Companies prioritize innovation as they anticipate recession

Nearly two-thirds of leaders and business owners foresee a recession within 18 months, and at least half see innovation as a top priority ahead of a downturn

Companies prioritize innovation as they anticipate recession

American businesses do not plan on treading water when the next recession hits, according to a new Grant Thornton LLP survey of more than 250 business owners and C-level executives conducted in late June 2019. Innovation will remain a top priority: At least half of respondents identified innovation and innovation-related activities among their top investment decisions ahead of a potential downturn, and almost half pointed to R&D, which also drives innovation.

Respondents represent companies with revenues between $250 million and $3.5 billion. They answered a range of questions concerning whether or not they anticipate a recession, how they are preparing for a potential recession and how they will respond if and when one arrives.

“It’s been more than a decade since the last recession – and companies’ memories and recession capabilities have atrophied. Few executives are in the same jobs they were 10 years ago, and some have never weathered a downturn,” said Chris Stephenson, national managing principal of Grant Thornton’s Financial Management practice. “Business models have changed significantly. Some companies will have to relearn some hard lessons, but what’s clear is they don’t intend to just retrench and try to ride it out. Most are counting on continued investment in technology and innovation to push them through.”

Sixty-two percent of respondents believe a recession will happen within the next 18 months. Private companies are particularly worried that a recession lurks in the near term, with 39% anticipating a recession in the next 12 months. This compares with 33% of public company respondents who felt the same way. Not everyone is worried, though: twenty three percent of respondents do not expect a recession within the next two years.

Public company respondents consider interest rate hikes the most likely recession trigger. Top triggers for private companies are shifting regulations – including trade and tariffs – as well as U.S. political uncertainly and availability of credit.

Leaning on new technologies
Companies plan to make strategic technology investments to help them thrive through the next recession. Using technology to better manage inventory levels without carrying unnecessary inventory costs is one example. When asked about plans for managing inventory levels, 43% of respondents said they were monitoring customer demand patterns and 36% were implementing systems to track and maintain inventory levels. Both activities will likely use big data capabilities and technology tools that were not as prevalent in the last downturn.

Weighing cutbacks in global spending
Regarding how a recession would affect businesses’ international plans, survey results were mixed: 42% indicated they would increase investment in international expansion, while 30% said they would wind down investment. Seventy-three percent identified the disintegration of international agreements as the most likely risk to short-term performance during a downturn – underscoring the importance of stable global trade to most businesses. Another four in 10 respondents (42%) said tariffs or the threat of tariffs will negatively impact their business.

“The global economy is slowing and becoming more fragile. These fragilities stem from a sequence of shifts, from aging to a related desire to turn back the clocks. This means we could repeat the mistakes of the past,” explained Grant Thornton Chief Economist Diane Swonk. “A financial crisis cannot be ruled out, but could be averted. We need to join forces with our allies to use peer pressure to bring China in line with the rest of the world. That means harnessing multilateral efforts instead of bilateral trade agreements. Multilateral negotiations at this late stage in our political cycle are a heavy lift, given the upcoming 2020 elections.”

Evaluating headcount
Respondents were almost evenly split on investments in headcount during a recession: 35% said they would ramp up, 33% would ramp down and 32% would make no change. But 42% of respondents from companies with revenue between $250 million and $500 million plan to increase investment in headcount, and 47% plan to invest in retention – much higher numbers than those reported by their larger competitors, at 33% and 36%, respectively.

Eyeing M&A opportunities

Forty-three percent of respondents plan to ramp up investment in M&A in the event of a recession; just 27% plan to decrease investment in that area. M&A investment was another area of marked difference between public and private company respondents, with public companies far more bullish on M&A investment – 51% of public companies plan to increase M&A investment versus only 37% of private companies.

Channeling resources to cybersecurity
Cybersecurity was second only to innovation/technology in terms of investment focus, with 55% of respondents planning to ramp up investment if a downturn is imminent. Fraud of all kinds often increases during a downturn, as cybercriminals know resources will be tight and expect companies to cut back when it comes to cybersecurity.

“Most companies believe a recession is coming, and the key is to plan now – then invest in, innovate and execute on the core business during the downturn, which will position companies that do to dominate the recovery,” Stephenson said. “Companies that approach a recession with the discipline to control expenses and manage cash, but with a matching vision to align ongoing investment with strategy and opportunity, can win the downturn rather than merely surviving it.”

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