Why Firms Will Bring Forward Operating Model Changes Because Of COVID-19

The pace of the COVID-19 collapse in economic activity has been incredible to witness. Many sectors have faced complete decline to zero of their revenue. Many firms were prepared for a crisis and will be dusting off their crisis transformation plans. Having invoked their business continuity plan, many will realise that they don’t need as many resources as they thought they did to run their business.

A firms ability to respond to a crisis depends on its leadership and its willingness to make radical changes to its operating model. Many firms will have found that underinvestment in technology in recent years has not set them up to succeed over the coming months and years. Their employees will be making working from home up as they go, introducing enormous cybersecurity risks into their operating model outside of the organisation’s standard risk management framework.

Other firms will have found that their healthy attitudes towards working from home have made this crisis a smooth transition for their workforce. They may generally be in professional service type industries with the margins to make investments in this or in the public sector where such expenditures are mandatory.

A firms culture before the crisis will determine what things look like for them on the other side of the bridge. It will also help drive whether they make it through the COVID-19 pandemic at all. High performing organisations generally embrace flexibility and openness to change. For some firms, this crisis will be the end of them because they can’t respond fast enough to near-daily requirements to make hard decisions.

However, a crisis is also an opportunity. And many firms will be dusting off their crisis playbooks and implementing cost-saving plans that may have been too difficult due to internal politics to execute over the past few years in an environment of rising profits and revenues.

The other side of the bridge, as many politicians refer to it, will be very different because of the psychological impact of simultaneous health and economic crises. This change means that firms will need to carefully review their products and services and make hard calls about what their customers will be willing and able to buy.

Already, a shift away from premium brands to store brands has emptied the shelves of basics around the world. If this continues, a wave of small businesses selling organic this-or-that will hit the wall within months. Anything luxury will only survive if it can sell at scale to those still earning good incomes on the other side.

Firms will need to simplify their products and services and demonstrate real value-for-money. Sales will be more difficult, particularly in business-to-business environments if all of the sales calls are going to be via video conferencing for the next year. That is if a prospective customer is even interested in taking a sales call unless there is a critical need.

A keen focus on simplifying operations wherever possible, embracing automation and eliminating any discretionary spending will deliver savings. But achieving cost savings isn’t the end of the story. Reducing process complexity, reducing system and application complexity and making hard calls to eliminate entire product or service lines will be needed to drive real change in your operating model through this crisis.

One of the downsides of this crisis is that as each firm tightens its belt, economic activity shrinks more. When they stand down or make staff redundant, the impact on lives is immense. It’s not like a typical recession which generally stems from one or two sectors wider. This COVID-19 disaster is an economy-wide sudden stop in economic activity. Doing the right thing by your customers, your employees, your suppliers, and your community were how many firms marketed themselves in recent years with the increasing focus on ESG issues. Many have failed the crisis test within weeks when you look at how some have responded.

The overall simplification of an operating model can’t happen in a vacuum. Due to the complexity of contractual arrangements and service models between 3rd parties that are a crucial part of many operating models, working with key partners and suppliers through this crisis will be essential. Engaging early with key suppliers and being open about changes to get to the other side is far better than surprising them with sudden cancellations. They have employees and families to look after too.

What is emerging from the scale of this health crisis is that many businesses will make the rational decision to close their doors utterly independent of any policy response from the government. Rash and sudden choices will occur. Firms that could use the JobKeeper payment won’t even apply because the owner has already given up.

Firms will bring forward operating model changes because of COVID-19, and the impact on workers on the other side of the bridge will be immense. Higher levels of automation will particularly hurt the lower-skilled, but its impact will reach high skilled workers over time. No one is safe from the Great Depression playbook.

In Australia, there are many turning to government support for the first time in their life. They may previously have looked down on welfare recipients, but now find themselves with no other choice. One thing that firms will need to monitor is attitudes towards unionisation and general strikes over working conditions through this crisis.

If they don’t care for their workers, particularly the lower-paid ones on the shop floor, they may have industrial relations issues on the other side of the bridge. There will also be legal consequences arising from some of the actions of small businesses. Fair Work will have a lot of work to do, and the Job Keeper payments will provide an ongoing stream of audit and investigation work for the ATO to chase down.

The benefit for the firms that adapt fast and simplify their operating models as quickly as possible is that they will emerge in a stronger competitive position once this is over. If they can reduce fixed costs and simplify processes, then they extend their time horizon to stay in business.

One interesting thing to remember is that landlords are businesses too. In essence, both commercial and residential landlords will have to renegotiate their previously guaranteed fixed revenue streams because commercial reality has completely changed in less than a month. The banks will end up being the primary beneficiaries even after a wave of credit losses once the six-month repayment holiday window is over. Hopefully, there’s a vaccine by then, if not, then dark times are on the horizon.