During the last weeks, I have gotten quite a few indications that companies are preparing for worse economic times. The combination of rising inflation due to, among others, logistics challenges, the war in Ukraine as well as the central banks finally deciding to increase interest rates seems to be the trigger the world economy needed to change from “risk on” to “risk off”.
To me, it seems that there is at least an element of self-fulfilling prophecy in this in that the likelihood of an economic downturn increases with the number of people that believe that there will be one. Human behavior being what it is, downturns are a normal part of the economic system and for all the panic the media tends to create, the fact is that we go through these once every five to ten years. Nobody gets upset when summer turns into winter as we all know that summer will be back. We should treat these economic downturns in the same way: predictable events that require us to adjust ourselves to a new reality, but that eventually will give way to growth and new opportunities.
The challenge that I see, however, is that companies have a tendency to fall back on their legacy. Whether it is products, ways of working, business models, architectures or relations in the ecosystem, an economic downturn makes everyone feel vulnerable and exposed and the default reaction is to return to the things that worked in the past. This notion of “returning to the core” often has a feel of longing for the “good old days” that, in reality, really weren’t that great. It’s mostly that our memory is selective and we forget bad memories faster than good ones.
In my view, returning to our legacy and aiming to do things the way we have done them in the past is wasting a perfectly good crisis that we could have used in much more positive ways. As this post is interrupting my “boost your digitalization” series, nobody will be surprised by my focus on the digital transformation that virtually all companies that I work with are going through.
An economic downturn is a great opportunity to accelerate the changes that need to take place anyway. One can at least identify three main areas where companies can accelerate, i.e. changing the competence profile in the company, using digitization and digitalization to reduce cost and to shift the business model for customers from transactional to continuous. We’ll discuss each in more detail.
First, most embedded systems companies have a workforce that consists of quite a few mechanical engineers, a decent number of electronics engineers and a small number of software and AI engineers. In a digitalizing world, differentiation is increasingly driven by bits and less by atoms. An economic downturn provides a great opportunity to shift the competence profile in the company by releasing or retraining mechanical and electronics engineers and to increase the relative percentage of software and AI engineers. In addition, as many less enlightened companies tend to get rid of these engineers instead of the mechanical and electronics engineers, you can even strengthen your cadre of software folks by hiring the cream of the crop released by other companies!
Second, digitization (converting existing processes from paper to digital) and digitalization are not just concerned with building new revenue opportunities. These also drive down cost as paper is managed by humans and digitization of information allows for automation to a much greater extent. So, we can accelerate digitalization by focusing on the cost benefits instead of the revenue opportunities. As we’ll discuss in an upcoming post, technologies such as robotic process automation (RPA) and advances in natural language processing and image recognition allow for automation of processes that we were not able to digitize earlier.
Third, during times of economic turmoil, customers are often less interested in paying large sums of money to buy our products or offerings. So, if we were using a transactional business model where the customer would have to pay upfront, this can be a great opportunity to change to a continuous revenue model such as subscription, usage or performance based pricing. That reduces the upfront revenue, but it allows us to close deals we otherwise would not have closed anyway. Also, brings in more revenue in the long run and as such positions us well for the future. And, of course, it accelerates the change of the business model in the direction we want anyway.
The above three areas are some of the ones that I reflected on. What areas do you think are the most important and I should have discussed? And how you and your company preparing for a potential economic downturn? Please leave a comment below or contact me directly.
Concluding, economic downturns have an element of self-fulfilling prophecy in them in that the expectations of everyone in industry causes a potential downturn to increase in likelihood. However, no matter if this is going to happen in the short term or not, we should simply expect these to happen every 5 to 10 years. Rather than panicking, we should take the opportunity to use the “crisis” as an opportunity to accelerate the changes required for our digital transformation. This may include changing the competence profile of our staff, reducing cost by digitizing and digitalizing and changing our business model, among others. Remember, never waste a good crisis!