers are looking to shop, our product content is instantly put before them, resulting in a higher rate of sales conversions.”

CAPEX IS ALIVE AND WELL, TOO

Not that all traditional investment is being avoided. To be sure, plenty of money, talent and management attention are also going toward traditional capital expenditures. Mike Flaskey, CEO of Diamond Resorts International, a global vacation ownership company that sells timeshares, has digested nine acquisitions in the past six years.

“We’ve grown organically, but the bulk of our growth has been through strategic acquisitions,” says Flaskey. “In some cases, we’ve bought a hotel or an apartment complex in a destination location and turned them into vacation properties. In other cases, we’ve acquired a competitor. I’ve been very focused on opportunistic buys, given the economic rebound.”

Flaskey has also sought ways to make operations more efficient, recently investing in a cloud-based email system, employee recruiting system and team member email system. “As the business continues to grow, we are constantly evaluating cloud-based technologies to make every department run as smoothly as possible,” he says.