The way companies project growth shapes the economic outlook. Here’s how to face the slowdown.
For the most part, the global economy is in better shape than many imagine. Companies are still growing — just not as much as they had expected. Inflation is cooling. The economy added more jobs than we anticipated. So what’s led to the disconnect?
Over the last couple of years, money was cheap because interest rates were close to zero. The economy was recovering from COVID and pent-up demand was being released. Capital markets were focused on top-line growth, so boards and C-suites were focused on it too.
Add all that together, and companies were basing their plans on projected growth. Companies traditionally act in advance, on projections. If they believe there will be lots of growth, and capital is cheap, then they invest in growth. They recruit, build infrastructure, and start projects.
But recently, companies started seeing that growth was not going to continue as expected.
Why? Interest rates have been going up, so capital is more expensive. Though long-disrupted supply chains are mostly sorted out, the effects are lingering. Geopolitical situations continue to become unstable, which leads to more conservative spending. China may no longer be the engine of demand and production.
A lot of factors are coming together at once, and companies are realizing that the growth they’d invested in is not necessarily going to appear.
Enterprises have to plan far in advance for growth and for reductions in growth. The longer in advance they have to plan, the more risk they take.
There is a great opportunity to reduce the risk and inefficiencies that come from these fluctuations and economic cycles. And that’s where digital approaches like the cloud really shine. The cloud, and other digital approaches, allows businesses to quickly match spending to revenues and growth opportunities. As a result, they don’t take on as much risk through capacity planning.
How companies can face these headwinds
There are three categories of adjustments companies need to make, based mostly on when the impacts will be felt. I call them the immediate horizon, the fast horizon and the fundamental horizon.
CIOs must show immediate spending reductions. It’s a matter of building trust. It would be insensitive to just find ways to spend more when the enterprise is in a panic about managing costs.
A CIO can earn credibility by proactively coming forward with solutions for saving money right away.
Cost savings that require some modest effort but have a quick payback make up the fast horizon. For instance, these could be line items that will appear on the current year’s financials and they’ll have an effect by the end of the fiscal year. These can fall into two categories:
First, there’s a great opportunity to adopt financial discipline in the cloud through what many call FinOps. FinOps is not a matter of a one-time cost reduction, it’s about setting up a discipline that manages costs as a matter of everyday business.
FinOps has an organizational component, a process component and a cultural component. Organizationally, businesses need to assign responsibilities to the right parties. Often a centralized organization, maybe in finance, takes on certain responsibilities. This includes reporting for transparency into costs, vendor negotiations and volume discounts.
Engineering and delivery teams also have a responsibility, because they can and should engineer their code to run less expensively. Responsibilities need to be distributed between centralized teams and decentralized teams, between finance and technology.
The cultural change is that all teams should see cost reduction as part of their jobs.
For engineers, it’s as if cost reduction becomes an engineering parameter they must optimize, like any other engineering parameter. They need to design for cost-efficiency, just as they design for security and availability.
The second category for fast cost reduction is to invest in IT where it can have an immediate impact on reducing non-IT business costs. The idea is to find those quick hits where the technology can be adopted quickly and simply and result in fast cost savings.
The third horizon is the fundamental horizon, making changes that affect the economic fundamentals of the business and most importantly the unit economics. A certain proportion of costs depends on revenues, or the number of units produced or sold.
Businesses want to move some of their fixed upfront costs into that category, so they will be aligned with their revenues.
In other words, costs automatically go down if revenue goes down, removing risk and permitting rapid adjustment. And then, businesses will want to drive those unit costs down further by finding opportunities to make processes leaner, often with the help of technology and the cloud.
The current crisis gives businesses a chance to get those unit economics right, so they are positioned well both for growth and for slowdowns. And remember: the current crisis will end. That means that we also have to plan today for the growth that will ultimately come. A danger today is to cut costs in a way that will make it hard to grow back again in the future.
In fact, that’s what typically happens. Gartner says that 70% of companies don’t regain their pre-recession growth levels within three years following the end of a recession.
The economic slowdown presents great opportunities. CIOs can use it to gain credibility in their organizations by proactively responding to the organization’s needs. Companies can use the slowdown as an opportunity to implement good FinOps cost discipline and to address the fundamental economics of their business.
The market is competitive. The long-term winner is the company that responds best to the economic conditions everyone is facing.