Have private firms cracked the code for success in this puzzling business environment?

As we continue further into the new calendar year, some European economies are showing signs of potential resilience against the many headwinds. This is driving an important question: How are firms and industries finding ways to mitigate recessionary macroeconomic pressures? Comparing public-listed and private firms, the EY European CEO Pulse Survey reveals differences in how they are managing economic uncertainty and challenges in terms of strategies and priorities. I sat down with friend and colleague Suwin Lee, EY EMEIA Private Leader , to discuss this topic in the next article of my series exploring themes from the survey.

In her role, Suwin advises ambitious CEOs, owners and entrepreneurs of leading private, fast-growth and family enterprises. She also leads the EY UK & Ireland Restructuring Tax practice and the Global Restructuring Tax network, specializing in global and pan-European restructurings, insolvencies and entity rationalization projects.

Hi, Suwin, let’s jump into it. According to the EY European CEO Pulse survey, geopolitical tension and inflation were identified as bigger risks to private companies’ growth than for public companies. Why do you think these challenges have been more difficult for private firms?

For private businesses the key to success in the future is transforming at speed, to build value that lasts. The current economic and political situation in many markets around the world, rising inflation rates, supply chain disruptions and rising energy costs are all having an impact on private businesses, their risk landscape, their overheads and their ability to grow and transform in the way they would like to.

Private company CEOs and boards should continue to monitor political risks and other megatrends for opportunities and challenges. They also need to watch geopolitics for signs of what the future of globalization will be. Private CEOs should proactively scan for these early warning indicators — and quickly shift their strategies accordingly.

How have private firms transformed their strategies in the face of these challenges?

Over the past year, private firms have increased their use of technology to build resiliency, reach higher efficiency and productivity levels, and lower cost levels. Over the next few months, we will likely see more private companies significantly increase capital investment in digital, technology, talent and innovation, especially compared with public companies, in order to shore up some resilience for the future.

In some cases, private companies may need to continue to transform supply chains to match evolving geopolitical realities. Other larger private companies may need to better incorporate political risk into their acquisition and divestment strategies. And some may need to change their entire business model to position themselves for growth in an uncertain geopolitical environment.

On that point, supply chain pressures have eased to some extent, with less European CEOs in January 2023 citing supply chains as a key issue compared with three months ago. Were private firms more agile in reconfiguring their supply chains?

Agility is in the DNA of private businesses. Nimbler than most large public companies, private businesses around the world were able to pivot at speed to address challenges such as supply chain disruptions raised by the global pandemic and geopolitical tensions, which have fundamentally changed the business landscape.

Many private business CEOs have already responded to this challenge and reconfigured their supply chains to reduce costs, minimize uncertainty and build resilience. Often, we see that private companies are still producing the same products and services, but the ways in which they are being manufactured and delivered have shifted. It will be important to continue to re-evaluate supply chain efficiency and transform on an ongoing basis.

You mentioned earlier how private firms are likely to invest in digital in the short term — and the CEO survey respondents agree with that sentiment. Can you dive further into why you think it’s more of a business imperative for private firms to invest in these capabilities?

When it comes to building value that lasts, private businesses are always aiming to build resilient enterprises that can adapt and thrive over the long term. An increased investment in technology is welcome news, as previous research conducted by EY showed private companies lagging behind their public counterparts across a range of risk factors, with significant investment in data and technology needed to narrow that gap.

Adopting new technologies can enable private companies to become more efficient, productive, and profitable. Currently, there is a dramatic rise in the importance of data and digital asset security — in terms of both impact and urgency. Cyber threats continue to rise, and remote work has created another opening for cyber attacks. Private companies are identifying their most critical digital assets and business growth drivers for protection. In turn, risk management is refocusing on how data is accessed and shared within and outside the organization to meet data privacy and security regulations and requirements.

What are the investment drivers for private firms that make it seemingly more compelling than for public firms?

Private businesses have made huge investments in technology since the onset of the pandemic to facilitate remote working, automatization and e-commerce. Technology adoption by consumers, citizens and administrations is the most critical factor that determines where businesses invest. It is likely that businesses view skills and IP protection as critical factors to maintain and accelerate their investments in innovation.

As more and more information is exchanged and stored online, private businesses are paying greater attention to cybersecurity. They are doing health checks of their systems to identify possible weaknesses and they are investing in technological tools to strengthen the security around the information they hold. As they grow, reputation is a huge concern for all private businesses – their customers need to trust that their investment in cybersecurity is adequate. Increased technology and ecosystem investments are likely to contribute to any future economic recovery, so it’s encouraging to see a majority of private businesses looking ahead instead of retrenching in these volatile times.?

As ESG becomes a growing priority for businesses more broadly, are private firms doing enough on ESG when pursuing M&A? What steps should they be taking now and what is the risk they face if they fail to act?

Implementing a strong ESG strategy is a very important value driver for private companies. Overall, private businesses are finding that more of their investors are fully supportive of their sustainability strategies and they are less likely to be accused of “green washing” than their public counterparts. Due to size and agility, private companies are also more likely to commit to, and succeed in, reducing their carbon footprint sooner.

Depending on where they are on their ESG journey, private businesses can still take this further and have an opportunity to learn from one another to activate and accelerate their ESG strategy. They need to understand the key players in their ecosystem, where the ESG leaders are and what they’re doing differently, and then think about how they might work together to jointly achieve their ESG goals.

Thank you, Suwin. That was a fascinating discussion and there were some tremendous insights for private firms. Certainly, it is clear that private businesses leaders need to take strategic action today, so they can seize growth opportunities when the broader economy inevitably begins to pick back up.

This was the second in my series of articles discussing themes from the European edition of the CEO Outlook Pulse Survey. If you missed it, please check out my first article on how businesses are using M&A as a key pillar in their growth strategies. And stay tuned for my next article with Laura Higgins, EY EMEIA Customer and Growth Strategy Leader and Karen Crum EY UK&I Customer and Growth Strategy Leader . We will discuss how business should react to rising costs, while managing customer expectations.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.