Uncertainty can take a variety of different forms. That’s why it’s imperative for business leaders to have plans in place in the event of an economic downturn—and what comes after.
The global economy is back in the headlines with warnings of a potential downturn. Recently, The World Bank lowered its global growth forecast for 2022, raising concerns about where the economy is headed.
Yet amid the shifting economic outlook, one thing remains constant: Business and finance leaders must be prepared to navigate uncertainty.
There are a number of approaches companies can take to not only react to but also take advantage of uncertain economic conditions. These four defensive tactics are widely cited by experts:
1. Plan for uncertainty. Establish contingency plans that give your organization a clear path forward in the event of a downturn. This plan should go beyond merely what actions will be taken and include other considerations, such as what events will trigger the actions and who will make the final decisions to act. That can mean optimizing an organization’s product mix based on input costs and sales information. For example, if input costs rise above a certain threshold or sales drop below a certain threshold, leaders might shift the production of that product in favor of another. The key is to have those thresholds defined and the scenarios modeled out prior to any disruption, so business leaders have a plan. Bringing this level of detail into your contingency plans early will ensure leadership buy-in and reduce both delays and overreactions if and when a downturn arrives.
2. Improve productivity. While focusing on continuous improvement is always a good idea, it becomes even more pressing when an expansionary period appears to be coming to an end. Look for new ways to get value out of your existing assets or redesign current processes to ensure your business is optimized.
3. Manage the balance sheet. Reevaluate your organization’s leverage and ensure it would be manageable in the event of a business pullback. Additionally, evaluate your assets and any opportunities to divest. Finally, ensure your organization has solid processes in place to make these decisions. Combined, these actions will ensure flexibility and cash reserves if there’s a slowdown.
4. Rein in operating costs. Reevaluate your entire cost structure and look for ways to reduce operating costs or reallocate resources to more strategic initiatives. As many companies have remained lean since the 2008 financial crisis and could still be contending with pandemic-related labor shortages, reducing headcount might be a less viable option for leaders. Risks such as negative brand implications and reduced morale may be more pronounced than they were in the past. The ability to explore alternative means to reduce operating costs through automation and process optimization, reduced travel and expense budgets, and dynamic resource reallocation can ensure leaders have a diverse set of tools available.
There are a number of tactics companies can take to not only react to but also take advantage of uncertain economic conditions.
Remain Vigilant for Opportunities
As economic uncertainty grows, many companies naturally focus on defensive tactics to weather the storm. However, downturns can also create opportunities.
Research from both McKinsey and Harvard Business Review (HBR) have demonstrated that companies can outpace their competition during and after a downturn. The difference between stragglers and top performers? A balanced approach that involves some offense. The following four tactics offer guidance:
1. Plan for the return of growth. Economic uncertainty doesn’t last forever. Have post-contraction plans in place that outline what actions will be taken along with clear guidelines around the data your company will need to see in order to take those actions. Look beyond managing through a downturn to ensure your company doesn’t miss the growth coming out of it.
2. Invest in the right capabilities. In response to economic downturns, companies sometimes scale back too aggressively and are in a weakened position to thrive when growth returns. The more successful companies don’t fall victim to this trap and continue to invest in those capabilities that will fuel future growth, such as research and development, sales and marketing, and customer service. Remain vigilant for opportunities, such as finding acquisition targets at discounted prices. Tactics such as these can ensure strong positioning for the future.
3. Leverage digital. Slowdowns are a good time to ensure your investments in digital technologies are working as needed to create better data visibility, support better ways of working, and enable cost reductions. If they aren’t, it might be a good time to redesign technology-related processes or to make strategic technology investments. This activity has the added benefit of potentially repurposing resources that may have additional capacity during a downturn. View the downturn as an opportunity to further your digital transformation journey.
4. Focus on your people. Rather than making blanket decisions such as across-the-board layoffs, pay cuts, or hiring freezes, rely on employee and skills data to make thoughtful, targeted decisions. Take advantage of alternatives such as furloughs, reduced hours, and repurposing existing resources. Finally, successful companies keep their recruiting engines running to hire talent that may have been cast aside from competitors. Measures such as these can ensure morale is preserved, post-downturn hiring is manageable, and teams remain intact (or even strengthened). Given the changing nature of how we work, employee engagement provides an opportunity to ensure continued productivity.
As concerns about a potential downturn continue, it’s worth considering whether your organization has the right capabilities in place.
While the ability to manage through uncertainty and thrive afterward appears to be straightforward, the reality is many companies lack the foundational capabilities to do so. Finance leaders, in our most recent global survey, say that legacy enterprise resource planning (ERP) systems lack the power to adapt to shifting conditions quickly enough to serve their organization’s needs.
Mike Neller, controller at Aon plc, experienced this firsthand during the pandemic. “As COVID-19 required colleagues to work from home by mid-March, we were in a 100% virtual close when we began the process. In the end, our close went without a hitch,” he said. “There’s no way that could have happened if we had 10 different systems, if we had systems that weren’t as reliable as Workday.”
As concerns about a potential downturn continue, it’s worth considering whether your organization has the right capabilities in place.
Does your organization have:
- A flexible planning solution that allows you to examine multiple scenarios?
- The ability to easily and quickly reconfigure business processes as your operations change?
- The data visibility to accurately assess your costs and investments to make data-based decisions?
- Tools in place to gauge employee sentiment and take proactive action to address their concerns?
If not, your organization could be lacking the capabilities to meet the challenges—and opportunities—ahead.
Ready to talk about how Workday’s unified technology platform, adaptable frameworks, and built-in analytics can support your organization during economic uncertainty? Schedule a mini demo right now.
This blog was originally published on the Workday Blog.
