Some challenges come from nowhere, but others develop more gradually: data predicts a worsening UK skills crisis, and environmental, social, and governance (ESG) regulation is only set to increase.
Shock or not, it's time to consider whether your business has the agility and resilience to ride unexpected storms and grasp new opportunities – while keeping costs in check. If not, how do you ensure that the cost of building in this flexibility pays off?
A is for agility
Agility is an organisation’s ability to adapt to external changes, such as those in a PESTLE (political, economic, sociological, technological, legal and environmental) analysis. Examples might include increasing energy costs, ESG regulation, new tax laws, or unexpected changes to export regulations.
The overnight transition to new sales channels and a work-from-home approach during the pandemic demonstrated the need for agility. Companies that were quick to change were able to minimise business disruption. Furthermore, those that retained a more agile working culture post-pandemic have reaped the benefits.
For example, many companies improved communication and invested in employee wellbeing. Moreover, many changed their management style to focus on trust and recognition of output. Those that took these steps have seen a significant jump in employee engagement, as well as improved levels of talent retention and attraction. One company experienced this by seeing a previous leaver return. The employee left for a role that offered further development but the culture in the organisation was poor. As a result, the individual returned the following year. There's a lot to be said around doing the exit work to allow people to be honest and to understand what drives and motivates them.
R is for resilience
Resilience is an organisation’s ability to absorb shock. Take wage inflation: a debt-free company with a small workforce and strong balance sheet might be able to mop up a small minimum wage increase. However, the same hike would severely impact a highly-leveraged business with a large volume of employees.
Fundamental to a company’s financial resilience is a thorough understanding of its balance sheet and cash flows. Pinpointing where profit is made lets management know which dials to turn in a crisis. As with agility, resilience isn't just a factor of finance. For example, a company with strong employee engagement, opportunities and benefits may be more resilient to a skills shortage than others.
In the current environment, companies increasingly must ensure they're resilient to the loss of a key customer, supply-chain disruption, and cyber threats.
C is for cost base
Building agility and resilience typically requires cost. If executed correctly, however, investment in these areas will reap future returns. Having a clear understanding of your cost base and what drives this is essential. Knowing where and how you can reduce your costs, and the implications of this, will help you weather and adapt to sudden shocks and periods of change.
Technology, for example, can often involve huge upfront investment in hardware and software (as well as time and potential business disruption). Implementing technology effectively as part of the right strategy, however, can recoup costs many times over as a result of efficiency savings, improved competitiveness and a more engaged workforce. A well-planned IT architecture helps a business to be more agile and resilient, too.
Where does your profit actually come from?
Balancing agility, resilience, and cost base
The ARC balance will vary depending on your existing situation, plans, risk appetite and other considerations. Every business should take an active decision over where this balance should lie. Businesses can use data-driven insight into their operations to model future scenarios.
Questions to ask:
- Do we accept that the resilience provided by having a large group of suppliers outweighs the loss of volume discounts from dealing with a select few partners?
- Are we happy to keep our costs lower knowing that we may then miss out on certain opportunities through a lack of agility?
- What can we cut first if energy prices go up by 50%?
- Are we ready to scale if we win a big contract?
- What’s the long-term risk of reducing our office footprint?
Now is the ideal time to evaluate your ARC balance for the next six months and beyond. To help, we will be exploring the following eight themes in upcoming articles:
7 Baking ARC into the culture of your business
8 Maintaining your ESG focus within the context of ARC
For insight and guidance on balancing ARC in your business, contact Justin Rix.