How inflation can lead to innovation – Varun Dewan

by | Oct 24, 2022

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The rising cost of doing business is a concern. But, beyond the defensive approach to cost cutting, there are also opportunities for meaningful innovation. Varun Dewan, Director at Protiviti UK, explains how businesses can tackle inflation and find new revenue streams now and in the future.

UK inflation reached a 40-year high in the summer of 2022 – at 10.1 per cent – following a continuous upward trend from 0.7 per cent in February 2021. The economic fallout from the COVID-19 pandemic has been compounded by Russia’s invasion of Ukraine, hitting energy prices, food supplies and transport costs.

Price increases on this scale haven’t been seen since February 1982 when unemployment was at record levels, and interest rates reached double digits on mortgages. Four decades later, many business leaders are therefore managing their operations through high inflation for the first time.

According to Protiviti’s 2022 Global Finance Trends Survey, the impact of inflation has become a matter of increasing concern. In a list of top priorities for CFOs and VPs of finance, 69 percent of survey respondents ranked inflation in the top 20 priorities to manage over the next 12 months, alongside the security and privacy of data, profitability, and strategic planning. For non-CFO/VP of finance respondents, inflation ranked as a top 10 priority to manage in the next 12 months.

So, how can businesses respond? There are several key areas where executive leaders can cope with increasing prices and mitigate risks.

Pricing it right

Boosting pay and bonuses to stave off competitors’ attempts to recruit might please employees but could also have a knock-on effect on profits and shareholder sentiment. Similarly, passing higher costs to customers might please shareholders but could also sow the seeds of customer dissatisfaction. Both are possible, but there are limits with how far these steps can be implemented with the concurrent threat of global recession. A detailed review and implementation of the right pricing strategy is the need of the hour.

The “breaking point” for price increases – when prices for a product or service become too high and customers start spending less – is important to understand. There is a reasonable expectation that prices will go up in the current market, but businesses can use customer data and scenario planning tools to help them determine how these increases will be tolerated. Good businesses are also careful to clearly communicate their plans.

From cost optimisation to collaboration

Business leaders are also optimising the cost of their operations to help tackle the impact of inflation, alongside approaches to pricing, according to Protiviti’s survey. But a defensive approach to saving money, where resources are cut and budgets trimmed, can also be a source of new thinking because there is a need to find new ways of producing and procuring products, for example.

A good example is the increasing cost of fossil fuels, triggering the need to identify alternative sources of energy, which are both cost efficient and environmentally friendly. Similarly, reducing the packaging on a product offers potential savings, not only through direct savings in packaging costs, but also through the transport of larger quantities in one

shipment, helping to reduce the distribution costs per unit. And both actions can help satisfy an ESG operational and reporting need (also a priority in that same survey).

In addition, small- to medium-sized businesses might be more successful if they work together to maximise economies of scale. For instance, a business that imports 10,000 tonnes of copper could work with one that imports 5,000 tonnes and achieve potential savings by negotiating better bulk discounts and reduced shipping costs in the joint procurement of 15,000 tonnes.

A manufacturing plant and machinery being used for eight hours by one business could be run at other times by another manufacturer, with the aim of utilising spare capacity. And redundant office space not being used because of hybrid working could be leased, in partnership with serviced office providers, and turned into revenue. Some of these collaboration initiatives are gaining significant interest in the marketplace.

Innovate for the long term

The spectre of high inflation naturally creates nervousness, and there is a careful balance to strike between cost cutting and price rises. But the challenge also presents opportunities – to innovate business models and products and to make investments that will pay long-term dividends.

The business reducing its packaging will spend money upfront but will experience the benefits long into the future, alongside its customers. The business sharing its manufacturing operations could gain new, ongoing revenue streams and potential partners; and those renting out office space could find another business model lying dormant in their existing sites.

The point is that high inflation can cause businesses to put off making investments. But the investments they make now will help them in the future. This was true with technology and remote working platforms during the pandemic and is true now with steps to improve economic and environmental sustainability.

So, what should businesses do now?

– Access data from internal and external sources such as partners, suppliers and customers to gain insight on the availability and cost of raw materials, pricing decisions and fluctuating labour costs.

– Use data and business indicators from forecasting activities to help with scenario planning and stress testing: projecting customer break points, for example.

– Assess and invest in appropriate technology-led tools to help optimise costs and increase efficiencies.

– Identify the factors most sensitive to inflationary pressures and run those through scenarios to assess the implications; analyse ways to mitigate them.

– Revisit the operating structure of the business; explore managed services and similar models to achieve improved cost and operational efficiencies.

– Keep boards and key stakeholders appraised of changing inflation-response plans; monitor and manage the investment community’s appetite for this information, too.

– And finally, continually measure the benefits of innovation, and other efforts put in place, as a result of these factors.

The silver lining to high prices? Forced innovation can make businesses better, and more valuable, in the future. As the saying goes, necessity is the mother of invention – and inflation in the current market is the “necessity” trigger this time. History will judge modern

business leaders’ success not only by the value they created but also by how they navigated turbulent times and maintained a focus on innovation.

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