The top business trend for 2020 is going to feel like a throwback. In 2018 and 2019, growth and innovation dominated the topics at the top of every executive’s news feeds. In many respects, reviewing what thought leaders were predicting in those years reads like a who’s who of the roaring 2010s – artificial intelligence leading customer experiences (Gartner 2018), the entry of Gen Z into the workforce (Forbes 2018), growth through marketing or new business models (Inc 2018), data-driven personalization (Inc 2019). It’s what everyone was talking about, it was all new and exciting, and in retrospect, some of these trends were inevitable while others fell flat.
For nearly 10 years now, the economy has been strong with housing starts, consumer spending, and M&A activity – all key drivers for middle-market businesses – continuing to demonstrate their strength. Predictions for 2020 aren’t quite as optimistic, although there is still uncertainty about when things will slow. As a result, CFO surveys across the board (the most notable this year was Duke Fuqua’s CFO annual survey) have indicated a widespread expectation of slower growth arriving by Q3 or Q4 of 2020.
Lessons from recent downturns paint a clear picture; businesses that prepare for slower cycles, and even moreso, businesses that put themselves in a position to actually invest during downturns, dramatically outperform businesses that do not. In his landmark May 2019 Harvard Business Review article, Walter Frick synthesized studies from Harvard, Bain, and McKinsey to find that companies who prepared for and invested through the last four major recessions outperformed their counterparts by 10% afterwards, in both revenue and profit growth.
The trend for 2020 will be preparing for slower times.
To prepare for slower times in 2020, business activities will focus on two primary things: 1) cash and 2) creating efficiency now to avoid reactionary cost-cutting later. There are three basic tenants to addressing these priorities.
The U.S. corporate debt of almost $10 trillion–equates to half of the nation’s annual GDP, which means that since the Great Recession, the total value of nonfinancial corporate debt in the United States now stands at, or near, all-time highs (PBS News Hour, 2019).
The more debt you have, the more your cash in a downturn is going to go towards interest payments rather than operations or investing. Leverage enabled the growth of many businesses, but most analysts expect well-prepared companies to undergo a deleveraging process in the first half of next year. This is likely to create cost-cutting efforts, efforts to lower cost of quality, and combined with a thriving talent market that is raising compensation, a renewed scrutiny on new hires.
What do businesses need to focus on to free the cash flow required to de-leverage?
Operational efficiency often gets buried in the discussion of new business trends and technology, but research continues to show that driving efficiency is the #1 thing businesses can do to improve returns and become more sustainable.
What gets lost in the talk about fun new tech like artificial intelligence, block chain, analytics, etc., is that they’re all essentially creating some sort of efficiency in the business itself.
The process of identifying efficiencies will be driven by finance, using numbers that have gotten progressively better and more detailed as they have implemented new core systems and analytics tools. Efficiencies will be found in business processes, sourcing and purchasing power, and sales and marketing. It will generally be measured with process metrics in the short term like on-time delivery, error rates, or customer acquisition costs, but in the mid to long term, this will translate into lower expense-to-revenue ratios for both labor and materials.
These projects have short-term costs, which means businesses are likely to put more of an emphasis on formal business cases and projected ROIs and less likely to invest in large projects on strategic grounds. This is appropriate in this economy, but businesses should make sure the assumptions they use in these cases are sound and are consistent with what executives expect to occur throughout the year.
New automation possibilities recently made their way to the middle market. Robotic Process Automation (RPA) now enables businesses to automate what were previously inevitably manual processes. This is new and this is a big deal for the middle market.
This allows businesses to automate tedious, lengthy, and error-prone manual activities and move their staff to roles analyzing data and overseeing much larger pools of transactions. Upskilling workers is going to be crucial for most companies – you need your best people doing your highest value activities.
RPA is more reliable and faster, less expensive than hiring new staff, and allows your payroll investments to go towards more strategic, higher-value roles. If you wait until results stagnate to implement this, the initial investment required to get results may be hard to justify. By implementing these now, you will make the investment at a point when you can start to realize results quickly, and be in a great position to dramatically improve the functionality and scope of automation at a relatively low cost when you’re looking for additional efficiencies later.
Getting back to the basics will help companies focus on fast-term results, create liquidity to sustain them through the economic cycles that lie ahead, and improve the quality of their businesses to make them more sustainable and more profitable.