Published Editorial

Battling the certainty of uncertainty

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The Hindu Business Line

by

Nitin Bhatt
Partner - Advisory services, EY

In Greek mythology, the two-headed God Janus was famous for a quirky contradiction — one of his faces was smiling, the other frowning. Expert views and analyst reports on the global economic outlook are somewhat in this vein. While some are upbeat and uplifting, others predict doom and gloom.

For instance, a recent report by the Conference Board suggests that the global economy is on an upswing: the world’s GDP is expected to increase from 2.8 per cent in 2013 to 3.1 per cent in 2014, and mature economies — including the Eurozone — will clock higher growth compared to previous years. On the other hand, a November 2013 report released by the World Economic Forum raises several red flags. According to this research, rising societal tensions in West Asia and North Africa, widening income disparities, increasing structural unemployment, inaction on climate change and persistent cyber threats do not bode well for the global economy in the coming years.

India’s economic indicators present a mixed bag as well. According to a World Bank report released in October 2013, India’s growth potential remains high. The macroeconomic environment is expected to improve, with growth likely to accelerate over the next two years. On the other hand, challenges related to the country’s slowing GDP growth and spiraling inflation combined with high fiscal deficit and regulatory bottlenecks continue to dampen consumer and business confidence.

Even as surveys and statistics continue to confound observers, they all agree on one thing — we are living in an environment which is marked by perpetual uncertainty. How are businesses responding to this new normal? EY asked 641 companies across 21 countries to identify and rank the top risks and opportunities they see in the 2013-2015 timeframe. The results indicate that the pressure on prices and profits, market instability, weak growth prospects and skill shortages are risks that will dominate the conversation for some time to come. On the brighter side, firms also see this as a time to invest in innovative products and services, new markets and productivity-enhancing processes — all seen as opportunity areas that can separate the leaders from the laggards.

The new paradigm

The EY study also found that successful companies are seeking to achieve two goals. Certainly they want to keep out of trouble — sound governance and compliance are still in the forefront — but they also want to improve their performance by way of innovation and operational excellence. Indeed, if one analyses the management strategies of companies that have outperformed their peers, three differences stand out.

Protecting the core

Pricing and cost pressures have exerted unprecedented stress on organizations over the past few years. As the term ‘customer loyalty’ becomes increasingly elusive, retaining and growing core customer accounts is central to every CEO’s agenda. In order to do so, leading organizations are continually challenging themselves to ensure alignment with their customers’ priorities. How is my customer’s business changing? What kind of enablement and risk-sharing would deliver the maximum value? What must be done to better align my products and services with the customer’s agenda? The answers to these questions have equipped several companies to rapidly transform internal processes and systems to deliver superior value and competitive advantage to their customers.

Leveraging risk intelligence

Leading companies adopt a clinical approach to protect themselves from downside risks. Directors and executives of such organizations typically benefit from a periodically updated risk dashboard that pinpoints mission-critical risks and assesses how well potential exposure areas are being managed. A mix of qualitative and quantitative criteria is used to determine risk tolerance. Critical risks are regularly stress-tested and early warning systems alert the board and management when risk-levels are likely to exceed established thresholds. Risk intelligence is leveraged to drive decision making. Perhaps, most importantly, executives’ performance scorecards are linked to risk performance.

Leading organizations also leverage risk intelligence to create new opportunities. For example, a large technology company’s risk analysis revealed a threat to its hardware business from cheaper providers in an emerging market. The company started looking for market adjacencies, including products and services that its customers bought from other vendors to complement the hardware that the company supplied. By quickly transforming itself from a product vendor to an end-to-end solution provider, the company not only mitigated a downside risk, it also created a big revenue upside for itself.

Smart controls

Over the last several years, many organizations have accumulated layers of redundant and ineffective controls in response to regulatory and operational triggers. EY research indicates that companies typically spend 20-30 per cent of their process-cost on ‘controlling’ activities. Unfortunately, up to 40 per cent of such controls can be duplicative, value-erosive and often misaligned with the risks that truly matter. It is not surprising that over-controlled organizations find themselves losing ‘speed’, and over time, experiencing lethargy when responding to internal and external imperatives. The future vision of controls is much smarter. It ensures that companies eliminate unnecessary controls and free up organizational bandwidth for analysis, decision-making and value-added initiatives. Indeed, organizations that have implemented ‘smart controls’ have benefitted from operational agility, organizational nimbleness, and ultimately, competitive advantage.

Battling the certainty of uncertainty is not for the faint-hearted. It requires an unrelenting focus on winning in the market on one hand, and a sharp focus on execution-intensity and risk resilience on the other. Indeed, organizations which successfully execute this agenda are more likely to deliver market-leading performance.

Views expressed are personal.