Navigating macro uncertainty

Economic turbulence makes business leaders uneasy, often leading to caution and conservatism. But while the uncertainties of the current market environment – including geopolitical tensions, high levels of inflation and the threat of recession – may not feel conducive to investment in innovation, research suggests now is exactly the time to be ambitious.

“It’s very normal to respond to pressure on revenues and costs with a financial initiative, but a smarter move is to focus on organisational change,” argues Jordi Ferrer, Vice President and General Manager for the UK and Ireland at ServiceNow, the intelligent platform for digital transformation. “The danger otherwise is that while you’re battening down the hatches, your customers are moving ahead – and your competitors are adjusting to their changing needs.”

Many of those competitors plan on doing exactly that. ServiceNow’s research reveals that 38 per cent of C-suite executives are determined to accelerate their digital transformation efforts despite the current volatility. And 70 per cent of those executives say they are optimistic about the next two years.

“Hunkering down is exactly the opposite of what companies should be doing during tough economic conditions,” says Vijay Govindarajan, Coxe Distinguished Professor at Dartmouth’s Tuck School of Business.

“After a recession, there are new winners and new losers – the new winners are those who have invested in innovation during the recession; a downturn means assets are cheaper and talent is available at reasonable salaries.”

The potential rewards for organisations brave enough to look beyond today’s anxieties are alluring. A recent study by management consultant McKinsey found that following the last recession, enterprises that continued investing in innovation outperformed the market by more than 30 per cent and enjoyed accelerated growth for the following three to five years.

Separate work from Harvard Business Review suggests that in the past three recessions, businesses investing in innovation outperformed competitors by at least 10 per cent in sales and profits growth.

How, then, should a business commit to innovation in practice? “There is ‘big innovation’ such as major business model change, and ‘little innovation’, which is more focused on process and people; but either way, the best approach is often additive,” argues Faisal Hoque, an entrepreneur, bestselling author and, a contributor at the Swiss business school IMD. “Build on what you already have, leveraging new technologies and partnerships to move the organisation forward.”

As Hoque points out, innovation does not have to mean total reinvention. Rather, tools such as data analytics, cloud computing and, increasingly, generative artificial intelligence (AI), enable businesses to move iteratively. They can constantly try new approaches, measure the results, and double down on successful initiatives while dropping ideas that did not work out so well.

Some of those ideas will be customer facing, while others may be internal, with automation, for example, offering efficiency gains. But the key is to keep moving forward, argues Govindarajan. “Critically evaluate all your projects and stop the ones that have little future,” he says. “Companies have a hard time stopping things, but tough economic conditions provide the justification to shut down less promising initiatives, which releases cash flows for the next strategies.”

Many leaders get it. ServiceNow’s research suggests 53 per cent of digital leaders think the current climate offers opportunities to advance their competitive position. Some 65 per cent of executives believe the current environment will have a positive effect on their organisation over the next two years.

However, it will be important to advance as a single organisation, says Ferrer. “Organisations are traditionally organised by function, with each one operating in a silo,” he warns. “Technology provides a means to connect those functions, enabling smoother workflows and increased collaboration; you only have to solve each problem once.”

Crucially, organisations set up this way are also in a stronger position to make good use of their employees. Freed from functional barriers, people are more engaged and empowered – and able to focus on challenges and opportunities that would otherwise have been beyond them.

Connected organisations also find it easier to work with external partners, spreading risk and sharing ideas as they innovate. “Don’t be afraid to allow your employees to work differently,” adds Hoque. “If you let them, they will bring a fresh approach to your problems and opportunities.”

The bottom line is that there is every reason to be positive. C-suite leaders, after all, have been through difficult periods before – and seen the rebound. The dot.com crisis, for example, lasted 18 months but the recovery endured for seven years. That took companies through to the global financial crisis of 2008-09, which was in turn followed by nine years of growth.

Opportunity abounds, argues Govindarajan. “Industry will be transformed by digital technologies, so this is the time to invest in data and AI in order to create new pockets of value,” he says.

Get it right and outperformance will follow. Analysis of 3,900 companies worldwide by Bain & Company found a massive divergence between the fortunes of those that reacted positively during the global financial crisis. The winners grew 17 per cent a year during the downturn, compared to the losers’ 0 per cent. And in the 10 years after the downturn, the winners averaged 13 per cent annual growth, against just 1 per cent for the losers.

In other words, those that just battened down the hatches suffered a lost decade. Their braver competitors, by contrast, stayed focused on innovation and technology, and reaped the rewards.