Four ways to prepare for next step in digital transformation
If the list of things keeping you up at night seems to be getting longer, you’re not alone. Between inflation, recession, geopolitical turmoil and talent shortages, there is plenty to worry about.
Which problems are the most serious? What else might happen? The truth is that nobody knows for sure.
Fortunately, there is also good news. In our advisory and transformation work with many of the world’s market leaders, we have seen firsthand that even if a recession hits hard, companies can still find ways to improve performance and resilience.
Our research suggests that these four decisions will leave you in a better place:
1. Keep your digital transformation going. Companies that are pursuing their digital transformation are outperforming the rest. Our research suggests that Digital World Class companies (firms that use state-of-the-art financial and operational software) typically have an 83% higher net margin, 82% higher return on equity and 13% higher earnings before interest, taxes, depreciation and amortisation – all of which leads them to bring home a 55% better return to their shareholders.
2. Don’t stint on brains A Digital World Class finance organisation applies not only more artificial intelligence to its problems, but also more human intelligence powered by empirically proven best practices. Historically, leading companies have hired on average 25% more specialists and 50% more staffers focused on planning, forecasting, and analysis. How do they fund this? They have 28% fewer people focused on transactional work and operate at a 33% lower cost of finance operations.
3. Trim intelligently In a tough time, budget cutting is inevitable. But using the same percentage cut across the board is generally a mistake. Yes, leaders in finance and procurement need to run lean operations; however, given current talent shortages, they should prune wisely. Don’t just “get out the lawnmower” and cut 20%.
With better insight from digital processes, leaders should be able to target cuts that won’t undermine the agility of their function in support of business growth. One frequently overlooked opportunity is excess working capital and the cost disadvantage this introduces with rising interest rates across most of the developed world. The Hackett Group’s most recent working capital survey found that the top 1,000 U.S. companies had nearly $1.7 trillion tied up in excess working capital – up 28% from $1.29 trillion in 2020.
4. Drive harder bargains. Inflation often paralyses companies because of the uncertainty over whether, and to what extent, cost increases can be passed to consumers as price increases. Yet, if demand and volume soften, there may be a silver lining, provided that your procurement team takes a closer look and is able to drive harder bargains with your suppliers.
Bad times can be good times for procurement. In the last recession, procurement functions were able to deliver over 20% additional value than in a growth period.
Companies bracing themselves for recession
At any given time, business leaders must balance a portfolio of both short- and long-term opportunities, while keeping in mind their related risks.
Most companies today are bracing for a recession. In the UK, certainly, the question is no longer whether there will be a recession, but how long, how deep, and which factors will hurt most.
Short-term budget cuts can make up for some weak sales, while a good understanding of the dynamics of inflation can create opportunities for procurement. It may be tempting to see inflation primarily through a pricing lens, yet this has inherent limitations. In some purchasing categories, inflation also weakens demand – a fact that can give businesses the leverage needed with their suppliers to bargain for better prices and push for payment on more favourable terms.
But it is today’s biggest long-term opportunity that should be underscored. Our benchmarking data shows that companies that digitise their financial and operational functions can save as much as 4% of revenue annually.
Automation also creates new insights to uncover more short-term opportunities as well. Having more timely data in a form that is easier to analyse can give finance and procurement more options than ever before.
Of course, this is only the beginning. Particularly in finance and procurement, smart hiring can multiply the value of the automation dividend. Blended finance and procurement teams can come up with a more creative pricing strategy, better forecasting or savvier deal ideas, and the opportunities they create could be much better than the baseline economic conditions would indicate.
Time not spent collecting and compiling information is time freed up for analysis and modelling. As this happens, finance and procurement can be transformed from functions that spend most of their time looking backward to functions focused on the future.