economic volatility
SCENARIO PLANNING has long been a vital tool for companies seeking to understand their options in uncertain situations. But as valuable as the exercise can be, it has its limits. Accounting for every variable can be difficult, and predicting how they’ll interact is virtually impossible.
Advances in digital technology are helping to overcome these challenges. Thanks to artificial intelligence, the Internet of Things, and advanced data analysis, companies can now build a digital twin of their businesses. With this simulation model, leaders can look at a range of factors to identify what might happen if there are staff shortages, supply chain logjams, or disruptions in other critical areas.
“It’s the hard way to tackle this, but it will probably save you more in the long run,” says Tom Davenport, president’s distinguished professor of information technology and management at Babson College.
What’s involved? Lots of data and the ability to analyze it, says Davenport. Data scientists, technologists, and operations leaders should all be at the table.
Start with a brainstorming session to identify the key factors affecting your business. What data is available to provide more insights? Take that data and internal information to develop a simulation model. “Then run through what it looks like over time, and induce some perturbations in it, too,” advises Davenport.
He points to one aircraft manufacturer that has built a model around future air travel. It lets the company see how a range of dependent relationships can individually or in combination affect travel, then make adjustments to the business to head off any major impacts. “It’s a very difficult thing to do, and they’ve been working on it for a number of years but haven’t finished yet,” says Davenport. So if it’s not done in time for this recession, they’ll be better prepared for the next one.
“Visionary organizations treat this kind of moment as an opportunity,” says Anup Srivastava, professor and Canada research chair, Haskayne School of Business, University of Calgary. Many of the most successful organizations have evolved or emerged from a time of crisis. Hewlett-Packard famously began in the Great Depression. Ford and General Motors each got their start in the economic downturns at the beginning of the last century. And there’s something to simply outlasting hard times—consider how Amazon grew from the dot-com bust, when its stock fell 92%, taking advantage of low costs to expand into new areas of business.
“Some things are available at much lower prices,” notes Srivastava. “Assets are available, companies are available.” Srivastava points out that Pfizer has been making acquisitions of biotech firms, for example. History shows that fortune does indeed favor the bold when it comes to M&A during times of economic uncertainty. Companies that made acquisitions during the early 2000s dot-com bust posted better shareholder returns than peers that stayed on the sidelines, according to an analysis by PwC.
Talent is available, too. While the Great Resignation took people out of the workforce, there are still others who may find themselves out of work as some companies make cuts, or others with underwater stock options looking for new places to land.
“Those who are growth oriented should treat this as an opportunity while using a fine scalpel,” says Srivastava. Be strategic about cuts, and try to avoid losing people, he advises. “Cutting the workforce is the wrong strategy to use because typically you lose the best people who are the most ambitious and the most growth-oriented.”
supply chain disruptions
IN THE PUSH FOR A FIX for supply chain woes, companies may double down on efficiency, with diminishing returns, says John Hagel, a former partner at Deloitte and founder of Beyond Our Edge, a new consultancy.
“Our institutions have been competing on a model of scalable efficiency for over a century, where the winners are those that squeeze their partners the hardest,” says Hagel. “But you can only squeeze so much.”
In a fast-changing world, the key to the future is collaborative learning, he says, where companies come together to create value that helps everyone improve.
It may sound unrealistic, but it has been achieved on occasion over the years. A striking example is Hong Kong–based apparel-maker Li & Fung, which prospered between 1970 and 2010 by building a vast “supplier network” of 15,000 fabric suppliers, manufacturers, and logistics providers that could be pulled together as needed to create new garments and clothing lines for leading brands such as Ann Taylor and Calvin Klein. Rather than get locked into contractual obligations with specific partners, Li & Fung could assemble on the fly the best combination of partners to design, make, and deliver a wool sweater, say, and another combo for a sweatshirt.
This approach removed some predictability, but gave both the company and its partners the ability to compete to do their best work, usually for a superior margin. Best of all, any learnings were then shared. “It created feedback loops so that everyone could improve their performance,” he says.
Ironically, the company fell on hard times when a new management team moved away from this supplier network approach, and began competing with its partners in many parts of the value chain in search of greater efficiency. But the flexibility and constant learning of this model makes it perfect for uncertain times like these.
“Supply chains are by definition rigid and brittle, so they crack when unexpected things happen,” says Hagel. Rather than try to weather the uncertainty and get back to those practiced ways, “collaborative performance improvement will help you do more than just bounce back. It will help all the participants move forward, and everyone will be better off.”
FOR DECADES, corporate shipping personnel spent much of their time negotiating two kinds of deals: long-term contracts for the most critical routes, and the best spot price they could find for everything else. But during the pandemic, moving goods around the globe went from checkers to 3D chess. Thanks to labor shortages, COVID protocols, and a spending boom by housebound consumers, trucking companies routinely turned orders away—in some cases, even from clients with those long-term contracts.
This shock is driving new thinking so companies don't get left in the lurch in the future. Rather than focus exclusively on lowering costs, companies need to prioritize capacity. "Sure, people want the lowest price," says Chris Caplice, executive director of the Center for Transportation & Logistics at MIT. "But at the end of the day, capacity matters more than cost.”
The most dramatic manifestation of the change so far has been an increase in companies creating their own fleets (usually by reserving full-time use of trucks owned by logistics providers, rather than buying and operating their own). Pre-pandemic, only giants like Walmart and Amazon could justify the cost and the risk of paying for trucks they might not be able to fill. But dollars spent on “dedicated” fleets rose 20% in 2020, and another 40% in 2021. According to Armstrong & Associates, a research firm, this “dedicated contract carriage” industry will approach $10 billion this year, up from $4.8 billion in 2019.
Caplice expects the trend to continue only until the nation’s supply chains settle back into something more akin to normal. But a more lasting trend is also gaining steam: increased use of automation technology that can be programmed to prioritize capacity.
Most shipping departments face an 80-20 rule: 80% of their product volume is transported on just 20% of the routes, such as those between the company’s main factories and major regional distribution centers. Yet most companies still have people negotiating those spot contracts, even if it covers a single truckload being delivered to a far-off desert town that won’t need another delivery for a year—especially given that even the Walmarts of the world lack the scale to push spot prices in their favor. “When 90% of trucking firms have fewer than 20 trucks, not even Walmart is a price maker,” Caplice says. “Everyone is a price taker.”
Fortunately, advances in AI and programming techniques now make it possible to let software lock in capacity on these less used routes. “Smart companies are using automation APIs to connect with carriers, brokers, or other intermediaries,” says Caplice. “That way, your people spend their time on the lanes that matter.”
He predicts that over the next decade, the vast majority of spot contracts will be executed in this way. His advice: “If you don’t have people with software expertise who know how to use APIs, it’s time to up your technology game.”
talent shortages
FILLING TALENT GAPS with temporary workers has a long history, but leave it to the tech industry to borrow from a software business model to solve the problem. Mark Campbell, chief innovation officer at EVOTEK Labs, recommends “expert-as-a-service”—that is, plugging outsiders with the right skills into the right roles, on-demand and with continuity, like a subscription software. “I don’t have to go through recruiting and a bidding war, and I can get .3 of a headcount, and if that chief information security officer takes another job with another company, since it’s a service, I’ll get another person,” says Campbell.
Expert-as-a-service places executives long on experience into roles, with an emphasis is on maintaining consistency. This means keeping the role filled even if one expert leaves, and establishing a “pass down” system of information, so that each new person doesn’t require a full briefing on the company’s history with the relevant tasks. “You don’t have to go through a retread every time,” says Campbell. “There's nothing worse than getting in an expert who says, ‘Oh, well, there’s your problem. You should just take everything to Oracle.’ And you're like, ‘Dude, we had a three-year project to migrate off of Oracle.’”
As companies face budget pressures, filling roles—especially expensive ones—may require creative solutions such as expert-as-a-service to keep growth on track. Companies of any size can benefit from this approach. A smaller, fast-growing business might need a CISO but lack sufficient budget to hire one full time. Expert-as-a-service models can bridge the gap. "These are legit people with 20 years of experience," Campbell says.
What’s more, the person in that role may make suggestions that push the company forward without worrying about politics or losing their permanent job. "They can speak truth to power without risk," Campbell says.
HERE’S GOOD NEWS for cash-strapped organizations seeking to retain workers in a tight labor market. Workers who quit their jobs are often motivated less by money and more by concerns that they don't belong at the company or can't grow in their current role, according to a 2021 study by The Josh Bersin Company
"Maybe they've been in the same job for a long time and just don't see any opportunity to advance," says founder Josh Bersin.
Workers can't be expected to mark time waiting for their manager to be promoted so they can move up. Instead, companies should focus on using tech to improve employee experiences. According to Bersin, a wave of new tools can help facilitate internal mobility and empower workers to take control of their careers.
“The entire HR tech industry is essentially doing backflips to build better systems that make it easier for employees to do their jobs and easier for HR and managers to give employees a meaningful and easy work experience,” he says.
Some of those systems include providing low-code tools that empower teams to build software applications they need to do their jobs better. Others focus on internal mobility and upskilling to “basically be able to infer an employee’s skills and then recommend content or solutions around that,” says Bersin. “Helping employees find better roles inside of the organization is a solution to a sense of belonging.”
Flashy HR tech can only get you so far. Companies must also invest in training managers to be attentive to the emotional needs of their teams. “People want to feel a sense of trust and compatibility and camaraderie with their team," Bersin says. “So a lot of what’s going on in companies is constant training of managers so that they listen to employees and create a sense of trust,” he says.
a changing climate
ONCE UPON A TIME plastic was considered a miracle material—stronger, cheaper, and lighter than the glass and metal it replaced. Today, it’s widely seen as a scourge that’s responsible for long-lasting environmental degradation. Seeking to turn pollution into a sustainability success story, some companies have begun incorporating recycled plastic into their products. Indeed, some of the leading shoe manufacturers are using plastic waste to replace polyester in their sneakers.
“And they’re doing it at a price that is no different than a normal sneaker,” says Arun Ghosh, a KPMG partner whose practice focuses on climate data and technology issues. “The next 18 to 24 months are going to drive an accelerated path to saying ‘OK, how do we do new product development to create more climate-resilient and climate-friendly products.’”
That starts with a better understanding of every step in the product life cycle, and a better understanding of a company’s entire operational ecosystem. This includes everything from the basic design to engineering concept to production, including managing margin and price points and considering sourcing and distribution. “It’s no different from anything else,” says Ghosh. “But this time, we’re putting a massive ESG and climate lens to each step.”
Ghosh also points out how some car manufacturers that produce EV automobiles are considering the climate impact of producing those cars. “It’s moronic to produce an electric vehicle in a factory powered by fossil fuels,” he says. “It doesn’t make any sense.” So instead, one manufacturer built a new plant that would be carbon neutral or net zero from the start.
Ghosh is optimistic: “There’s a lot of growing impatience among the global community, but there’s also a lot of momentum going into this,” he says.
PRESSURES TO ADDRESS climate change come from every corner—shareholders, the board, employees, customers—and the initiatives are usually many and varied, from product modifications, purchase of carbon offsets, and beyond. ServiceNow's Shuchi Rana argues that blockchain technology can help build transparency across all these efforts.
“People are ready to make investments in climate efforts, but you need to account for them just as you would your finances,” she says. Logging this data in the blockchain creates a permanent, unchangeable record for all stakeholders. It gives organizations the ability to understand where they stand, and as they’re laying out plans for sustainability, to know that their data is stored immutably, that it can be audited, and it complies with the approved standards of the regulatory bodies. They can look at the data and be able to create a plan to improve their path to sustainability.
But before companies can realize this potential, they’ll likely need to take a close look at how they’re collecting and storing the data itself. All too often, for example, a company’s business units might measure the same things in different ways or keep vital information in systems that can’t communicate with each other.
Consider the complexities for global companies with plants and offices around the world. "Every utility is going to be different, every energy source is going to be different," Rana says. "How do you bring that all together into one database and make sense of it, and then be able to turn that into the calculations and formulas that folks have come up with from an offset standpoint?” she says. “It’s a very manual process. It’s all Excel spreadsheets, which is just so time-consuming on so many levels. Data reporting and data harmonization is where technology can play a role.”
