The Top Trends in 2024 for Capex Stakeholders in Finance and Operations

With the new year around the corner, here’s a sneak peak at the trends we expect to shape 2024 based on expert predictions and conversations with customers:

Finance will catch up to other departments in AI deployment

While generative AI was the technology story of 2023, finance teams have been lagging behind other groups in its implementation. Gartner reports that nearly two thirds of finance departments “have no plans for AI implementation or are still in the initial planning phase,” while HR, legal, IT, and procurement are twice as likely to already be using the technology.

Going into next year, they recommend that CFOs “partner with their finance leadership teams to compare their current [AI] progress against their peers’ and identify concrete recommendations from early adopters on how best to accelerate AI use in their function.”

Our take: Expect AI to be widespread in finance by the end of 2024. One report showed a staggering 96% of finance leaders are interested in deploying AI within their team, and they’ll increasingly realize they’re at a competitive disadvantage by not doing so.

Generative AI adoption will follow an S-curve

The few finance employees that used generative AI in 2023, mainly via ChatGPT, mostly summarized reports and produced basic content. Starting next year, those use cases are likely to get more complex, following a common “S-curve” adoption pattern.

BCG notes that “generative AI will eventually collaborate with traditional AI forecasting tools to create reports, explain variances, and provide recommendations – thereby elevating the finance function’s ability to generate forward-looking insights.”

Our take: With capabilities such as scenario analysis and predictive analytics continuing to improve, AI will be a more useful capital planning tool in 2024. By enabling finance teams to conduct more sophisticated and data-driven analyses, AI will improve decision-making quality and project selection.

For instance, with Finario’s Predict feature, you’re able to leverage historical project data to forecast likely outcomes for future projects with similar characteristics. This approach allows finance teams to identify traits within historical projects that might predict success or failure, offering insights that may have been overlooked without AI-driven analysis.

AI providers and users will work together to mitigate security risks

The potential for AI in finance is massive, but security risks continue to be the main reason many leaders are hesitant to roll it out. According to McKinsey’s research, while “more than two-thirds of companies are expecting to increase their AI investment over the next three years…only 32 percent of respondents say they’re taking measures to prevent inaccuracy, while 38 percent, down from 51 percent last year, are managing cybersecurity risks.”

Companies that have implemented AI securely treat it as part of the foundation of their business, rather than a department to be managed. As the technology changes, this structure makes it easier to update risk controls across the enterprise.

Our take: Companies are starting to feel the pressure to confront AI security head-on, as avoiding it altogether could leave them trailing behind more adaptive competitors.

As we covered in our webinar “AI: A Primer for Leaders in Corporate Finance,” the lack of transparency in the data and assumptions underlying AI models makes it difficult for finance leaders to trust them. This underscores the need for transparency in how AI models are created, and it’s why we expect enhanced collaboration between AI providers and finance professionals in 2024.

This collaboration will involve strengthening security protocols and engaging legal and cybersecurity teams early in AI strategy discussions. Moreover, companies are likely to embrace agile methodologies, not only for immediate solutions but also for the ongoing adaptation of risk management strategies to keep pace with the swift advancements in AI technology.

Additional regulation, such as the “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence” adopted in October 2023, is also likely to put guardrails around responsible AI use. The EU AI Act is encountering roadblocks, but is likely to pass in some form in the next year or two. All of this will help executives create a framework for deploying AI responsibly in their organizations.

Navigating higher interest rates

Higher interest rates won’t be a surprise for companies in 2024, but their resulting effects as they work through the system could be. Economists generally believe that rates will be ‘higher for longer,’ meaning leaders shouldn’t expect the cost of capital to come down anytime soon.

Here’s what that means for capital planners:

Project hurdle rates may need to be updated to account for higher financing costs
CFOs should keep an eye on debt that’s rolling over in 2024, which may see higher interest expenses
Cost of capital may increase both due to higher interest expense and investor expectations of equity returns relative to the risk-free rate
Companies should stress test their budgets and capital plans based on higher rates
In some cases, it may be more beneficial to finance new capital projects with cash rather than high-cost debt

Our take: Companies in 2024 will need to adapt their capital planning strategies to account for these higher interest rates. This involves a careful assessment of debt and equity financing, re-evaluating investment plans, and adjusting ROI thresholds to ensure financial viability in a higher interest rate environment. CFOs and leaders in FP&A will play a crucial role in guiding their firms through these challenges, balancing the cost of borrowing with long-run growth investments.

ESG standards become mandatory

2023 saw several new pieces of legislation around ESG requirements, including the EU’s CSRD and the SEC’s Climate Risk Disclosure. While most companies were given leeway this year, in 2024 many will be required to disclose their performance in accordance with these laws.

Starting January 1st, 2024, “European companies complying under the Non-Financial Reporting Directive (NFRD) will be required to report on their climate impact under CSRD.” The Climate Risk Disclosure is further behind, and U.S. companies won’t need to begin reporting until mid-2024 at the earliest.

Additionally, carbon offsets and greenwashing are likely to come under greater scrutiny by regulators, investors, and consumers. The public is much more aware of the shortcomings of carbon offsets, and will expect companies to reduce emissions and use clean energy directly rather than buying offsets.

Finally, FiscalNote believes that “as more climate-related financial disclosures become mandatory…we expect to see a closer integration of finances and sustainability, with ESG becoming increasingly the domain of CFOs and financial controllers.”

Read more: FiscalNote https://fiscalnote.com/blog/top-esg-trends-2024

Our take: Integrating ESG concerns within their capital project selection and approval processes will be crucial for finance leaders in 2024. This will necessitate better data and reporting on ESG-related metrics, and new evaluation methods that take these variables into account.

Renewed focus on portfolio resilience

Geopolitical conflict, supply chain snags, climate change, and other disruptions in the past several years have caused many capital planners to put a renewed focus on funding projects that enhance operational flexibility and buffer against future shocks.

The “Resilence Consortium,” founded by McKinsey and the World Economic Forum, defines several key pillars for capital planners to keep in mind in 2024 and beyond, including:

Resist short-term pressures and keep the long-term view in mind, such as by building slack into supply chains and dedicating resources to sustainable growth goals. As the authors put it, companies should “strengthen resilience beyond a survival capacity.”
“Cultivate flexible operating models and adaptable leadership capable of embracing uncertainty.”
Build “resilience muscle” by preparing for crises and leveraging them as opportunities for growth and adaptation

Our take: Managers are always on the lookout for ways to boost efficiency, but strategies like just-in-time supply chains leave firms overly exposed to internal and external shocks. Many learned this the hard way in the past several years.

The consensus going into 2024 is to strike a balance between operational efficiency and resilience. The right combination depends on individual industries and companies, but the days of far-flung supply chains that optimize efficiency at all costs are over. Initiatives like ‘near-shoring’ and ‘friend-shoring’ are gaining traction as ways to couple operational efficiency with greater resilience.

Greater Capex commitment to cybersecurity investments

A series of high-profile cyberattacks in the past several years have put executives on alert to strengthen their own security protocols. AI’s entrance into the finance department has made doing so even more crucial.

Misconfigurations, usually due to improper or inadequate settings in software and hardware devices, are one of the most common causes of data breaches, according to a report by Verizon. To combat this, G2 notes that “A systematic approach of regular patch management, security audits, and employing automated tools to monitor and correct misconfigurations is crucial to fortifying security posture as we move toward 2024.”

Our take: Cyberattacks can be devastating, and it’s hard to overstate the importance of putting as many safeguards around sensitive data as possible. While no one can guarantee complete protection against cyberattacks, capital planners can put their organizations in the best position possible by implementing a forward-thinking cybersecurity investment strategy that’s able to adapt to evolving threats.

The labor market will continue to cool

With a historically hot labor market following mass unemployment during COVID, employers have had to deal with significant fluctuations in hiring and keeping workers. However, higher interest rates have begun to cool the labor market in the second half of 2023, and human resources consultancy Mercer expects the trend to continue in 2024.

Mercer goes on to say that “the future of the job market is bright…Layoffs aren’t impacting the labor market as they have in the past, allowing it to begin stabilizing…Even though the market is on the path to rebalancing, it remains tight. You will notice some lingering challenges going into 2024.”

Our take: In 2024, workers are unlikely to have the kind of leverage they experienced in 2021 and 2022. That being said, the unemployment rate remains below 4% in late 2023, and finance teams will have to provide compelling offers in order to compete for talent.

While there can be challenges around communication and culture, allowing employees to work remotely can be a huge advantage in the labor market. Harvard Business Review found that “working from home is valued by employees about the same as an 8% pay increase, on average. It’s a huge amenity and helps reduce turnover — in one recent, large study, by as much as 35%.”

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