Downturns can present a serious challenge to digital transformation efforts, says The Wall Street Journal’s Tom Loftus. Modernization efforts can take several years to deliver positive ROI, but a recession can bring returns grinding to a halt.
Downturns also highlight the benefits that digital transformation can bring. Specifically, enterprises can use technology and data analytics to anticipate upcoming downturns and put strategies in place to better weather them.
Using Data to Anticipate Downturns
Accurately predicting future downturns is incredibly hard, but possible. Doing so is impossible, however, for businesses that lack access to the right data or the tools needed to analyze it.
Take company spending, which Coupa Chairman and CEO Rob Bernshteyn believes is a key metric to predicting future economic health. Cloud-based technology makes collecting this data possible in a way that it wasn’t before, Bernshteyn writes. “Today’s cloud-based technologies that help businesses manage their spend can also ‘see’ behavior as it happens. Add a few machine learning capabilities to the mix and we might have a way to make a prediction.”
Thanks to digital transformations, this kind of anticipation is now possible in industries where it previously wasn’t, says Microsoft’s Bill Moffett. In the past, businesses in industries like manufacturing were limited to using their own data in the decision-making process.
“Once manufacturers understand that they can now get accurate information from the marketplace and external data sources and tread outside of the traditional historical planning approach they have always done, their eyes open,” he says. Today, they are able to calculate the possibility and anticipate the impact of unforeseen global, economic and environmental changes — and make adjustments accordingly.
The Earlier You Act, the Better Prepared You Are
It’s important that businesses have some ability to anticipate potential downturns because changing strategy early can make all the difference. McKinsey researchers Kevin Laczkowski and Mihir Mysore found that the most resilient companies during the last economic downturn in 2008 got their houses in order before anyone else.
“By the first quarter of 2008, the resilients had already cut operating costs 1% compared with the year before, even as their sector year-on-year costs were growing by a similar amount. The resilients maintained and expanded their cost lead as the recession moved toward its trough, improving their earnings advantage in seven out of the eight quarters during 2008 and 2009.”
By acting early and cutting costs, these companies were able to reduce debt far more quickly than anyone else. As a result, they were able to take better advantage of the economic opportunities offered by the recession. During the deepest part of the recession in 2009, the earnings before interest, tax, depreciation and amortization of resilient companies were up by 10 percent. For their competitors, EBITDA was down 15 percent.
Executives may want to see indisputable evidence of a downturn before acting, but BCG Henderson Institute’s Martin Reeves, Kevin Whitaker and Christian Ketels believe that will mean waiting too long. Their research found that proactive organizations — the ones that took action before the 2008 recession officially started — managed to achieve 6-percent better total shareholder return.
Data analysis isn’t just a way for businesses to survive downturns. It reveals the path for them to thrive. Bain & Company’s Tom Holland and Jeff Katzin believe that going on the offensive during downturns is almost always the best strategy. They compare recessions to a sharp turn in the track during a motor race. That’s one of the best moments to pass competitors, but you need skill and strategy to do it.
“The best drivers brake just ahead of the curve (they take out excess costs), turn hard toward the apex of the curve (identify the short list of projects that will form the next business model), and accelerate hard out of the curve (spend and hire before markets have rebounded).”
Get a Grip on Your Financials
Being able to understand and forecast your financials accurately is the best thing you can do for your business, whether times are good or bad, says financial counselor Linda Matthew.
That’s where predictive analytics come in. Look to historical data to forecast future cashflow more accurately and understand where you may be in the event of a recession. You may even be able to spot the areas that need the most attention right now.
Keeping costs down is key to a healthy balance sheet, says McKinsey’s Sven Smit. “The simple answer is the healthier your business is today, tomorrow, and the next quarter, the more resilient you will be in a downturn, in the sense that if your costs are lower, you have more buffer to take on stuff.” When you aren’t leveraged to the hilt, you have more breathing room when things get tight, and more capital to invest in new opportunities.
Make Sure You Have the Right Team in Place
If you’re anticipating an economic downturn, make sure you have the right staff in place. That means the right people in the right positions and the right number of staff in total. A bloated staff spells danger in a recession.
Rather than shooting in the dark, data analysis can be used to take doubt out of the equation. “Technologies such as demand-based rostering analyze factors like staff competencies, consumer behavior, historical trends, and seasonal economic factors to predict how many workers you’ll need at any given time,” says the team at Enquiron.
If you need to let staff go, data analysis can also be used to identify what impact downsizing will have, notes Debra Solt, the workforce and economic development director at Vegas PBS. Cutting evenly across the company is rarely the best decision. Instead, data can be used to find out where layoffs will cut the highest costs while having the least impact on the company.
If you’re short on staff, tech can come to the rescue here, too, the team at Textkernal points out. Rather than waste money and destroy employee morale by filling vacancies from outside the company, turn to technology to match current employees with new opportunities.
“AI-powered sourcing and matching technology enables employees to quickly, easily submit their application information and receive proactive alerts when matching roles and projects come available. This will allow you to fill more open roles with existing employees that will in turn lower your cost-per-hire and also reduce onboarding and time-to-ramp into new roles.”
Uncover Hidden Growth Opportunities
Increasing sales is the No. 1 strategy European CFOs are using to make their organizations more resilient in the event of an economic downturn, reports Deloitte’s Michela Coppola. More than half of respondents in Deloitte’s CFO survey said they were making efforts to expand into new markets and new regions.
Having digital tools embedded in your sales strategy is important to success, Bain & Company’s Mark Kovac and Jamie Cleghorn write. In a study of 900 B2B companies, the pair found companies that grew absolute revenue and gained market share over two years were four times as likely to leverage digital tools. In particular, these tools can help sales staff more accurately gauge market size and anticipate how many reps are needed, and where.
Being able to analyze business and sales data accurately can help organizations identify new opportunities that would otherwise remain hidden, writes Salesforce’s Rosy Callejas. “Say, for example, that your product and messaging is tailored to a specific type of audience. Analytics could reveal that your product and messaging could fit another audience entirely, thus allowing you to identify possible opportunities for future growth.”
When your organization has undergone a digital transformation, downturns aren’t just a case of battening down the hatches. With the right digital tools in place, you can use data analysis to not just survive, but thrive.