Just about every observer of the economy agrees that a recession is coming. The only question is when. Given the inevitability of a downturn, what are companies doing to prepare? That’s the question that Grant Thornton LLP asked of business owners and C-level executives in a recent survey. In this conversation with SupplyChainBrain editor-in-chief Bob Bowman, Chris Stephenson, national managing principal in the accounting firm’s financial management practice, discusses the survey’s findings, and urges companies to take action.
SCB: What was the genesis of the latest Grant Thornton study on supply-chain resiliency?
Stephenson: We started thinking about how we wanted to approach talking about this projected downturn. We wanted to aim our survey at what might cause it, and how companies were thinking about reacting to it. What were they doing in preparation? How were they thinking about coming out of it?
SCB: How many companies did you talk to?
Stephenson: It was up approximately 250 executives, from companies with revenues in the $250-million to $3.5-billion range.
SCB: How many respondents are expecting a recession, and how soon?
Stephenson: About 80%. A third of them think it’s going to be in the next six to 12 months, and a third say 12 to 18 months, give or take. There was a wide spread on the “when” part, but approximately four out of five agreed that a recession is coming within the next two years.
SCB: Of those who believe a recession is coming, how are they preparing for it?
Stephenson: Almost two-thirds of respondents believe they have a plan or they are working on one. We found that private companies feel a little less prepared than public companies. I don't know if that they’ve done less preparation, or just feel less prepared.
SCB: What kinds of actions are they focusing on?
Stephenson: First, they’re looking at how much they're going to spend on R&D and innovation, and also at continued growth opportunities during a recession. Second are areas where they’re looking to possibly cut [costs]. And third is planning for different scenarios, because there definitely wasn’t alignment about what’s actually going to cause the recession. Most are starting to prepare for multiple scenarios, such as a liquidity crunch, the tariff war continuing, or Europe becoming a channel they can't sell to. They’re getting answers for each of these scenarios.
SCB: How does that translate into actual targets for investment? What are they spending money on?
Stephenson: The biggest surprise to me were the top two areas that they plan to continue investing in: innovation and cybersecurity. The latter makes a lot of sense — even though it's not necessarily a growth investment, it does reduce risk. And typically during a recession, organizations try and focus on their core business and make sure they lower customer churns as much as possible. A cyber attack could hurt both of those goals. It could really distract an organization.
SCB: What about innovation? That seems like an unusual priority in tough economic times.
Stephenson: It’s Recession 101. Go back to what Warren Buffett says about investing in times of risk and fear. If we look at the last few recessions, the companies that came out of them and added market share tended to be those that were the early movers in investing. Whether it was an acquisition, new technology, or new-product rollout, they did something bold during the downturn, and essentially bought at the bottom. Organizations responding to this survey really want to win in the coming recession, and they’re going to invest throughout.
SCB: What do they mean by innovation?
Stephenson: That’s an interesting question. I live up in the Pacific Northwest, home to Amazon, Microsoft, Expedia and Starbucks. Innovation to them is white space — spreading new content, new value, new areas. But we also have Boeing up here, with all its suppliers, and innovation to them is building a better mousetrap — making better versions of the same product that are more sustainable and longer-lasting.
The second part of this question is deciding whether the investment is going to stay within the core business, or are they going to try and go into new businesses along the way. In a bull market it's very easy to try new things, to experiment. Fail-fast is a very common word. In a recession, the buffers tend to get a bit tighter as to how many fail-fast moments you can have. So there's the question of how broad a scope you want to innovate.
SCB: Did the responses to your survey mirror those of actions taken in previous recessions?
Stephenson: If cybersecurity and innovation are the line items that are going to be protected during the next recession, then that’s different from past recessions. How organizations protect these typically cut areas is one of the biggest questions we're exploring right now, to help them prepare.
SCB: What has been the impact to date of these plans on inventory levels?
Stephenson: Inventory levels drastically changed during the last recession. A lot of companies were stuck with inventory, and learned. Inventory reduction was already happening in the late 2000s and early 2010s. The innovation that spawned from that was real-time inventory — the ability to build after an order happens. Customization has come from that as well, which has allowed supply chains to build more on the fly.
SCB: Is all this helping companies get ready for the next recession?
Stephenson: Many organizations are better prepared for an inventory adjustment than they were 10 years ago, and during the last recession. That said, manufacturing numbers have started to show a bit of a slowdown. A lot of organizations with inventory are pausing right now because of uncertainty in the market. There are a lot of good numbers still underlying the U.S. economy, but there’s also a lot of uncertainty due to tariffs. In an election a year, you couldn't have two more divisive opinions about which way we need to go as an economy. Plus we have issues of changing interest rates and high levels of corporate debt. So the current slowdown isn’t necessarily a right-sizing of inventories, it's just a pause to see what's going to happen.
SCB: Recent reports show that corporate R&D investment levels aren’t keeping up as a percentage of GDP. How do you view the claims of respondents to your study in this light?
Stephenson: We've seen a change in industry where acquisitions are higher than ever. Corporate R&D and acquisitions go hand-in-hand, and have to be looked at as a bucketed amount. A lot of bigger businesses are spending more on the development side of R&D, to make better versions of existing products. But on the research side, they're looking at acquisition targets. So I'm not sure that a change in R&D spending is necessarily going to be driven by this recession. It’s about being able to purchase winning startups, and taking a lot less risk on the other side of that.
SCB: What’s your message to companies that are doing nothing to prepare for a recession, either because they don't believe it’s coming, or haven't got their plans off the ground yet?
Stephenson: My message is, it doesn't cost anything to plan. If organizations aren’t talking about the recessions and possible scenarios, then this survey is telling me they're falling behind their competitors. Because two out of three companies are, and they're going to be better prepared. What happens if tariffs stay for another year? What happens if you lose a major supplier? What happens if liquidity dries up? If they're not having those conversations with their board and senior leadership team right now, then they're putting their heads in the sand.
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