We are enduring arguably the most complex and dynamic economic environment ever witnessed. Goldman Sachs President, John Waldron, told Bloomberg that the “confluence of the number of shocks to the system is unprecedented,” and top Wall Street bankers have sounded the recession alarm. Claiming that the market will get worse before it gets better, multiple intersecting factors from the pandemic to inflation, the reduction in monetary stimulus, and Russia’s invasion of Ukraine have made for an extremely tough and unpredictable capital-market climate.
Likened to the 2008-2009 financial crisis, Waldron warned to “expect tough economic times ahead,” with many economic prognosticators reiterating the caution. During the past several months, CFOs have had to make difficult decisions on critical factors such as wages, prices, and capital allocation against a broad range of arbitrary risks; rising price pressures, supply chain bottlenecks, the possible emergence of new coronavirus variants, the turmoil in commodity markets from the Russian-Ukraine war, and the lack of accessible talent due to The Great Resignation.
However, this recession is not simply a repeat of 2008. This time, there is no single trigger, such as banking failures and falling house prices. This pandemic-era economic downturn is a perfect storm comprised of multiple factors: overspending by governments who used substantial federal reserves to bolster the economy through universal wage support, the prospect of widening military conflict, weak supply chains, once-in-a-generation inflation, a sanctions-induced energy crisis, and a labor shortage.
Most CFOs expect the Dow Jones Industrial Average to fall to 30,000 before reaching a new high, which would represent a decline of 9% from its current level and an 18% decline from its 2022 high. In a market where every bounce may be a “dead cat,” more than half (55%) of CFOs say that the current industry leader will remain in its top spot: energy, by showing the most growth among all sectors of the economy over the next six months.
A pandemic hang-over and a demanding workforce
Over the last two years, CFOs have had to reallocate spending and aggressively reduce costs to accommodate pandemic lockdowns. In the wake of remote working and flexible hours, there is a newfound reluctance among workers to remain in their pre-pandemic roles and, in some cases, an antipathy to rejoin the labor force entirely. Such attitudes have caused the pool of available labor to shrink, forcing employers to compete for resources and inadvertently raising the employment cost index during the first quarter to 1.4% for a 4.5% year-over-year increase.
Companies are battling severely understaffed workforces, paying substantially more for critical labor roles and attracting under-experienced talent. The wrong people are performing incorrect jobs and exposing extreme operational inefficiencies. In one example, we found nurses processing invoices and many other employees fulfilling the demands of two or more jobs. Management is overburdened and unable to delegate appropriate workloads, leading to higher attrition rates, further compounding the problem.
As the price pressures persist and consumers anticipate high inflation rates, workers are demanding higher pay and triggering a self-perpetuating upward spiral in prices and wages. As this trend intensifies, workers are increasingly threatening strikes and protests, causing a further drain on company funds and staff and collapsing customer experience protocols.
The key question for CFOs today: Will the go-to one-dimensional recession strategy of cutting costs, pulling investment, and waiting for the good times to reappear, be enough?
Failing to prepare is preparing to fail
In an attempt to stabilize businesses in an unstable market, finance officers must find ways to increase or maintain current revenues, but finding balance in a turbulent economy is no easy feat. The finance division must prepare and mitigate risks of a recession and preserve cash whilst staying competitive in the market to stay afloat. Many CFOs have stated growth as top of their CFO priorities for 2022, alongside finding improved solutions to better serve their customers, including re-evaluating current business models, identifying opportunity areas, and locating gaps in operations. By taking a proactive approach, the C-Suite can find ways to weather the storm, grow revenue to profit from an unstable market, and even emerge stronger from a possible downturn.
Responding to rapid changes in consumer spending, ongoing supply-chain disruptions, and new sustainability reporting requirements may not allow finance chiefs to simply dust off old playbooks from past slowdowns to plot strategies for what may be coming. The extreme variation in forecasts for economic growth caused by external factors means that a one-dimensional approach of simply cutting costs may not suffice.
Starting with education, CFOs and finance teams can better acquaint themselves with the current economic market, its impact on business revenue, and overall stability. They must achieve short-term awareness and long-term planning to prepare businesses for worst-case scenarios and navigate the current high-cost environment. Scenario planning is vital to reevaluate business models to mitigate risks and create alternative revenue streams.
Scenario planning can come in three forms:
High productivity equals high efficiency: as the cost of talent soars and the pool dwindles, the cost of acquiring and retaining talent is rising alongside inflation and posing a substantial threat to the bottom line. CFOs must decide if they focus on less experienced, cheaper staff or expensive high-performing leaders. Perhaps quantity is more important than quality, and through investing in training programs, less-experienced workers can be molded into great leaders of the future - if they don’t quit before then. Either way, the concept of ‘production capacity’ is a critical issue, and CFOs must decide how to balance the cost of talent with their bottom line.
Expanding the Scope of Outsourcing and Shared Service Centers: the current economic climate has impacted sourcing agreements with suppliers, affecting the bottom line and eroding company resources. Traditionally reserved for back-office-only processes such as Finance, HR, IT and Procurement, the move to centralize and rationalize middle and front office operations is gaining in popularity.
Forecasting: maintaining agility and flexibility during turbulent times is imperative to success, forecasting, and budgeting. Building flexibility into a strategy can feel redundant, but scenario planning for uncertainty leaves space, resources, and funding for unforeseen circumstances.
Finding growth in a shrinking market
In troubled economies, job eliminations and hiring freezes are almost routine. Commonly seeking to downsize and reduce costs, job cuts and layoffs are the typical courses of action. Many CFOs fear that the reduction strategy alone won’t work this time. For businesses to find growth and remain competitive in today’s market, they must invest in development programs that cater to consumer demands and address issues caused by an expensive, dwindling labor force. Deploying unsustainable methods, such as raising wages to compete for talent attention and attempting to operate with outdated, inefficient pre-digital processes, only compounds the problem. Therefore finance teams are faced with a dilemma: how do they balance cutting costs pari-passu with pursuing growth?
Finding growth in a shrinking market can appear daunting, but CFOs have multiple options:
1. Explore new markets: this can be geographical or product focussed. Businesses will be dusting off their Ansoff Matrix looking to find new markets for their products or to develop new products for their current customers.
Each approach carries a degree of risk and requires substantial data to understand the market and gain a deep understanding of current and new customer needs, customer adoption rates, estimates of market size, and product launch variables. Expanding into new markets can be a successful way of leveling up with the competition, growing your customer base, and satisfying existing customers’ needs - but it also may require capital, planning, data gathering, compromised productivity, and loss of control.
2. Vertical integration: by foregoing reliability on outsourcing, external contractors, or suppliers, companies can streamline operations and take direct ownership of various stages of the production process through acquiring or establishing suppliers, manufacturers, distributors, or retail locations. Whilst offering greater efficiencies, reduced disruptions, quality control, and improved profitability in the long-term, the initial setup price is expensive, management intensive, and many companies underestimate the difficulty and cost of the overall process, causing increased debt and extra capital expenditures.
3. Cross-selling: an effective method of marketing. Businesses can earn additional revenue by selling more products or services to an existing client base. Cross-selling can be very profitable when executed correctly, but it requires firms to have a profound understanding of their customers, behaviors, needs, and expectations. Each new product or service must appear complementary and elevate the customer’s experience. When done incorrectly, cross-selling can have an adverse effect on customer loyalty and brand reputation as it can appear pushy, aggressive, and self-seeking.
Using tech to drive operational efficiencies
Reducing reliance on humans by deploying technology solutions and automation combats the labor shortage by decreasing manual tasks, freeing time and workloads for staff, and allowing companies to hire fewer people of more value. With improved communication across the business, increased connectivity between staff - particularly in hybrid and remote-based businesses, better collaboration between teams and departments, and more accurate tracking and analysis of performance, brands can achieve more success in a shorter time.
Technology allows teams to work together and manage reporting from anywhere, accelerate submissions, boost security, enhance data management, automate first-line customer communications, and improve customer service. Brands can also deliver campaigns more effectively through the insights gained from detailed audience metrics allowing for accurate pricing of products or services, crafting more compelling messaging, and targeting the appropriate channels for your audience. The benefits of automation in business are significantly growing with each innovation and transformation.
From inventory and project management to dashboard and detailed metrics, below are some tech-driven business use cases:
Workflow automation, in particular, can expedite and streamline document-based processes to improve efficiency, reduce costs, provide transparency, and boost workforce productivity. Businesses can also seamlessly identify bottlenecks and pinpoint issues within processes across the organization, respond to them rapidly, and implement solutions.
Currently, 62% of invoice processing time consists of data entry, validation, GL coding, and approval. With accounts payable automation, companies can reduce the lag time by up to 90%, allowing the team to do more in less time, saving money and reducing costs.
Datafication: data is the key enabler behind all technology trends. With access to enormous amounts of data, organizations must break down and make sense of the valuable insights to understand their customers and the workings of their business in more detail. With the help of Machine Learning, businesses can turn complicated data sets into digestible context for humans.
AI & Machine Learning: deployed to reduce cost and enhance productivity, AI and ML encompasses language processing, machine vision and low or no-code. From aggregating business data to streamlining job processes, AI is predicted to revolutionize two-dimensional screens into three-dimensional physical environments. Assisted by machine learning, these types of AIs can “learn” over time and are already disrupting every business industry.
Cloud computing has redefined the way people do business. Firms can now store information and use hardware and software remotely over the internet. Deployed stand-alone or alongside existing IT infrastructure, solutions can offer cheaper, faster, and more portable resolutions. Although occasionally raising concerns for security and reliability, cloud technology advantages outweigh the disadvantages with greater scalability, access to new technologies, more flexibility, and enterprise-level back-up.
The power of CX
Maintaining and protecting existing customers in a market notorious for unpredictability and lacking loyalty is critical for business success. Delivering a positive CX, regardless of industry, needs to be present at every stage of the customer journey and across all touchpoints. Customers transitioning between platforms, whether online or in-store, should be seamless and effortless. The equation is simple; a happy customer is a repeat customer that celebrates their loyalty and often becomes a brand advocate, inadvertently advertising the company through word of mouth. A positive CX allows the business to grow and reduces the cost of serving customers by up to 33 percent.
Although requiring initial capital, the benefits gained from improving your CX mission are clear, as gaining a new customer costs five times more than retaining a current one, and a negative customer experience results in 89% of consumers switching to a competitor. Brands can be easily championed or equally canceled when fighting for recognition in an overly saturated market by delivering emotionally impactful and memorable experiences - whether they're positively or negatively perceived.
As Gen Z becomes the largest cohort of consumers today, brands must understand their expectations and emotional drivers. This digitally-native generational group likes immersive, technology-driven experiences they will remember. They expect seamless, cross-channel integration that demonstrates convenience and playfulness. As the future of the workforce, businesses must cater to a generation that knows what they want, both as consumers and employees: up-to-date technology systems, alignment with brands that have a sustainable purpose and exhibit diversity, insurance of staff well-being, and support of local markets. More than a sleek website, companies must embrace technology at every level of business operations and revise their identity to become experience hubs that offer meaningful, entertaining experiences. To weather the recession storm and bounce back better and faster, brands must reinvent, innovate and listen to their customers.
As we attempt to navigate this extremely uncertain time, brands have an opportunity to rethink their investments and restructure their businesses to become more future-focused and relevant to today’s rapidly changing market. In the workforce and from the customer’s perspective, businesses that appear outdated will fail first. Technology is non-negotiable and offers improved ways to conduct business and operations. We’re enduring a once-in-a-lifetime economic crisis where, currently, jobs are plentiful, but organizations are bereft of talent. After two years of lockdowns, most had hoped for a ‘return to new normals,’ but the recessionary reality looming is changing the expected course of action. The pressure on CFOs to navigate these turbulent waters and steer the business has never been more acute. But this time around, there is a far greater requirement to be open to strategies and investments for growth, collaboration, new solutions, and wise investments - after all, the 2022 playbook is yet to be written.
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