Recently, Maya MacGuineas (President of the bipartisan Committee for a Responsible Federal Budget) said of the US economy, “…when you’re structurally weak, which our economy is now because of the fiscal irresponsibility that we’ve been practicing for so long, anything can set off a problem… we are already stuck in a very difficult situation between fighting inflation and avoiding recession. That tricky balancing act just became so much more difficult.” She was referring to the collapse of Silicon Valley Bank and the ripple effects, which have only just begun. The Federal Reserve appears likely to raise interest rates further but by a much smaller percentage than originally expected. Many believed we were likely to avoid a recession in 2023 but the risk has now returned.

C-suite executives often lament a business downturn as they reactively scramble to protect the top and bottom lines. They end up feeling that they did too little too late, that they should have been better prepared for unfavorable conditions, perhaps even been able to turn crisis into opportunity. Irrespective of whether the US actually experiences a recession this year, one thing is certain: there is no better time to shockproof your business.

Following the 2008 global economic collapse, Garrett co-authored Shockproof: How to Hardwire Your Business for Lasting Success where he reinforced the importance of:

• Creating an agile business that can adapt quickly as conditions change
• Fostering leaders who can mobilize people to execute and deliver results
• Building a workforce that is adaptive, innovative, and energized by the rewards of success

Those areas remain critical in today’s economic environment, requiring an especially tight focus in four key areas on which you can move with more speed:

1. Driving competitive advantage through your operating model
2. Leveraging the sweet spot between your business model and the customer’s business model
3. Increasing revenue without increasing your price (or cutting cost)
4. Getting the right talent in the right roles

Underpinning each of these strategic areas is the need to use a combination of data science and analytics as well as behavioral science to maximize results. We explore these strategies below.

 

Strategy One: Driving Competitive Advantage Through the Operating Model

Every company should strive to be lean and agile. But too often, there is a sizable gap between intent and reality. Over time, businesses have a tendency to become bloated with duplicative or non-value-adding resources, with layers upon layers of management slowing decision-making as well as execution and creating a drag on efficiency and growth.

Assessing the fitness level of your organization means answering questions like these:

• Do we know which capabilities create competitive advantage for our business? If so, are we investing appropriately to build and sustain those capabilities?
• Are roles and responsibilities clearly defined to drive accountability for results?
• Do we have a lean organization with appropriate spans and layers?
• Are we clear about how decisions get made – and by whom?
• Is our organizational structure appropriate to ensure focus, serve customers, and foster collaboration across functions to deliver results?

Transforming your operating model can take out cost, improve execution speed, and create a more agile and resilient business that can take advantage of growth opportunities when a rebound occurs.

Lotis Blue worked with the market leader in a technology-focused business to identify $100 million in potential savings through an operating model transformation and exceeded that goal. We first prioritized the strategic capabilities that matter most and analyzed investment levels in those capabilities versus supporting capabilities that were needed but deliver less impact. Leveraging data science and analytical techniques, we reduced spans and layers and increased the speed of decision making by clarifying the few people who really need to be involved in key decisions. We also grouped similar products under new leaders and consolidated support functions to reduce the number of P&Ls and to improve efficiency in solution delivery for their customers. The move not only improved cost but increased the quality of the customer experience.

We established a transformation office to drive the needed changes and make it stick. We used behavioral science capabilities to assess and monitor change readiness and engagement across leadership and employees. This allowed us to identify and address where commitment was strong or waning.

 

Strategy Two: Leverage Your Sweet Spot

Every business leader knows that it’s (almost) always easier to maintain an existing customer than to find a new customer— and that’s without factoring in the cost to acquire a new customer. When growth stalls due to market competition from new entrants or an economic downturn, leaders often become hyper-focused on adding new customers to drive growth. But too often, not enough attention is paid to managing existing customers effectively and seeking to understand their evolving needs.

Questions like these can help determine whether you can extract more value from your current customer base:

• Which customers are our most valuable based on their current and likely lifetime value?
• How well do we understand the needs of our customers in each segment?
• How effectively have we segmented our customers into actionable groupings with different strategies and tactics to drive profitable growth?
• How can we add value beyond what customers are currently paying for to bolster their loyalty?
• Which customers should we target with our newer solutions or offerings based on their profile?

 

Strategy Three: Increase Revenue Without Increasing Your Price

In times of inflation, raising prices to cover rising input costs feels like a no-brainer. However, many companies have executed poorly and moved too slowly during the past several months of inflation; far too many chose to absorb the costs of inflation rather than pass them along to their customers. With many commodity prices falling, it’s likely too late to raise prices unless you have a true competitive advantage or unique offering that will truly justify an increase in your customers’ eyes.

A smarter approach to pricing considers questions like:

• If we raise prices when input costs increase, how will we avoid dropping them too far or too fast when those same costs decrease?
• Have we considered customer value, our competitive advantages and disadvantages, and costs to serve when thinking about price ranges?
• How price-sensitive are each of our customers? What drives their price sensitivity? Can we address the sensitivity by some way other than lowering price?
• What economic value do we provide beyond the next best alternative? How much of it is truly capturable given customer price sensitivity and the current economic environment?
• What kind of switching costs will our customers incur if they opt for another supplier? How can we communicate that without making them feel ‘held hostage’?

When thinking about ‘price’, it is important not to focus exclusively on the price level; instead, think about the price metric (a.k.a. the mechanism by which you get paid) as a means of increasing contribution margin dollars. We worked with a global SaaS company that offered monitoring services for critical infrastructure which was pricing on an annual subscription basis plus upcharges for type and volume of reports generated. After careful analysis, we realized that customer value did not track with the type and number of reports generated – nor did it impact our client’s costs. Rather, value to the customer tracked with the square footage of their buildings being monitored – meaning, customers with less square footage received much less value from the client’s solution than its customers with large and multiple buildings. Changing the price metric enabled smaller customers to pay less (which enabled them to purchase our client’s services that they otherwise would not have been able to afford) and it justified a higher price for larger customers. This is a much better approach to pricing compared to the company’s traditional practice of setting a price in the middle that would have been too high for the small customers and left money on the table for the large ones.

The goal is not to maximize prices; the goal for the business should be to maintain or increase margin dollars. Raising prices and cutting costs aren’t the only ways to do that.

 

Strategy Four: Get the Right Talent in the Right Roles

Wealth advisors typically suggest holding a variety of stocks in a portfolio. Similarly, we recommend a portfolio approach to managing talent in which each organizational role is placed into one of three categories. Strategic roles are those that have a disproportionate influence on the capabilities that create competitive advantage. Core roles are ones that serve as “the engine” of the enterprise and are critical to serving customers and delivering value. Requisite roles are those that, while needed, don’t add significant value and could thus be outsourced or resourced differently.

Questions to consider when managing the talent portfolio include:

• Are our strategic roles occupied by high-performing/A-level players?
• Are we prioritizing strategic roles in our recruiting and succession planning efforts?
• Are we investing enough in our core positions to ensure that the business runs well?
• Do we have any top talent in core or requisite roles? If so, can we shift those resources into more strategic roles?
• Do we have any vacant requisite roles? If so, can we consolidate, outsource, or eliminate that role?

A data driven company that serves the health care space was consolidating solutions as part of a significant reorganization of segmented roles. Leaders wanted to understand which employees were the “key influencers” across functions and were also most engaged to help with the changes ahead. We employed data science using passive data accessed through the Microsoft Graph to understand meeting and collaboration patterns across the business. Doing so helped find those “influencers” that were then tapped to be change agents. Interestingly, they were not functional leaders and were typically two to three levels from the top. These team members were added to the transformation office and helped reduce the implementation speed of the reorganization from a planned six months to four.

 

Stay Poised to Perform

Few industries are recession-proof – most experience reduced revenues as people reduce consumption, postpone purchases, and otherwise find ways to spend less when consumer confidence is down. Whether the next downturn is a quarter or a decade away, optimizing the operating model, keeping close to customers, pricing smarter, and keeping employees engaged will not only shockproof your business, but also ensure it excels under all conditions.

 

By Garrett Sheridan, March 16, 2023