Leading in the NEXT normal
By Tim O’Sullivan, Director of Global Accounts, IDS
It is natural for those who have been in the business world since 2008 to compare the current coronavirus-driven economic struggles with those of the last financial crisis and subsequent recession.
There are many similarities. The cumulative GDP of major global economies fell about 4% as the housing collapse and the associated market funds decline rippled through financial markets. Global stocks endured a 17-month bear market; including a one-day record drop in the Dow Jones industrial average of nearly 778 points.
As Covid-19 spreads around the world, we have experienced similar impacts. Economic forecasts call for major global economies to experience GDP loses of 2.4%–3.0% in 2020 and early 2021 as the coronavirus pandemic continues its spread. Global GDP reached US$86T in 2019, so even a 2.5% loss over 12-18 months would result in nearly a US$2.2T drop. Earlier in 2020, the Dow Jones industrial average index suffered a one-day drop of nearly 3,000 points, making the one-day record drop from the 2008 crisis seem like a small dip.
While many of the headlines and economic impacts feel the same, this pandemic-induced crisis is different in some important ways. One key difference is government response. During the 2008–09 crisis, governments, for the most part, waited to provide stimulus packages and, even then, were a bit reserved in their actions.
For example, for the 2008-09 crisis the German government’s stimulus package equalled 3.5% of the country’s annual GDP; for the 2019-20 pandemic, that number has reached 33% of GDP. In the US, stimulus packages totalled 4.9% of GDP in 2008–09 compared to 12.1% in 2020. The UK delivered stimulus in 2008–09 that equalled 1.5% of GDP, versus 14.5% for the recent pandemic.
Regardless of where you live, the impact is real and has forced us all to revisit strategies that will drive growth in the future.
Asset finance firms NEXT focus. One way to think of the impact of Covid-19 on the asset finance business is to view it as an earthquake in a mining town. Your team was busy extracting gold from productive veins deep in the hillside when the pandemic hit. For a short time, work stopped while companies found their footing. The quake left some veins open, some partially covered, and others completely shut off. At first, the focus was on ensuring all the workers were safe. Then, attention shifted to restarting work and recovering as much gold as possible.
Many businesses will stop there: making sure workers are safe, restarting work, recovering revenue that was in play and then – waiting. While some take that protective approach, others will recognise the earthquake has shifted the landscape and uncovered rich, new opportunities to explore and strike gold.
A majority of businesses will take the recover-and-wait approach. This is interesting because, in a number of surveys (including one conducted by McKinsey in the late spring of 2020), about 90% of senior leaders acknowledge that the onset and eventual dissipation of the pandemic will create new opportunities for growth.
The reasons for pulling back and waiting are many: but the big three are talent gaps, technology gaps and the decision to spend available budget on more conservative measures. Even companies that had dedicated budget to technology investments and net-new growth strategies often shift their priorities and redirect those funds to maintenance-oriented activities.
A look at history, though, shows a trend you might expect: the organisations that invest in innovation during a financial downturn or crisis, tend to outperform those that limit or shut down their innovation efforts.
McKinsey also conducted a study on this topic in its pandemic coverage. Table 1 shows how companies that continued to invest in innovation outperformed others during and after the 2008 financial crisis.
Investing in innovation. What does “investing in innovation” look like in this most recent global crisis? In banking, it is the proliferation of mobile apps and other digital channels that helped to improve or enhance the customer experience.
During the pandemic, consumers who wanted nothing to do with digital banking were nearly forced to use apps and online channels as banks closed or offered limited access to branches. Aggressive banks are using the move to digital to expand offerings and move into new geographic markets – after all, if you’re using an app or online banking, location matters little.
Forward-thinking health systems, hospitals and clinics are building up their telehealth capabilities right now. Patients who would resist online consultations with clinicians had little choice during the pandemic, as hospitals closed their doors to nearly everyone except Covid-19 patients, women in labour and emergency room cases.
Providers expanding their telehealth offerings are winning the battle for patient loyalty and healthcare dollars. They are reaching new patients, making their clinicians far more productive and expanding their partnerships in ways that increase their areas of expertise.
What about asset finance companies? What does it mean to invest in innovation? And how does this investment translate into new clients, new revenue and market leadership as the world emerges from the depths of the pandemic?
Like banks and hospital, the path to innovation is largely digital. Investing in technologies that connect you with key business partners and differentiate your company from the competition.
Move beyond remote work: Your workforce has shifted to remote work. Now it is time to start investigating technologies that do more. An easy one is transitioning to a cloud-based platform that frees your team to spend more time developing new business opportunities. You can also leverage digital platforms to rethink your workforce. For example, you could consider hiring people who bring value to the company but live far from your central offices.
Connect with ecosystem partners: The right cloud-based origination and portfolio management platform will also provide connectivity with ecosystem partners who provide services related to digital signing, tax rates, insurance and payment automation. This connectivity not only offers operational savings but provides the foundation for expansion into adjacent markets.
Explore new asset classes: Cloud-based origination and portfolio management tools also provide you with a simplified path for moving into new asset classes. Prebuilt workflows that are unique to specific vertical markets can be quickly configured to align with your own internal processes. This makes it easier to create offerings and onboard new clients.
Expand geographic reach: Like banks and hospitals learned, more and more of the world is willing to do business through digital channels – and they are willing to work with companies that offer the best solution, rather than the closest proximity. Cloud-based platforms allow you to conduct business with clients anywhere.
Integrate with customer initiatives: The pandemic also prompted your customers and prospective customers to accelerate their digital transformations. They’re building their own digital platforms – and increasingly looking for partners who can connect seamlessly with them. Cloud-based technologies give them visibility over their contracts, powerful financial and operational analytics and the ability to collect data for a variety of applications, including new lease accounting practices.
Obstacle or opportunity? Make no mistake, the pandemic has caused massive changes to our industry. But where some see obstacles, successful firms will identify opportunities – especially those able deliver business continuity and innovate in ways that align with changing buyer beliefs and behaviours. One view of this path to recovery is a phased approach.
- Phase I (which many businesses have already found their way through) centres on business continuity, employee enablement and a strategic focus on ROI.
- Phase II targets operational resilience, strategic investment and a focus on innovation to drive growth in the last phase.
- Phase III is all about leveraging the infrastructure and resilience that was put in place to bring innovative new ideas to the market and grow. Think of this last phase as becoming a growth leader in what’s being called the NEXT Normal.
Business design for the NEXT normal. If your business is like most, your revenues, profits and other financial metrics are not back to your pre-pandemic plan… but it has not been as bad as first predicted. After the initial period of digital improvisation and experimentation, you have been in a constant state of change as the world and business continue to adapt to the new socially distanced model. But now, the focus needs to shift from simply adapting to change to thoughtful design.
The first question that needs to be addressed is “What are we designing?” As many have commented and research confirms that life as we know it will not be “going back to where we were.” People have changed. Companies have changed. Industries have changed – and there is no going back.
As employees, we think of work as less of a place than we did eight months ago. We have greatly increased our use of banking apps, online shopping and delivery services. And, as professionals, we have new expectations and have changed how we evaluate brands and choose partners, providers or suppliers.
The pandemic elevated the importance of digital ecosystems and resilient supply chains. It also made us put a high value on smart businesses – those that found ways to deliver in the face of a crisis without interrupting service, drastically increasing prices or letting quality slip.
At a minimum, as we emerge from the pandemic, the markets you serve will be populated by people and businesses that have packed years of change and evolution into several challenging months. Some previous sources of revenue that felt permanent at the end of 2019 will be gone. But other entirely new opportunities will emerge as corporations, hospitals, governments and schools change everything from their mission statements to how they interact within their work environment.
Thoughtful designs capitalise on these changes. While there is no one way or right way to drive this strategic process, there are three core steps to consider and use as foundation for your work: (1) Identify core changes in your markets (and adjacent markets); (2) Determine the depth and longevity of the change; and (3) Align new opportunities with your current/emerging offerings.
(1) Identify core changes in your markets (and adjacent markets). A good first step in the design process is to identify changes that were either caused by the pandemic or coincidental to it. Then, identify the behavioral changes that have already resulted – or will likely result – from that change. For example, if we look at the opportunity created by remote work:
Remote work and hybrid work environments have led to refurbished or expanded home offices and distance meetings. NEXT normal opportunity… dramatic increase in the demand for construction equipment; home office printers, scanners and collaboration software; networking and telecom solutions.
(2) Determine the depth and longevity of the change. Most of us can remember what it was like to travel before and after the events of September 11, 2001. Massive changes followed that date. Some were permanent, others dissipated over time. For example, the requirement to show your government issued ID at both the security gate and the boarding gate eventually dissipated. But changes like the US TSA pre-check programme and the UK registered traveller not only remained, they progressed.
When evaluating foundational changes in the markets you serve, it is important to determine how lasting and how impactful they will be. One way to classify them would be to place them in one of four categories and determining if they should be a foundational part of your long-term plans (see Table 3).
(3) Align new opportunities with your current/emerging offerings. The reality for most asset finance organisations is that some customers will grow financially stronger in the NEXT normal and some will weaken or even disappear.
The same is true for asset classes. Some will surge because of increased demand and floods of innovation, while others will stagnate because the world either needs less of them or abandons them altogether.
While there is no magic formula, applying the practices noted above will help determine where your current customers and current asset classes fall. Chances are, you will continue to drive revenue and profit from most of your traditional lines of business. But even more important than reshaping your existing offerings, the process described above can help identify entirely new areas of growth.
In most cases, growth will be centred on technological advancements. Most organisations — from banks to factories to schools had been slowly moving down the path of digital transformation. The pandemic accelerated those journeys, resulting in high demand for robots, SaaS platforms, security technologies and modern payment systems.
Understanding the trajectory of this change will be key to growth and success in the NEXT normal. Are you ready to take the next step?
Tim O’ Sullivan
Director of Global Accounts
8–10 Hill Street
London W1J 5NQ
Tel: +44 20 3705 611