“We are seeing some top line softness …”
In the world of private equity these days, these words are as a cough was in Q1 2020 – a prelude to an ominous unknown.
Today, we teeter on the cusp of recession. The way businesses respond will sort the wheat from the chaff across the economy.
Why? How does the economy sort the wheat from the chaff, with some companies getting ample investment and others ending up bankrupt, stalled, or in special situation funds? The clue is in the words echoing around, but not quite grabbed hold of and dealt with by, struggling companies: “top line softness”. A company’s revenue starts drying up or its growth slows, and, as an asset-light company of today, it lacks the agility to adapt.
Look at Made.com for a cautionary tale. It burnt through all its £1bn of enterprise value in 18 months during COVID. Sales rose dramatically, but its fragmented, batch-by-batch procurement structure meant it wasn’t a top partner to their suppliers – and even IKEA was struggling for supply. Made.com’s development and ability to bring new products to market was greatly reduced. In response, they stocked up against inflated sales forecasts, resulting in a painful whiplash of inventory write-offs as the cost of living reduced consumption.
Research on the 2008 recession by both Bain and McKinsey has shown that times like these become defining ones. Companies that stayed close to customer needs, freed up cash to invest, and doubled down on R&D grew substantially; what’s more, this was not a one-off boost, with those failing to be agile taking the hit with decreased growth that persisted for the whole business cycle. The major vehicle of creative destruction is capital allocation and investments – and in today’s world, much of this is driven by procurement decisions up and down the supply chain.
Better buying, then, is one of the key agents for creative destruction in the economy, rewarding those who get it right on both ends of the equation. A robust review of your needs and the market pushes you to the best suppliers. This switches more revenue to the cutting edge of implemented innovation – drying up the revenue streams of those not keeping pace, like CD sellers in a Spotify age. Your suppliers’ innovations become fuel for your organizations’ cost savings, releasing cash for you to re-invest in your own innovations and attract more customers.
But it’s about more than cost. The capabilities are a springboard for your own innovation and ability to multiply your R&D spend. Today’s asset-light, partnership-driven companies with growth rates of more than 20% simply cannot build everything at once. They must maintain focus on the customer and their own R&D. Selecting the best partners slingshots their development forward, taking blockers to momentum off their own plate and so unlocking new ideas for customers with fresh capabilities. But the “best partners” aren’t static – this portfolio of partners needs regular renewal as these asset-light companies change. For instance, a logistics partner that started out as the right fit with a tolerance for late changes and great management attention may no longer be suitable when you’re looking to serve five times as many customers and add multiple last-mile options.
The opposite is also true. Fail to keep an eye on key partners in times of risk, and you will find that a handful of them are the chaff in this scenario – bankrupt or slowing innovation. They will absorb more and more of their clients’ time and energy as they invest less in themselves. This deadweight will hold their clients back until the clients help their partners re-set – or switch away. Often, both options come needlessly late, putting your company through a year or more of avoidable pain.
In a downturn, procurement is often on the executive agenda, thanks to cost. Both above perspectives show that procurement is in a position to have considerable sway over corporate agility in the face of a recession. Those who select the best and most innovative partners can springboard from their partners’ innovation and focus on what their customers need. This agility will be a key to thrive in this recession environment. Are your suppliers a boost or ballast?