Confusing Predicament For Businesses In COVID-19 Crisis

The stakes for businesses have rarely been as high as they are now. The global pandemic is upending companies’ existing mindsets, strategies and investments. It’s leading to new decisions about actions and strategies that must occur at the same time but appear contradictory. This causes a lot of confusion for people in enterprises as well as the enterprise vendors. The contradictions and confusion can fuel tensions.

What’s the remedy for this predicament? Before I answer that question, it’s important to understand the underlying factors driving the predicament.

Factors Driving The Confusing Predicament

The COVID-19 crisis moved companies from a time of abundance and strong economic performance into a mindset of recession. Furthermore, as the crisis continues longer than anticipated in the beginning, there is now a growing conviction among the Fortune 500 that this recession is not likely to be V shaped. Enterprise leaders believe it won’t be a quick step back for a quarter or two; they believe we’re entering a time of significant deep recession for a protracted period.

I have talked with 50 CEOs of large firms in the last three weeks, and it is clear this mindset shift is widespread, and it happened abruptly. Because of the shift in mindset, they are being especially prudent and preparing for the worse. Consequently, they take the following actions intended to preserve cash and lower the run rate:

• Preserve cash; pull in lines of credit to ensure they have cash on hand
• Extend terms from net 45 to 180 and beyond
• Cancel discretionary projects, and require that discretionary projects need the personal signature of the CFO, which dramatically discourages any new initiatives
• Reduce salaries
• Engage in staff layoffs
• Delay or eliminate new hires
• Ask vendors for discounts – even squeeze their vendors.

These activities matriculate down through an organization unevenly, in waves. Different constituencies in the organization drive these actions. For instance, the purchasing team puts pressure on the vendors. The finance team cancels discretionary spend and extends credit terms. Executives cancel initiatives and pull back on capital expenditures. It results in a cascading series of actions that move at different paces through different departments.

At the same time as companies take these steps to grapple with business in the immediate crisis and short term, some are looking intently at the broader, longer-term future.

The crisis exposes how companies previously conducted business. And it is very clear, as I explained in my prior blog, that many companies now regret that they didn’t automate more, implement digital technology and business models to increase productivity and move more work into the cloud. They now see that, where they took those steps, the business performs better. They have lower operational costs and are more agile in meeting the new business performance challenges.

So that they can operate leaner and better meet customer needs, companies are looking to use the protracted period of recession as a time to fundamentally restructure their firms. These decisions and actions, taken together with steps to deal with the immediate and short-term needs, appear contradictory and cause confusion. And they create a dilemma.

Examples Of Contradictory Actions

Here are some examples of actions that are taking place at the same time and appear contradictory.

• Start initiatives to implement much more intensive automation – while, at the same time, canceling discretionary spend power and laying off talent.
• Plan for a company’s GBS (captive organization operating as a Global Business Service) units to take over more functions and more responsibilities because the GBS can operate at a lower cost in a shared service environment – but, at the same time, asking the GBS to cut 10-15% of its workforce. Companies now seek to clean up their balance sheets to prepare for the deep recession and a more difficult business environment. Some use this opportunity to save money by growing their GBS organizations because they are in low-cost locations (India, Philippines, Eastern Europe, Central and South America and China). At the same time, they can achieve greater scale and savings by divesting some GBS units.
• Bring outsourced functions back in house – but, at the same time, do more outsourcing.
• Diversify the vendor portfolio to reduce risk – while, at the same time, consolidating the vendors to become strategic champions that can drive end-to-end process design transformation.
• Conduct staff layoffs – but, at the same time, invest in modernization, which requires highly specialized digital skills, when there was already a talent deficit before this pandemic crisis. (I’ll discuss a solution for this dilemma in an upcoming blog post.)

How can a company square these conflicting signals to cut costs yet expand? These contradictory actions create a confusing time for employees and the company supply chains. 

The Remedy To The Confusion

I asked at the outset of this post: What’s the remedy for this predicament? I believe it clears up the confusion if people understand that two seemingly contradictory decisions can be true at the same time. It is entirely appropriate and necessary for companies to preserve cash in the short run to protect themselves and give them running room. But it’s also appropriate and necessary for them to use the COVID-19 crisis to steer into their strategy of modernization and designing end-to-end processes.

It’s entirely appropriate for companies to take actions that will allow them to exit from this crisis into the new normal (or the next normal). And they can use this crisis to accelerate the three to five-year (or 10) road maps they previously designed. They can now modernize and drive those road maps down to six to nine months. In this way, they can position themselves for success as they operate in the new expected difficult environment.

Yes, it’s a very confusing time. Companies want to potentially consolidate their supply chain as well as diversify it. They want to double-down on their internal shared services and captives (GBS organizations) while they also want to exit some of them. They want to cancel investments and yet want to make other investments. They are rapidly working through all the options.

It appears we are at a moment when everything is in play. When we evolve out of this pandemic crisis in the next few months, I believe we will see very different companies that used this time to restructure their business.