A follow on from The Top 5 FP&A Trends for 2023
The instinct for many companies when a recession hits is to batten down the hatches, try to ride out the tough times and come back stronger when the good times return. However, hibernating and bouncing back when economies rebound is easier said than done, research from a Bain study found that following the 2001 downturn, less than 30% of companies that lost market share were able to regain it subsequently. Furthermore, research by Forbes shows companies that invest in R&D and focus on improving operational efficiency are those that are most likely to thrive following recessions, while those that focus primarily on cuts are most likely to be outperformed by the competition.
While scrutiny on all spending is likely to increase during harder times, this should not preclude investment in R&D if a company wants to flourish. Investment during recessions can lay the foundation for increased leverage over the competition and lead to future growth - Apple in the early 2000s are a prime example of a company taking advantage of a recession to set themselves for success by investing heavily in R&D even during the most difficult times. Additionally, it can be when demand is lower and the pressure to continually increase production wanes, that companies can be afforded an opportunity to step back and effectively assess where the optimal places for R&D investment and opportunities for improving efficiency are.
Increases in operational efficiency are key to both being able to effectively ride out a recession, but also set yourself up for future success. As margins are squeezed, especially in the inflationary environment we currently operate in, being able to control operating costs can be the difference between remaining competitive and being left behind the competition, or worse, facing bankruptcy. Improvements in this space can also provide the platform for a more agile organisation that is able to scale more effectively when demand begins to pick up.
There are also added benefits outside of the direct economic consequences of increased operating efficiency, in a world where ESG is an increasing focus, with TCFD (Task Force on Climate-related Financial Disclosures) disclosures already in place and ISSB (International Sustainability Standards Board) regulations on the way, being able to reduce waste throughout the supply chain will have broader environmental, reputational, and regulatory benefits for organisations.
Improving operational efficiency in the long run doesn’t need to mean mass layoffs as recession hits. In fact, there are large costs to recruitment and training which means re-hiring in the future isn’t straightforward and the benefits to employee morale and productivity by avoiding layoffs during recessions can be another source of competitive advantage to organisations, as can retaining skilled employees in an increasingly competitive labour market. HBR research shows that alternatives to layoffs such as strategically reducing hours, furloughs and performance related pay schemes, can help companies emerge from crises in the strongest shape.
Rather, increases in operational effectiveness can come in other forms. As suggested in this HBR article on productivity, “the most effective antidote to low productivity and inefficiency must be implemented at the system level, not the individual level”, the article also suggests 4 very low cost and actionable measures to improve productivity.
In the finance space, one systematic way to improve operating effectiveness is by investing in an FP&A platform – a budgeting & forecasting application that saves 100s of days of effort may pay for itself in terms of efficiency gains within a year or two but will also provide a wealth of other benefits by freeing up finance teams to support effective decision making, rather than turning the handle in slow and manual processes. As highlighted in our 2023 FP&A trends article, the new normal is instability, with teams who may have moved to shorter planning cycles in 2020, continuing to plan responsively, due to macroeconomic conditions such as inflation, energy price increases etc. FP&A teams need to be agile, helping the organisations understand what impact fluctuating currencies, inflation and more will have on their sales, headcount, and profitability. Effective scenario modelling and improved decision making are increasingly important as margins around decisions are finer and the cost of getting it wrong can be greater. These aren’t the times to put your faith in a 5-year-old Excel that has been passed through generations of owners in your finance team.
No organisation will have a fail-safe plan to see them through the recession and come out stronger at the other end. However, those that are able to improve their operating efficiency and invest in the right areas are most likely to be able to adapt effectively to rapidly changing business conditions and succeed in laying the foundation for long-term growth and profitability, at a time when many organisations will struggle.
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