Digitally Preparing Your Company For A Recession

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My company, FROM: The Digital Transformation Agency, is getting ready to release a new report on Digitally Preparing your Company for a Recession. Here is a sneak peak for my newsletter subscribers. I welcome your comments!

Most economists have forecasted that the US economy has a likely chance of entering into recession territory sometime in 2023, although the timing and severity predictions continue to change. With the looming possibility of a downturn, it’s critical for companies to be ready for challenging times and well-equipped to take advantage of the growth opportunities they may also create.

If you’ve ever taken sailing lessons, your first question may well have been, ”If the wind is blowing north, how can the boat go south? In fact, how can the boat go in any direction other than the way the wind is blowing?” The truth is that if you know how to sail, you can navigate in any direction no matter where the wind is blowing, although some directions are more challenging than others.

Similarly, an effective?strategy for responding to a? negative economic environment can actually make the difference between a company being blown onto the rocks and sailing into the sunset. Many major businesses such as Disney and Apple were started during economic downturns.

At our company, FROM, The Digital Transformation Agency (which also started during the difficult economic times in 2008), we work with our clients on their portfolio of strategies to help them sail artfully through the possible coming recession. We are happy to collaborate with you as well!??

Click here to request a free meeting to discuss how we can help.

In the meantime, we’ll present the three key areas we focus on when developing a strategy for a company to thrive during a downturn and some clever ways digital can help you in each area: reducing costs, increasing revenue, and preparing for future recovery and growth.?

In each of these areas, we will share techniques that businesses can use to achieve impactful results. Most companies will want to use a combination of these tactics, although rarely all of them.?

HERE ARE THE 10 WAYS TO DIGITALLY PREPARE FOR A POTENTIAL RECESSION…

REDUCE COSTS

Lowering the costs of doing business is one of the most common ways to prepare for an economic downturn. It’s a strategic move to maintain profitability at a time when revenue forecasts are trending downward.?

However, one major problem with cost-cutting measures is they may end up hurting future revenue. When companies cut down their budgets in key areas like human resources or product development, it can impact their ability to grow the business and deliver a good customer experience.

This is why it’s important to be strategic and not just reactive when reducing business costs.

Digital solutions help companies optimize their spending while still delivering strong customer value and a memorable customer experience. For example, cloud computing tools allow businesses to use on-demand IT resources without needing to invest in additional hardware or equipment. Low-code platforms make it possible to develop applications much faster and at lower costs.?

While high-tech solutions may require substantial investment in order to achieve the cost savings, often the majority of the cost of implementation can be capitalized. This means that if a solution achieves a 20% return on investment in its first year, it has essentially paid for itself (assuming a typical five-year depreciation schedule), and as the ROI increases, the company’s net income also grows.?

1. Increase Use of Digital Self-Service

Live channels such as phone, email, and live chat cost an average of $8.01 per contact. In contrast, self-service channels such as AI chatbots, mobile apps, and company websites cost about $0.10 per customer contact. This amounts to nearly 99% in cost savings.

In addition to its remarkable cost-effectiveness, digital self-service also provides a much quicker and more convenient experience that customers often strongly prefer. In fact, according to a recent survey, 95% of companies reported growth in self-service requests in 2021 compared to 2020, and 81% of consumers wanted more self-service options.?

However, self-service platforms need to deliver a highly effective and elegant customer experience or they run the risk of driving the customer to jump to a more expensive live channel, which possibly results in higher rather than lower cost for the business, as well as a less satisfied customer.

As an example, a customer with an urgent concern may start with using a chatbot. However, if they don’t get a satisfactory response, they may call the company call center and also send an email for good measure. The use of two live channels in addition to the self-service platform would incur an average cost of $16.12 for the company, essentially wiping out the potential savings they may have had by employing a chatbot.

Overall, digital self-service can reduce customer service costs by up to 75%. Beachbody, a fitness and media company, was able to save $2.5 million in one year after increasing the number of customers using their self-service channels from 32% to 55%.

At FROM, we work with dozens of large organizations to help them create cost-effective digital solutions that deliver outstanding customer experiences. For example, if your vehicle has broken down recently, you may have experienced the result of our collaboration with the American Automotive Association (AAA).?

Working with them, we designed and built a new app that made it easier for AAA customers to receive roadside assistance. This resulted in a reduction of inbound calls to the company’s call center and a massive increase in digital requests, leading to greater customer satisfaction.

2. Streamline Work Processes Through Automation

About 50% of all work activities have the potential to be automated using available technologies. Many businesses took advantage of these automation capabilities to improve operational efficiency, particularly in the last economic downturn during the COVID-19.?

According to a McKinsey survey, 67% of companies have since accelerated their automation and AI capacity in response to the pandemic.

One particularly useful tool is robotic processing automation (RPA), a software technology that allows users to create bots, which can perform repetitive tasks much faster and with far better precision than their human counterparts. They can be employed in areas like data entry, data gathering, sales order processing, and inventory management.

RPA bots can also be used to streamline back-end processes triggered by digital self-service options such as processing insurance claims or product returns.

One example is Virgin Trains in the U.K. They deployed RPA technology to automatically refund commuters for late trains. Equipped with natural language processing capabilities, the bot “reads” customer emails, recognizes key information in the text, and issues refunds as needed. The entire process being fully automated has reduced processing time and manual labor by 85%, delivering significant cost savings for the company.

Workforce management applications are another key automation solution. They are extremely useful in automating routine HR processes and helping organizations optimize labor requirements, employee schedules, and workforce forecasting.

Starbucks has employed extensive AI and predictive analytics to optimize staffing allocation and scheduling. In 2019, they launched the Teamworks app, which allowed employees to manage their work schedule, request days off, and trade shifts. It also made schedule planning much easier for store managers and reduced their administrative tasks.?

With this tool, the company was able to shed about 12 hours of work at the store level and free up more time for training.

3. Digitize Manufacturing and Distribution

For companies that manufacture physical products, whether it’s processed food or industrial generators, using digital solutions like advanced analytics, AI, and machine learning can significantly increase their production capacity and reduce material losses.?

According to McKinsey, the use of innovative technologies in manufacturing can increase labor productivity by up to 30% while reducing machine downtime by 30-50%.

Nestlé, the world’s largest food company, is a prime example of employing digitalization to make operations more efficient and deliver better value for customers. The company currently has more than 100 connected factories that are equipped with AI and predictive analytics to maintain production quality and prevent breakdowns.?

Since Nestlé has gone paperless, tablets were placed in every line routine to give workers access to real-time, accurate information, letting them know exactly when to sample a product or perform an analysis. Completing documentation, releasing batches for shipping, and troubleshooting factory issues have also become digital.

Nestlé’s connected logistics hubs have real-time tracking capabilities which enable trucks to be rerouted quickly in case of problems, reducing waiting time and wasted truck miles.

Digital self-service, automation, and digitalization of manufacturing and distribution operations are just a few of the ways that digital transformation can help dramatically reduce an organization’s cost, enabling it to better withstand difficult times and drive higher profits during periods of growth.

INCREASE REVENUE

The danger of economic downturns is that many companies see a decline in sales and therefore revenue, which may lead to the desire to reduce costs to maintain profitability, as discussed in the previous section.??

It’s true that in an economic downturn, consumers and businesses alike tend to tighten their budgets. In a recent consumer survey about the potential coming recession, 30% of customers said they were making fewer purchases while 24% were more conscientious in their spending.

However, despite this broad trend, some companies are actually able to use difficult economic times to generate more revenue, or at least soften the revenue decline by adjusting their approach to the market.?

4. Focus on Necessities

One strategy to adapt to this more cautious spending behavior is for a company to focus on meeting what customers consider to be their most immediate and essential needs because these are the needs least likely to be reduced during an economic downturn.?

During the COVID-19 pandemic, organizations that delivered high-demand products and services were some of the most successful.?

Of course, some companies just got lucky during the pandemic. Those that were already manufacturing paper towels or surgical masks found themselves in the right place at the right time to fill a huge increase in demand.

But other companies made strategic shifts to gain these benefits…

An example of this shift in strategy is Bath & Body Works, one of the largest bath shop chains in the U.S. When sales of some luxury products declined as the economy soured, the company re-focused heavily on soaps and sanitizers to fill the gap.

While the next downturn may not be about germs, there’s always an opportunity to pivot to necessities.

Necessities can also be emotional. Bath and Body Works heavily promoted their candles, which turned into a quarantine essential as demand increased for products that made people feel more comfortable in their homes and offered a means for self-care.?

Because of these and other strategic measures, Bath & Body Works earned $3.7 billion in sales by October 2020, an increase of nearly 20% compared to their sales the previous year.?

Commercial suppliers of meat and poultry to fine dining establishments also made a similar shift during the pandemic. When lockdowns nearly eliminated the option of dining out, restaurant demand for their products was dramatically reduced.?

In response, they pivoted to serving home customers who were having difficulty getting these products from supermarkets. They went from supplying raw materials for a luxury experience (fine dining) to supplying essential protein directly to families.

5. Charge Customers Less

When customers have less money to spend, they will still want to meet their needs as well as they can but at a lower cost.? Businesses that help their customers do this effectively can increase their revenue.

Naturally, slashing prices can increase sales but usually at the painful expense of profits. Although depending on the nature of a business, this is not always the case. Continuing to fill seats in a movie theater or cruise ship even at lower prices is better than leaving them empty. SAAS platforms with very low incremental cost per user also have economics that allow flexibility in pricing models. Digital yield management tools can help with this type of pricing optimization, which FROM has helped many clients implement.

Businesses should consider downturns as a time to experiment with alternative business models that lower the cost to the customer.

Mailchimp, a leading marketing automation platform, did this when the company was founded in 2001. Back then, the owners were running a web design business when some of their clients asked for a way to send marketing emails without having to spend on expensive software.

During the Great Recession, Mailchimp survived by switching to a “freemium” business model, offering a “Forever Free” plan to clients with under 500 subscribers. This calculated move increased their user base fivefold within one year, from 85,000 to 2009 to 450,000 in 2010, and their profits grew by 650%.

Google and Facebook provide free services by making money off of the data generated by customer use. Could your business charge customers less if it was able to more effectively monetize the data their interactions produce?

At FROM, we have worked with many large brands, from AVIS Budget Group and Transamerica to major sports and telco companies, to consider how data can be used to generate revenue without compromising customer privacy.

6. Help Customers Save Money

There are often more clever ways to capitalize on a customer’s need to save money than by giving discounts. One approach is to provide cheaper alternatives to premium products and services that people often want but may need to cut back on.?

During the last big recession, many customers canceled vacations and replaced them with “staycations,” using time off from work to engage in leisure activities at home. Businesses that provided cost-effective ways to help make the home a better leisure experience—from lawn furniture to home beer taps—benefited.?

Gym memberships are perceived as luxury and can get canceled as a belt-tightening measure, but this can benefit the sale of lower end home exercise equipment.?

Another example of ways businesses can help customers save money is by providing innovative ways to reduce recurring expenses and gain discounts.?

One example is Rocket Money (formerly Truebill), an app that monitors users’ transactions to identify recurring charges and cancel unwanted subscriptions. It can also help customers negotiate lower rates on their bills and request refunds for bank fees such as overdraft or late fees. Rocket Money charges a fixed monthly fee and a percentage of the savings from bill negotiations.

Other apps make it more convenient for customers to get discounts and cash-back on their purchases. One of the more popular ones is Paypal Honey, a browser extension that scours the web to find promo codes that customers can use at checkout. Rakuten is another browser extension that lets shoppers earn cash back for online and in-store purchases at partner retailers. These platforms earn commissions for the customers they refer to their merchant partners.?

7. Consider Distribution Or Market Shifts

Economic downturns change customer behavior, and businesses need to adapt quickly so they can better meet consumers’ evolving needs and preferences. This can mean shifting to a new and more economical way of getting their products to users.

Netflix is one example of a successful shift in product distribution. During the Great Recession, DVD sales and demand for video rentals sharply declined as consumers cut their spending on discretionary items like entertainment.

It was the perfect opportunity for Netflix, which started as a DVD mail-order business, to provide a cheaper way to watch movies and shows. The subscription-based platform gave viewers access to a massive library of video content at a much lower cost because Netflix did not have to create the type of retail infrastructure that rival Blockbuster had invested in.

With this innovative change, the company’s subscriber count grew from 7.5 million in 2007 to 23.5 million in 2011. They were also able to increase their revenue from just $270 million in 2003 to nearly $3.12 billion in 2011.?

Another strategy is to utilize digital platforms to broaden the geographic reach of a business. When economic hard times hit Europe over the last few years, many businesses offering luxury goods focused on the Middle East where the downturn was less severe.

And even when a recession is global, simply expanding the potential customer base of a business can increase sales even if the percentage of buyers and their average purchase size decline. ?

To Increase Revenue, Customer Research is Critical

For these revenue generation strategies to work, companies need to have deep knowledge of their customers’ changing needs, preferences, and pain points.?

Businesses with robust customer research capabilities are better able to provide products and services that best meet customer demand. They can also design a superior customer experience that delivers maximum convenience, personalization, and better value, which can boost customer retention and loyalty.

At FROM, we prioritize customer research as an essential component in developing digital solutions for our clients. For instance, in our work with ADP, a leading provider of HR management tools, we conducted interviews, surveys, and other customer research methods to better understand the needs and concerns of their users. From there, we were able to create a more streamlined payroll platform that allowed for greater customization. Users with simpler payroll needs can customize the tool to only show the features they need, while customers with more complex requirements can just as easily access advanced functions.?

PREPARE FOR THE FUTURE

While recessions can bring difficult times, they are temporary and a natural part of the economic cycle of expansion and contraction. Since World War II, a recession has occurred every five years on average. It usually lasts about 11 months; the longest one post-WWII was the 2007 financial crisis, which spanned 18 months.

Perhaps the most important response for businesses is to use the time of economic downturn to strengthen their capabilities so they can better capitalize on the inevitable period of growth that follows any slump.

8. Avoid the Layoff Trap

Companies often resort to layoffs during recessions in order to cut costs. While this can sometimes be a necessary move, and is certainly a quick way to reduce expenses, laying off employees often results in diminished innovation, higher voluntary turnover, weakened morale, loss of knowledge, and other negative impacts that reduce profits in the long run.

Furthermore, the cost to staff back up when the economy rebounds can be significantly higher than the savings during the downturn, after factoring in recruiting, onboarding, and training.

Organizations may also end up needing to hire more people after a layoff due to higher employee resignation. A layoff affecting just 1% of the workforce can lead to a 31% increase in voluntary turnover.?

The average cost of hiring is about $4,000 per employee, and finding a new worker takes about 24 days on average.?

For these reasons and more, businesses that conduct layoffs tend to underperform. In a 2012 review of companies that had gone through layoffs, it was found that most of them suffered from lower profitability, which persisted for three years following the layoffs.?

In another study, researchers found that companies that conducted layoffs were twice as likely to file for bankruptcy compared to those that did not lay off employees.

There are times, of course, when the pressure to reduce cost is too great and reducing payroll costs seem inevitable, but even then there are alternatives to large-scale layoffs that should be considered.

Honeywell was able to address this pressure creatively during the Great Recession by employing furloughs rather than layoffs. The average furlough was three to five weeks, taken in one-week blocks. ?

While the move to make people take unpaid leaves became a point of pain for employees, the company still saw a significant decrease in their voluntary turnover. Workers saw furloughs as a way to save jobs, and the company assured them that the tough times were not going to last forever.

Despite lower sales in 2008-2009, Honeywell remained profitable. By 2010, revenue was on an upward trend and the company was on a solid path to recovery.

By keeping their workforce intact, Honeywell was able to continue with product development and was well prepared once customer demand picked up. Their inventory and delivery times were better compared to their competitors, and they found it easier to garner new business.

9. Take Advantage of the Buyer’s Market for Talent

In a recessionary environment, companies can hire talent from a much larger pool since, as discussed previously, many organizations still lay off employees to reduce costs.?

Such a talent purge has been happening in the tech industry, with giant companies like Amazon, Microsoft, and Meta shedding thousands of employees. More than 150,000 tech workers were laid off in 2022, the biggest round of tech layoffs since the dot-com crash of the 1990s.

One sector that benefited from these layoffs is the agriculture and construction equipment industry. For example, Deere & Co., the world’s biggest tractor producer, has been luring Silicon Valley talents into their payroll to help strengthen their expansion into autonomous tractors and other smart farming technology.

Deere’s main competitor, Caterpillar, is also on a tech hiring spree, recruiting workers skilled in computer science, machine learning, and software engineering. The company opened about 500 tech roles in December 2022.

Meanwhile, CNH Industrial, an Italian-American machinery maker, hired more than 350 engineers as part of its plan to invest more than $1.4 billion in research and development for cutting-edge agriculture machinery.?

It has long been very challenging for heavy machinery manufacturers to compete with the sky-high compensation packages offered by major tech brands. The recent Silicon Valley layoffs gave them a rare opportunity to build their technology teams and boost their digital strategies.

Office supplies retailer Staples was also able to grow their business by employing a similar strategy. During the 2000 recession, the company increased their workforce by 10% to support their new product categories and services while shutting down underperforming facilities to contain operational costs.

Staples emerged stronger and bigger after the downturn, doubling their sales from $7.1 billion in 1997 to $14.6 billion in 2003. They were also 30% more profitable than their rival Office Depot in the three years following the recession.

10. Invest in Digital Transformation

According to a Bain study on the 2007 recession, organizations that boosted their digital capacity and prioritized improvements in the customer experience became far more profitable during and after the downturn. In contrast, companies that resorted to extreme cost-cutting, scaled back on R&D and marketing, and laid off valuable talent ended up on the losing end. ?

An Accenture study on business performance during the COVID-19 pandemic showed similar results: companies that invested heavily in cloud computing, AI, and other advanced technologies increased their revenue five times faster than the digital laggards.

The study also identified a new group of companies called the leapfroggers. These were organizations that were able to accelerate their digital transformation through an aggressive strategy that involved allocating up to 70% of their IT budget to innovation. This bold approach paid off as leapfroggers grew four times faster than laggards and narrowed the gap with the digital leaders.

Amazon became the tech giant it is today by continuously pursuing digital advancements even during economic slumps. Throughout the Great Recession, the company invested heavily in technology that made fast shipping possible, building a highly efficient data model that enabled them to make smarter logistics and supply chain decisions.

Amazon also doubled down on product development, enabling them to launch some of their most successful digital products such as the Kindle, Amazon Echo, and Prime Video following the crisis.?

At FROM, some of our key collaborations involve speeding up digital innovation even for pre-digital companies like Clear Channel Outdoor (CCO), one of the world’s largest outdoor advertising companies.?

CCO needed support in mitigating the massive disruption from digital technologies. After just two days of working with their leadership team, we were able to map out a strategy that would help the company reach $50 million in new digital revenue.

IN SUMMARY

Whether a recession is imminent or avoidable is not within your control, but your readiness to respond most certainly is. Digital remains a powerful force that can enable companies to survive financial difficulties and thrive in an intensely competitive environment. When economic recovery ultimately comes, organizations with a strong workforce, robust digital capabilities, and single-minded focus on the customer experience will emerge as the biggest winners.

These strategies are part of our methodology at FROM that we used for some of the large enterprises that we’ve worked with. Talk to us today to learn the successful solutions we deliver.

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YOUR TURN

Which of these strategies are you most likely to use? Let us know in the comments below.

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Howard Tiersky is the founder of FROM, The Digital Transformation Agency where he works with leading brands on digital transformation.

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