Just as the IT community got used to the changes wrought by the pandemic – working-from-anywhere with the changes to its corporate relationships and added support complexities, XaaS moving sales to monthly billing cycles, and e-commerce being implemented across all industries – so it’s facing the next big wave, and this one’s huge.
By Guy Whitcroft
Actually, it’s a series of waves that will affect all businesses across the world. The question will be one of how to survive this “perfect storm” of change – are you ready for it? Will your business evolve to meet the challenges it faces in the next couple of years?
First, let’s look briefly at these challenges:
Chip problems – the major chip manufacturers, having wound down operations when the pandemic started (and on the back of declining sales anyway) are now facing enormous pent-up demand and will take a good while to meet this. Although we tend to think of this affecting the computer industry, it is actually impacting no less than 169 different industries, according to Goldman Sachs. Every major industry across the globe is competing for chips, with prices rising strongly accordingly.
Labour problems – compounding this, and most other areas of business, is the growing shortage of labour. “The Great Resignation” is real, with the pandemic having led people to re-evaluate their work-life balance and is compounded by the retirement of the Baby Boomer generation. This shortage of labour is affecting developed countries around the world across almost all categories of work. Again, labour costs are rising sharply as companies compete for resources.
Shipping problems – the rapid increase in demand for shipping as the global economy recovers is also putting the shipping industry under severe strain. This is compounded by ongoing closures and/or short-working due to Covid-19 at major ports around the world, and by labour shortages impacting the turnaround times for ships too. As a result of the delays, both ships and containers are in short supply, with costs rising dramatically across the board.
Energy problems – as if the logistical issues above are not enough, the world is also facing serious energy problems. As with the previous categories, the upswing in demand, coupled with climate changes, is causing energy demand to outstrip supply in many places. China, for example, is experiencing production halts at many factories and reducing municipal services in many places in order to have sufficient energy to heat homes. Oil is at a 10-year high, natural gas prices have almost trebled in Europe this year, and coal supplies are not meeting demand either. All this at a time when governments are trying to reduce carbon emissions.
Taxation increases – as governments see their economies recovering, they will need to find considerable extra money to pay for the various initiatives launched during the pandemic – initiatives ranging from vaccination programs and additional medical facilities, to job-creation programs (or job-loss reduction programs). With public debt having increased dramatically during the past 18 months, changes to tax laws and structures are inevitable, with the recent OECD agreement on minimum taxation levels for multinationals being just a first step.
Inflation – of course, with price rises due to energy, labour, shipping and chip problems, as well as increased taxation, look to inflation taking hold in the next year or so. Interest rates were reduced sharply at the start of the pandemic to try to reduce the impact on people, but these will have to rise soon – not only due to huge increases in debt, but also the need to try to limit inflation. This will impact business in many ways, not least being the reduction of disposable income among consumers and a likely dampening of demand.
And, of course, in developing countries like South Africa, look at the impact of all of this on currency, too.
So, what should businesses being doing to reduce the impact, so far as is possible, of all these waves of change?
The first thing is to ensure they have a professional, active and committed board. Boards are not just for listed companies – in fact, SMEs often benefit even more from regular meetings of a professional board than the largest companies as they can add enormous experience at a relatively modest cost. Boards are, after all, tasked with the responsibility of overseeing the business: its strategy, processes and procedures and, of course, its executives.
Risk identification and management is just one of the key functions of a board and these risks should be front and centre on the board agenda, with scenario planning and strategy discussions taking place as to how best to counter their impact. Here, again, is where the expertise of independent directors can be brought to bear.
Cost-containment measures need to be looked at closely – if input prices are going to (continue to) rise while demand is likely to drop once the inflation and tax changes take hold, how best can this be done? Incidentally, the normal “knee-jerk” reaction of cutting advertising and training is not the best way forward. You should rather be looking to efficiencies in your processes and recognising, too, that you might need to reduce your net profit percentage expectations for a period to retain market share and relevance.
The frequency of board meetings should be looked at too – instead of quarterly, or less frequent meetings, I recommend monthly ones with a comprehensive calendar that includes updates from the executives on the risks identified and the measures being taken. Time really is of the essence in these times.
Companies that have a professional board with regular meetings looking at these, and other, issues will find it much easier to ride out this storm – and will do so with better profitability, lower costs and greater growth than competitors that do not.