COVID-19 is exacting a real negative effect on cash flows. No degree of scenario planning will accurately predict future business outcomes. However, the 2008 recession provides context for business leaders to better understand current events.
The 2008 crises began within the financial sector of the US. The housing market in the US was growing and innovative traders at large banks created bonds out of these mortgages. The collaterals behind these bonds were houses whose values were growing month on month. Middle-men were buying property from developers, and selling to other buyers – before construction work began. Soon, home prices in the US began to fall. Holders of subprime mortgages were starting to default at higher rates; and the owners of those mortgages were no longer the original lenders: the lenders had bundled the mortgages into bonds and sold them off to banks and hedge funds all over the world. As the financial system in the US crumbled, the dominoes began to fall globally depending on the degree to which the financial markets of other economies were linked to the US market.
The current recession – The Great Lockdown – is a step shift away from the 2008 recession. There are few dominoes, and the linkages among nations are as short as an infected passenger taking a flight from one country to another. About a year ago, the US yield curve inverted, and analysts began to expect a slowdown, but nobody envisaged a recession of this magnitude. The global economy is projected to contract sharply by – 3 percent in 2020, much worse than during the 2008–09 financial crisis. The stock market has deflated, unemployment is growing daily and every scenario of the future points to a difficult outlook for businesses.
The figure above shows that the fundamental differences in outcomes between the 2008 and 2020 recession are two-fold. First, sectors that provide outdoor experiences are shrinking, whilst sectors that provide indoor utility are growing. At the level of the firm, two key insights are obvious: first, every business B2B or B2C alike, must tweak their business models to provide experiences that improve customer experiences and build in-the-home utility. Second, every firm should prioritize on operational efficiency and increase the level of tech intensity within their operating model to minimize avoidable costs. Being a low cost, high margin player with in-the-home value creation is the key to business sustainability.
The top winning firms are executing on these insights proactively. Airbnb created a new product to help house 100k healthcare workers. Airbnb will not charge fees for stays arranged through this product. accuRx has developed a video consultation service (over a weekend!). Top Cuvée, a restaurant with a great bar, created an online shop in a matter of days delivering orders to consumers. The Rapids have transformed their “Field Trip” workshops into “Remote Field Trips”.
Forward-thinking firms should do two things: first, build out a Direct to Customer Mobile/Web Experience that effectively leverages cloud technologies to drive end-user brand awareness. This can be a trivial entertaining app, or a non-trivial customer relationship channel. Second, Virtualize all operations. The best firms will go the extra mile to ensure that all core operations (not just meetings!) can be delivered on-top of technology – reliably. COVID-19 is a great forcing-function to push through strategic IT/tech projects that can scale easily as your business explores online value creation.
In other words, it is possible to overcome this crisis if you reinvent yourself and the way you do business. In this scenario, technology is a real need – not only do you need technology, but you need the right technology and expertise for your company.