Winning In A Crisis

Yes, the headlines are scary. And, of course, some commentators are making 2008 comparisons but all this “noise” will pass and those companies who seize opportunities during the Covid-19 chaos will win big time.

Yes, the headlines are scary. And, of course, some commentators are making 2008 comparisons but all this “noise” will pass and those companies who seize opportunities during this Covid-19 crisis will win big time. History is a rather good guide. When the TMT bubble imploded it was Amazon and Google who hoovered up lots of talent fleeing weaker business models. More importantly, this talent was acquired at a less bubbly price.

When the credit crisis (GFC) hit in 2008 the US banking system wobbled and many famous institutions went to the wall. However, in the aftermath of the GFC, the major US banks aggressively wrote down bad loans and restructured their business models and invested in technology. In contrast, the European banks failed to act in any significant way to address their obvious vulnerabilities and that is the lesson for today.

The big US banks are now the most robust and profitable financial institutions on the planet. Meanwhile, European banks are teetering on the brink of another financial crisis as the fragile Italian banking system stares down the barrel of a Covid-19 economic shock. The strategic lesson is clear. A crisis can provide opportunities to future proof a franchise. In more pragmatic terms, expectations on profits for 2020 are softening along with share prices which provides useful cover for some very wise investment. Bold strategic action is likely to be rewarded and we can think of a few obvious areas:

  • Digital Transition: In a low inflation world there are many sectors where pricing is under pressure. The winning franchises will be those who successfully excel on two fronts. First cost bases need to be best-in-class which necessitates smart technology and faster cheaper solutions. Second, technology can drive sales with superior marketing, customer engagement, execution, finance interfaces and customer retention. Many of these technology solutions are now residing in “the cloud” and it was fascinating to see leading Irish cloud transition services player, Version1, make its 11th acquisition this week with the purchase of another Irish digital star, Singlepoint. This type of corporate activity/confidence gives you a clue about the pipeline of digital transition work coming down the tracks.
  • ESG: Climate change is the hot topic but that’s only the “E” in ESG. We have repeatedly stated that corporate health is wealth. Environmental, Social and Governance criteria are now being monitored by investors managing over $30 trillion of funds. Many companies will try to “greenwash” this emerging trend by paying lip service to ESG frameworks but this will end up being a costly lack of action. McKinsey in a recent report made it very clear that funding costs, operational costs, regulatory/safety fines, personnel productivity/retention and cash flow are real risks that will ultimately diminish the value of a franchise. As an illustration, banks are now beginning to peg lending rates to a corporate’s ESG rating.
  • Automation & Talent: Imminent research from Loughborough University is about to reveal that the UK is facing the biggest slowdown in productivity in 250 years. Amazingly, Brexit is not the key culprit. In fact, all developed economies have particularly struggled on the productivity front since the GFC crisis. The reasons are complex but the good news is that automation offers huge productivity opportunities for both employees and companies. The implementation of robotic process automation(RPA) is poised to accelerate dramatically and take a huge number of repetitive, low-value manual tasks off employee to-do lists. The powering of employees using AI and RPA will enable them to focus on higher-value activities and enhance creativity. One can expect that companies who fail to embrace automation will struggle to keep quality employees and, more importantly, customers wary of franchises with high staffing turnover and outdated clunky business processes.

All of the above actions require investment and management focus. The companies which seize the opportunity to strengthen their business models in the increasing likelihood of a challenging 2020 can gain a very valuable head start on distracted competitors. Just think, Yahoo celebrated its 25th anniversary this week. It is safe to say most of the business world didn’t really notice. The choice for companies is simple; DO or YAHOO.

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