Finance in a Mercurial World

Economic and market volatility has reshaped the finance function and will define its tasks in the years ahead.

The U.S. economy's shallow recovery, ongoing globalization and heightened competition -- the broad economic forces that have shaped business conditions in recent years -- have left a permanent mark on finance. CFOs are now applying practices they once reserved for recessions across all phases of the business cycle. Consistently high levels of economic and market volatility have reshaped the finance function and ratcheted up the speed with which it must respond to change.

Only five years ago, the U.S. federal funds rate was 5 percent, unemployment was 4 percent, the federal government was running a surplus equal to 2 percent of GDP and the dollar reigned as the world's strongest currency. Today, the federal funds rate is 1 percent, unemployment is close to 6 percent, the federal government is running a deficit equal to 5 percent of GDP and the dollar is down nearly 10 percent against the world's major currencies.

U.S. corporations held four of the top five spots for multinationals ranked by foreign assets in 1999; today they hold only one. In 1999, more than $283 billion flowed into the United States in foreign direct investment; last year, the United States pulled in less than one-third of that amount.

Five years ago, the tech bubble was intact. U.S. GDP growth stood at 5 percent in 1999. A year later, growth was barely positive, and in the first quarter of 2001 GDP contracted, signaling the end of the boom years. The recovery that theoretically began at the end of 2001 remains weak, and volatility still reigns in the economy and the securities markets.

"The business cycle has required CFOs to focus on cost structures, expense management and product line/infrastructure rationalization," says David Odell, CFO of Hyperion Solutions Corp., the Sunnyvale, Calif.-based business performance management software provider. "Moving forward, a global economic recovery must be led by the United States."

Economic and market volatility has marked all phases of the business cycle for the past five years, however, and it will likely characterize the next five, as the U.S. economy moves along a rough trajectory of slow growth and ongoing, if erratic, globalization. Corporate restructurings -- once a strategy reserved for troughs -- will likely remain a way of life as the world economy improves.