Positioning for an uncertain future
With economic tides turning, CEOs need to be purposeful about reshaping their organization.
The combined impact of varying changes to central bank monetary and fiscal policy, energy price spikes and persistent supply chain challenges have pushed inflation into double digits. That’s resulted in stalled economic growth, rising costs, increases in interest rates and a commensurate dip in consumer confidence and spending.
As growth continues to slow and costs increase, more companies are issuing profit warnings. According to the EY CEO Outlook Pulse – January 2023 findings, 98% of CEOs expect an economic downturn, with 55% believing that the recession will be worse than the global financial crisis in 2008.
Responding to the new economic realities, CEOs are seeking a balance between strategic investment and cost-cutting to protect against these challenges and best position themselves once economic conditions improve. The survey also found that CEOs are doubling down on business-as-usual investments, with 40% saying they will increase investment in operations, including finance, accounting and supply chain logistics. Thirty-eight percent say they will lean into innovation and research and development (R&D), including product and service innovation and corporate venturing.
At the same time, 97% are prioritizing overall cost reduction to help maintain profitability and margins, while 96% will be considering restructuring opportunities, optimizing net working capital, and continuing their digital and technology transformations to boost growth and leverage operational advantages.
Workforce costs will need to be trimmed in the short term to weather the recessionary storm. But employers know that recruitment and retraining lead times mean they need to be planning ahead for an exit from recession.
The pandemic has accelerated long-running workforce changes, bringing skills and engagement to the top of the agenda. Tight labor markets and a demand for key skills have resulted in a power shift that has put employees in the driver’s seat. This has resulted in increased attrition and higher related recruitment costs as employees seek new job opportunities that offer flexible or remote working and a greater sense of purpose.
Skills and talent shortages are structural rather than cyclical. Talent lost now will not be easy to replace when the economy rebounds.
Now is the time for CEOs to be asking themselves some tough questions:
- How can I review workforce spend and explore cost-saving opportunities while also preparing for growth tomorrow?
- How should I prioritize those opportunities?
- How can I do all of this and encourage employee engagement and motivation in ways that are consistent with our values and purpose?
In other words, CEOs have to think about the shape and size of their workforce needs, simultaneously. They should be thinking about the skills, capabilities and technologies they need for today and the future, as well as how many people they require and where.
A new talent agenda
Strategic talent challenges make reimagining the workforce of the future a critical imperative.
As CEOs consider ways to reshape their organizations for resilience, they are also rethinking how they approach the talent agenda. Power has shifted to employees in the workplace. Skills are the new currency. Even as CEOs look to reduce costs, organizations have to be talent magnets: attracting and retaining the best in the market.
While it may be tempting to trim costs by cutting headcount, many of the CEOs we surveyed are embracing new ways of working. Seventy percent of CEOs say that flexible working, including remote working, is critical to reducing employee churn and attracting new talent, while 59% see an even greater need to focus on workforce wellbeing during the downturn, including childcare and mental health. Further, 57% see other companies reducing their headcount as an opportunity to attract and retain talent.
A chart showing the different ways of working that CEOs are embracing. The statement most CEOs agreed with is “Flexible working is critical to reduce employee churn and attract talent.”
There needs to be a shift in how organizations view talent, particularly during times of economic uncertainty. CEOs who understand that need recognize the skills and talent shortages they face as a long-term challenge. The global race for talent is a dynamic issue that is both independent of and connected to the external disruptions.
Shifting demographics, propelled in part by an aging workforce globally, has created severe capability gaps for most employers who are increasingly reliant on a core of workers in critical roles. Over the last 70 years, fertility rates worldwide have experienced a 50% decline. The result is that for the first time ever there are more people over the age of 65 than under the age of five.
This issue is compounded by a dearth of recruits to fill roles requiring new skills. Not enough university graduates have the science, technology, engineering or math (STEM) skills – data analysis, digital and cyber skills – that organizations desperately need. The need is particularly acute as consumers have shifted to buying online and organizations have had to build secure, data-led, digital architecture in response.
These strategic talent challenges create a paradox that CEOs must nimbly manage as they reimagine their workforces. Half of HR leaders expect increased talent competition in the next six months. Simultaneously, 46% anticipate that attrition will remain high for in-demand roles in 2023.
Competition for the highly skilled46%
of HR leaders anticipate that attrition will remain high for in-demand roles in 2023.
Organizations cannot afford to lose employees who possess the skills of the future. They need to maintain a longer-term view, retaining employees who have both current capabilities and the capacity to adapt to new skills quickly. Of course, retaining them requires an understanding of what they want and need.
Employees have new opportunities with tight labor markets, and they feel empowered to demand the right environment to thrive. According to the EY 2022 Work Reimagined Survey, 43% of employees say they are likely to leave their employer in the next 12 months. This represents a significant rise from 2021, when just 7% said that they’d be unlikely to stay. And it’s a data point that will get worse if organizations lead transformation poorly, or fail to build the workplaces employees demand.
A chart showing the percent of employees who say they are likely to leave their employer in the next 12 months, indicating 43% said they would in 2022 compared to 7% in 2021.
For those considering other offers, 35% say the opportunity for increased total pay would be a key driver, followed by better career advancement (25%) and enhanced flexibility in where they work (19%). Employers, meanwhile, think that improving learning and development opportunities (21%) and providing more flexibility in paid time off (21%) are key elements to addressing turnover.
A chart showing there is a gap in employee and employer priorities. Employees prioritized opportunity for increased total pay, while employers thought the workforce mostly need learning and development opportunities, and flexibility with paid time off.
Beyond pay, only 53% of workers said that their organization had an employee experience they saw as sustainable, allowing them to thrive with the tools and flexibility expected with new ways of working. These findings point to the importance of getting these new ways of working right to attract and retain top talent. A failure to do so can result in significant and measurable costs to the business.
There are four areas that need to be at the heart of designing the organization of the future:
- Flexibility: Hybrid work is here to stay. Organizations need to be deliberate about designing flexible work into their ways of working. In the EY Work Reimagined survey, optimistic employers that were more committed to flexible ways of working going forward (91% versus 65% “pessimistic employers”) gave employees more choice in working onsite versus remotely (44% versus 21%).
- Purpose: In a tight labor market where the power has shifted to the employee, people are looking to work for organizations they believe in. A strong voice on key societal issues and a powerfully worded organizational purpose are essential. Purpose has to go beyond lip service and be fully integrated into the life blood of an organization.
- Wellbeing: The cognitive load of the past few years has been high. People are looking for more from their employers – specifically, how employers are meaningfully supporting their employees through these psychologically and emotionally challenging times. CEOs need to focus on investing more in initiatives that make a difference. The EY Work Reimagined survey results indicated that optimistic organizations invested more in moderate-to-extensive changes to ensure safety and wellbeing (93% versus 83%).
- Human-centered: Organizations need to be truly focused on the needs of individuals, customizing services internally in the same ways that they do for customers. CEOs need to recognize their talent is being targeted by their competitors in highly individualized ways that make them feel unique and special. CEOs should be asking: Are we looking after our people in the same way?
Six ways organizations can remain adaptive through transformation
In an era of hyper turbulence, organizations must find the right balance between empowering and challenging their employees.
CEOs need to focus on resizing and reshaping the organization, while also building an environment that attracts and retains talent. However, to truly thrive in an age of hyper turbulence, CEOs must couple the “what” with a differentiated “how.” How organizations transform today will set their legacy for the next 10 years. Our research shows that organizations delivering transformation well in times of turbulence using six key levers can build a dynamic and resilient culture that can learn and adapt to any circumstance in a persistently disruptive environment.
Leveraging the findings of a research collaboration between EY teams and the University of Oxford’s Saïd Business School, and using 2020 as a proxy for downturns, we compared successful and unsuccessful transformations that took place during 2020 and in prior years. Transformations in 2020 were more likely to be successful (54% versus 46%) and achieve their KPIs compared to prior years. There was a greater sense of urgency about change and transformation, and respondents were more likely to see the value of transformations.
To truly thrive in an age of hyper turbulence, CEOs must couple the “what” with a differentiated “how.”
Additionally, we noted that the gap between successful and unsuccessful transformations widened during 2020. Specifically, successful transformations in 2020 had more emphasis on a clear, well-communicated vision, were more likely to have clear roles for employees and provide meaningful incentives, and placed greater emphasis on how they deployed technology resources and skills.
The findings showed that the emotional state of the leaders and workers going through a transformation was critical to the health and success of a transformation program. Heightened pressure and stress are fundamental to a transformation’s success. However, if the pressure and stress created by the endeavor is too great, the transformation collapses and fails.
CEOs must find ways to keep their organization in the transformation (T)-zone. Staying in the T-zone requires an optimal mix of support and challenge. Workers need heightened pressure to get to a high point of performance and learning. When there is too much pressure in the system without enough compensating support, negative emotions may escalate and compromise the success of the transformation. Conversely, if there isn’t enough pressure, workers won’t be motivated to strive for peak performance. The role of organizational leaders is to make sure there is the right level of pressure versus support.
A chart showing that successful transformation tends to happen when employee emotions are kept in the T-Zone, in which employees feel optimally supported and challenged.
When developed and implemented properly, the following six levers give CEOs and their transformation leaders the tools to apply greater pressure or apply greater support. Leaders need to use them dynamically as they lean in and pay attention to the emotional and psychological state of the transformation.
1. Care: Build a culture of psychological safety and provide the right levels of emotional support
During times of turbulence, everyone is frazzled entering a transformation, creating something of a dry well to draw from when the workforce needs to dig deep to face the incoming challenges. EY research suggests that senior leaders and workers who were part of successful transformations in 2020 were more likely to have negative emotions before the transformation (30% versus 25% in underperforming transformations), a difference not seen in transformations prior to 2020. Yet, successful transformations in 2020 were much more likely to see positive emotions post-transformation (72% versus 18% in underperforming transformations), which suggests that transformations in 2020 underwent an even bigger emotional journey. Leaders had to lean in and support the already anxious workforce – getting them to a point within the T-zone where they could perform and learn.
How leaders manage the emotional journey of the workforce will be critical either to unlocking the right ingredients for a successful transformation or contributing to a spiral down to failure.
A chart showing respondents having positive, neutral or negative emotions during transformations. Successful transformations concluded with overwhelming positive emotions, while underperforming transformations had more negative emotions.
Key action: Harness the right emotions to keep workers engaged and motivated, while providing enough emotional support to prevent anxiety and promote wellbeing.
2. Inspire: Create a vision that everyone can believe in
Vision sets the tone and serves as the foundation for the transformation. For this reason, the vision cannot be a knee-jerk reaction to the immediate circumstance. It needs to be well-considered and take a long-term view. The EY research of 2020 transformations shows 41% of respondents in successful transformations said the transformation was clear and compelling (versus 35% of those in underperforming transformations).
To make it real, leaders need to clearly articulate not just what needs to happen but why a transformation needs to happen. In successful 2020 transformations, leadership articulated why the organization needed to change (41% versus 34% in underperforming transformations).
At the same time, employees need to see themselves as part of the transformation, and understand its benefits, not only for the organization but for them as individuals. As such, it is critically important to explain and constantly communicate to the workforce the long-term vision – and expected outcomes – of the transformation. In successful transformations, respondents said the vision and strategy were frequently communicated (43% versus 36% in underperforming transformations). More than talk, leaders also need to demonstrate that they believe in the vision for the future by making it practical and tangible. In successful 2020 transformations, the workforce understood and believed in the transformation vision and strategy (44% versus 38% in underperforming transformations).
Key action: Clearly articulate the “why” of the vision, not just the “what”; and make the vision real through regular communication and articulating tangible outcomes.
A chart showing successful transformations had more respondents who believed the vision of the transformation was clear, compelling, and frequently communicated.
3. Lead: Adapt and nurture the necessary leadership skills
Whether it comes naturally, CEOs and transformation leaders will need to show that they care, that they are walking the talk with respect to the vision, and that they are present and show up, particularly when the going gets tough. Teams also need to show that they are in it together – and are aligned behind the transformation. The workforce is looking for a strong and coherent voice from leadership.
Leaders tend to be more aligned during a crisis. CEOs and transformation leaders will want to use this to their advantage to get buy-in early from senior executives and management. In successful transformations, leaders (41% versus 34% in underperforming transformations) were united on how to achieve the vision.
The key difference between successful and underperforming transformations was the actions of leaders. In the crucible of transformation, technical expertise is less important than human emotion and empathy.
Key action: Listen intently and be open to everyone’s opinion, demonstrate that you are listening by showing up, align leadership around the vision, and be emotionally present and supportive, particularly when workers are struggling.
4. Empower: Set clear responsibilities and be prepared for change
Transformations are not linear journeys. There are ups and downs, twists and turns. This is why it is so important for leaders to provide both structure and discipline, as well as the freedom to be creative, explore and innovate. Get people involved by co-creating and defining clear roles in the transformation. People need to feel a sense of agency and see that they are part of the solution, rather than being hit by forces beyond their control. In successful 2020 transformations, workers said they were assigned clear roles and responsibilities (46% versus 37% in underperforming transformations).
Further, in successful transformations, the organization’s culture encouraged innovation and new ways of thinking. Leaders need to harness the power of the people within the organization to problem-solve and crowdsource novel solutions to key challenges.
Key action: Get clear on roles and responsibilities (delegate decision rights where you can) and nurture a culture of experimentation. Engage everyone in innovating solutions.
5. Build: Use technology to demonstrate quick wins and build momentum for the transformation
Technology doesn’t equal the vision. Rather, it can help bring the vision to life. Leaders will want to use technology to quickly breathe life into the future through automation, artificial intelligence (AI), digital and data. Technology will need to be closely tied to the stated vision and properly funded to maximize success. In successful 2020 transformations, respondents said that their organization deployed the right technology to execute the transformation (47% versus 39% in underperforming transformations).
It’s also important to link the new technology to organization and workforce of the future. Change is scary. With the right investment in learning and by bringing emotional support, leaders can shift the fear to excitement as workers build a digital mindset and skillset. In successful 2020 transformations, respondents said that their organization had the digital skills and mindset needed for transformation (48% versus 42% in underperforming transformations).
Key action: Tie technology to the vision and properly fund it; invest in skills and mindsets, providing the right learning to foster a digital mindset and skillset.
6. Collaborate: Find new way to connect and co-create
Throughout the pandemic, most organizations shifted to radically new ways of working almost overnight. They did it by taking risks, innovating and co-creating new ways of collaborating and working. They were constantly talking and listening to their workforce – co-creating as they went. This is key to human-centered transformation. CEOs and transformation leaders will want to create an organizational climate that fosters connectivity, collaboration, and creativity, all in support of the vision. In successful 2020 transformations, respondents said their culture encouraged innovation and new thinking (43% versus 36% in successful transformations prior to 2020), indicating that collaboration is of heightened importance in times of a downturn.
Leaders will also want to create two-way dialogue and work with their workforce to define future ways of working. A quick way into this is to identify influencers across the organization to get a strong understanding of the current mood of the organization and what leaders need to do to keep it moving forward.
Key action: Bring the workforce into the process and co-create future ways of working.
Transformation is the new normal
The twin challenges that organizations currently face – of reshaping and taking costs out while simultaneously investing in the organization of the future to attract and retain key talent – offer a great example of the paradoxes that will be part of a hyper turbulent age.
For the foreseeable future, organizations will be in a constant state of flux and transformation. How CEOs deliver transformation will become a strategic differentiator. Those that successfully deliver transformation will push ahead of their competition. They will build new muscle and retain key talent.
The ability to position the organization into the T-zone will be key to its long-term success. By focusing on the human concerns of the workforce and keeping the emotional journey of the organization’s people at the center of strategic decisions, CEOs can lead their organization to a position of strength that will withstand present headwinds, and be a foundation to take advantage of future opportunities.
Organizations face a perfect storm of structural and cyclical challenges requiring short-term remedies that don’t undercut long-term strategy. In this time of constant transformation, it’s vital to keep humans at the center of actions and planning, and to fortify workforce capabilities for the future of your organization.