In my article about not taking your foot off the gas, published just as the world returned to some degree of normality in July 2021, I discussed that the pandemic was the forcing function that challenged businesses to adapt and engage in broad organizational transformation using the cloud, and that it should not be seen as a reason to slow down.
As we enter uncertain times again, with the war in Ukraine dragging on, concerns about increasing interest rates, rising commodity costs, and double-digit inflation, many businesses are hunkering down and slowing down much needed transformation.
The pandemic caused huge disruption to businesses around the world, but it also accelerated transformation; allowing completely new ways of engaging with customers and employees. According to research by AWS, during the pandemic, organisations accelerated digital transformation initiatives by 2 years and 5 months on average and they now depend on the cloud.
So, in light of a coming downturn, what should Boards do? I couldn’t help making a comparison between the 5 principles I set out in last years’ article, and how they could be updated for companies who were slashing costs in an effort to protect themselves from reduced revenues as a result of an economic slowdown.
Why the downturn is different from the pandemic
Supply chain disruption caused by the pandemic, energy shortages caused by the war in Ukraine, and commodity price increases caused by that same conflict have fueled a global surge in inflation, leading central banks to increase interest rates in an attempt to tame consumer spending and dampen demand. It will be some time before we will know if this strategy is effective. Some argue that interest rates are already higher than is needed to bring inflation back to its target level, and the latest numbers from the USA are showing an encouraging downward trend.
However, businesses are not waiting it out; we’ve already seen over 120,000 layoffs in the tech sector alone as companies tighten their belts and make every dollar count. Companies are reviewing unprofitable initiatives, not back-filling roles when people leave, and generally looking for cost savings wherever they can get them. Those layoffs have largely been centered around businesses who rely on advertising revenues in the first instance, but it is spreading beyond this as businesses look to sweat their assets more and increase productivity.
Consumer behavior during the pandemic was driven in large part by the income guarantees that had been put in place by governments around the world. This led to a period of unprecedented consumer demand for a tightening supply of goods and services due to factory lock downs. Looking back now, we can see the seeds of inflation being sewn by millions of us sitting at home and clicking the buy button more times a week than it would be polite to admit to.
During the pandemic, businesses responded to this demand by creating capacity, opening job roles, and working on the basis that the demand would continue to increase. During this latest period of uncertainty, businesses have gone in the opposite direction; mainly in response to lackluster financial performance, over capacity, pressure from investors, and the need to keep the CFO happy.
The role of the c-level
A key leadership task is to continue to transform organizations to meet the challenges and opportunities presented by market forces. The pandemic shone a light on businesses and showed them that transformation wasn’t just to be done once and forgotten about, but that it was a continuous state. That organizational change was continuous. In the pandemic, organizational change became the key to survival.
In a downturn the role of the c-level does not change; the c-level still needs to consider the long-term viability of the business in light of the economic data, and make short-term decisions (which on the face of it appear tactical and reactionary) which drive long-term business outcomes. Once again, in a downturn, organizational change is the key to survival.
Coming out the other side of the downturn
The five principles in my original article still stand even in a downturn, but here are five more that could help you navigate the downturn and come out the other side stronger:
1. Engage with the business and look for opportunities
Often the Board can be distracted and disengaged from conversations about transformation through cloud adoption because there is a perception that cloud is an IT conversation and not a business transformation opportunity. This is understandable, especially if the Board are making hard decisions about headcount, overheads, and other costs. Continuing to engage with the business is essential, many parts of the business will want change to take place and will be driving this from outside IT. For example, your business may want to find ways of reducing waste, increasing quality, and increasing throughput on a production line. Or you may want to cut your fuel bill in your logisitics business. Both of these opportunities sit outside of IT. So as a Board it’s important to ensure you find them and provide the resources to make them happen. They provide long-term sustainability for the business.
2. Make the case for transformation
Businesses are under continued pressure to invent for their customers and deliver product innovations, whilst responding to disruption. The Board has to demonstrate to customers how they can continue to transform their businesses and meet these challenges head on. How does global economic uncertainty influence business’ engagement strategy? What technological innovations are helping businesses connect with their customers? How can operating models evolve to reflect generational shifts in customer demand? How do Boards measure the value of investment in new tools and resources to support engagement with customers? These are all questions Boards should be asking their businesses; and then enabling the business with resources to answer these questions. Innovation can increase visibility of cost as well as operating models. This visibility allows business leaders to ask the right questions, and make critical decisions, quickly, and with much greater awareness than they have ever had before.
3. Innovate your way out of cost
It’s very tempting to make short-term cost decisions which merely nip and tuck at the business fundamentals. As concerns over inflation and economic recession intensify, businesses are gauging the most effective options regarding their cost base, their employees, and the productivity of their operations. Remote and hybrid working are still very much the norm across many sectors following the pandemic. Will these new workforce models help companies navigate the pressures of higher input costs and a weaker economy? The pandemic taught businesses how to cut their cloth to the circumstances they found themselves in, those same playbooks should be dusted off and applied to the current situation. Boards shouldn’t simply look at optimizing the costs of existing functions which are themselves are faulty; doing the same with less resources is not a good way to achieve cost savings. Instead, focus on transforming those functions then giving them the appropriate level of resources.
4. Show customers that using your business is in fact, a flight to quality
When recessions hit, history shows that customers look to commit spending with stronger brands and, in particular, those that they trust most, on the basis that they are more likely to weather recessionary headwinds best. Boards should double down on this, and ensure that customers are able to conduct their business with you seamlessly. Focus on improving the customer experience, and building on your reputation as a business of quality.
5. Prepare for business after the downturn
All recessions and downturns eventually come to an end, and the companies that do best when that happens are those that prepared for it. Getting the business on a sure footing by helping it increase productivity, cut expenses, and improve cashflow will open new opportunities as the economic bounce back begins. Being ready to make an acquisition of a competitor, being able to see off the disruptors, taking market share, launching new product innovations, entering new markets, increasing revenue, margin, and profit, and being more operationally efficient will set you up for success in the next phase of business. A Board that has prepared for this and has identified business initiaitives driven by transformation will be the winners.
Light at the end of tunnel - not quite
With inflation on a generally agreed upon downward trend in the USA, and UK policymakers saying we’ve reached the peak of interest rates, we should start to see some interest rate reductions as we hit Q3 2023 and into 2024. We probably won’t see interest rates as low as they were 2 years ago, but this is still some good news. That being said, we will likely see a relatively short, shallow recession in many major economies through 2023 and possibly into 2024.
The war in Ukraine may also be reaching a nadir, with many commentators suggesting it could be over before its first birthday. This will loosen supply of commodities such as wheat and accelerate the downward inflation trend.
As with the pandemic, the downturn has driven its own realizations; geopolitically, the shift to renewable energy sources is now more necessary than ever, security of supply of energy has been replaced by certainty of supply (through becoming a net exporter), and businesses have recognised the need to be operationally excellent, cutting costs to match outcomes, and striving to be good corporate citizens.
All of these things illustrate the importance of resilience in the face of disruption. We need to ask ourselves; how can I help my business to continue to transform as new disruption emerges.