May 03, 2024
How much human and financial capital does your company reallocate from year to year? In light of a recent analysis of data from PwC’s 27th Annual Global CEO Survey, that’s a question CFOs should urgently be putting to their chief executives. The analysis, visualised in the chart above, shows that higher rates of resource reallocation are associated with higher profit margins—and suggests that most companies could increase profitability by reallocating more actively. Indeed, the difference in profit margin between significant resource reallocation (31–40%) and low reallocation (0–10%) is almost four percentage points. This relationship breaks down only at extreme levels of reallocation.
The finding aligns with prior PwC research showing that dynamic resource reallocation improves overall company performance because better-performing units or initiatives get more funding, and thus grow faster, while poorly performing units or initiatives are cut or slowed. Given the transparent logic of this ‘fund the winners and cut the losers’ approach, why does research continue to show that many companies still subsidise lower-performing units using funds from higher-performing ones?
Cognitive biases are often the culprit. Among the most common: the sunk-cost fallacy (a reluctance to abandon a project because a lot of money has been sunk into it), anchoring (overreliance on arbitrary benchmarks), and naive diversification (the tendency to allocate equally between available options instead of weighting investments strategically).
Overcoming these and other biases should be a top priority for CFOs, especially those facing reinvention pressures. (Many of them are: three-quarters of CEO Survey respondents said they’ve taken an action that’s had a major impact on their company’s business model.) For CFOs, smart resource reallocation requires disciplined processes and nuanced decision-making. Three proven practices can help:
- Take a ‘portfolio view’ across the company, and rank projects and initiatives by profitability. Projects towards the bottom end of the ranking should be considered for culling, and their resources reallocated to those meeting a certain profitability threshold.
- Hold project reviews with small groups of stakeholders who have a high degree of independence. Doing so is likely to reduce the influence of power dynamics on resource allocation decisions.
- Remember that reinvention is about more than M&A. Though this year’s CEO Survey found that companies are stepping up M&A in pursuit of reinvention, the complexity of deals and the significant variance in financial returns should serve as a reminder that internal capital redeployment may be an underutilised alternative to transaction-driven reinvention.
Data analysis by Shir Dekel
Explore the findings of PwC’s 28th Annual Global CEO Survey.
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