With the economy posting two consecutive quarters of declining gross domestic product numbers, recession worries have deepened, and firms are counseling their clients about how to cope with surging inflation, labor shortages and tight supply chains.
EY Americas Consulting vice chair Raj Sharma, a 25-year veteran of commercial and financial services, is advising his clients to pay attention to what happened during previous economic downturns, but also how this one could be different.
“There are quite a few lessons learned from the recent economic cycles, but we also have to appreciate that every recession or potential recession has its own characteristics,” he said. “Inflation, the rising interest rates associated with it, and supply chain problems are definitely top of mind for companies. Juxtapose that with a very low unemployment rate, and that creates a very different set of circumstances. When we speak with companies, we think that all these conditions will lead to a gradual sort of recession.”
Unlike the financial crisis of 2008, he doubts there will be a massive government bailout. “Don’t count on big economic stimulus because we don’t think it’s going to be there,” said Sharma. “Make sure you have a strategic plan so you are ready to deal with your costs and revenue, what you’re going to continue to invest in and what you’re going to stop.”
He expects to see revenue pressure. “There will definitely be increased operational costs and expenses associated with them,” said Sharma. “CEOs will have the dilemma of saying how much do I cut now versus how much do I continue to strategically spend on? But companies with multiple lines of businesses will also have a strategic opportunity. They have a portfolio of things that will have impacts and opportunities associated with them.”
Supply chain problems are contributing to those pressures, including from the war in Ukraine, the continuing fallout from the pandemic, and climate change.
“There are people that have invested in resilient supply chains, and we are seeing those companies fare better,” said Sharma. “But there is still that uncertainty around the war in Ukraine and sanctions on Russia. You’re continuing to see COVID management in China, which is a big hub of supply chains. Clients have also recently started talking about the climate crisis that leads to floods, fires, hurricanes, those kinds of disruptions that can add to the supply chain crisis out there.”
Companies are also continuing to experience labor shortages. “Add to that the complexity of workforce management,” said Sharma. “Coming out of the pandemic, companies are already dealing with key resources not being available, even at the last leg of the supply chains. That continues to be an issue. Employment loyalty continues to be an issue. How are we helping companies create an environment where they can attract the workforce so employee loyalty comes back and you have empathy in terms of how you’re dealing with your workforce? Those factors are still leading to supply chains being very inconsistent and unpredictable at this point in time. Do we see signs of improvement? We are far from where it needs to be.”
EY has been advising clients to do more risk management and contingency planning in case the economy worsens. “During the 2008 crisis, companies were surprised by the unanticipated effect of the contagion effect of failed counterparties, and the bubble effects of the housing market,” said Sharma. “But in the last decade, some companies in some industries have developed risk management and contingency planning. Those tools are essential to many different industries.”
He recommended investing in better third-party counterparty management to maintain supply chains, a variable workforce to bring down costs during unpredictable revenue cycles, and a more flexible technology infrastructure.
Accountants can advise clients on how to navigate around these challenges. “Clients that have a risk management framework are looking at emerging risks to deal with them before they become real issues,” said Sharma. “They’re avoiding risks that they do not understand fully in this environment, to rapidly adjust their costs in line with the revenue cycle. How many of your costs are variable in nature where you can start and stop without a lot of issues? That includes your workforce and your partners in the supply chain, that you can change dynamically. We are asking them to continue to invest in technology and data so they can bring automation resiliency, so whatever happens, when you come out of it, now you have a resilient infrastructure to be able to deal with it. With certain companies, we’re also advising them this is your opportunity to lean in heavily while your competitors are struggling to capture a better share of the market. Lastly, a robust resiliency plan will protect the firm so that both the decision-making ability and the velocity of the decisions they make is out there. They need to have the scenarios in place and the courage to make those decisions.”
The climate crisis has posed challenges for companies amid record temperatures and disasters like wildfires, floods, hurricanes and tornadoes. “In our assessment of the resiliency plans to deal with the climate crisis, fires, hurricanes and geopolitical pressures are still not very robust,” said Sharma. “They are still in the very early stages. The acknowledgment they have to do that is the first step, so a lot of companies are acknowledging that. But we are engaged with multiple companies helping them develop a plan from various dimensions.”
Those dimensions include supply chain disruptions, capital, liquidity, geopolitical pressures and the impact they could have on taxes, as well as the climate crisis. Sharma and EY’s representatives declined to discuss the
“What do you do when a recession happens? Generally the first thing is you start cutting people,” said Sharma. “One thing we saw from 2008 is people who cut their capabilities and their workforce deeply did well during the crisis, but were not able to capture the upside associated with that. In fact, there’s good data that they fell behind the curve.”
EY is advising clients to get experts in workforce management involved early on. “Have a plan around how you’re going to deal with your workforce,” said Sharma. “What part of your workforce management today is variable? What are you doing near shore? What are you doing with third parties? What are you doing offshore? Make sure you have a plan for your key critical resources. Continue to invest in technologies that enable your workforce to grow, and also create an environment of empathy.”
Multiple clients have been engaging EY to help with workforce management. “We have seen a spike in that type of work, especially helping them prepare for what’s the best way for their industry and their workforce to be able to deal with a recession if it comes, and what level of workforce management is necessary,” said Sharma. “We’re seeing an uptick around companies really paying attention to it rather than a knee-jerk reaction of laying off these many people because this is coming. I see much more robust planning and a lot more consulting companies involved in getting help from outsiders.”
Companies are continuing to deal with labor shortages while trying to predict the economic future. “We still have a shortage of key skills,” said Sharma. “We still have issues with employee loyalty. We still have issues around how we get the global workforce back together. Make sure you have a strategic plan around your technology investments. We strongly believe that companies need to continue to invest in their digital infrastructure. If they don’t, they will not emerge from this and capture the rebound from the economic crisis that could potentially happen.”
