Dangers of an inflationary environment – What should CEOs and Boards be doing now?

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Posted: 21st September 2022 Michael Appleby, Markets & Growth Director

Forecasts of inflation of more than 15% and interest rates above 6%, union strikes, supply chain pressures, a cost-of-living crisis, political uncertainty, a weak housing market, caps on rent increases below inflation and an impending recession – not a particularly appealing environment to be heading into the Autumn with.

It is the record levels of inflation that are the real problem in all of this. With levels set to exceed those seen in the 1970s, few (if any) leaders in any sector have had to deal with and guide their organisations through such a difficult period. This is a new challenge for us all.

There have been debates on the extent to which the current challenges in the environment will persist (a short-term shock or long-term shift) with (previous) hopes that a quick end to the war in Ukraine would relieve many of the inflationary pressures. It is now clear that, even if the war in Ukraine was a catalyst, the wider fundamentals (post-pandemic supply and demand imbalance, impact of Brexit, employment market shortages, etc.) mean that the current inflationary environment is here to stay. Action is needed now.

The housing sector will be at the forefront of the challenges.

Responsible for supporting some of the most vulnerable in society (and those most exposed to the cost-of-living crisis), whilst at the same time being a significant contributor to the development of new homes (exposed to significant supply chain cost inflation and potential drops in housing market values). And whilst it is unlikely that any in the sector would increase rents in line with current levels of inflation, wherever the Government lands on the current rent cap debate will result in real terms decrease in income year on year.

So, what are the key areas that CEOs and Boards across the sector should be focusing on now to guide their organisations through the next period?

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Service offer review

Ensuring service offers remain relevant to the environment will be essential. This should include what services are needed from the broad range of customers, as well as what is affordable going forward.

A robust prioritisation based on cost and need will be critical to ensure that organisations focus on what services will provide the highest value and the most positive impact to people in their homes. Tough decisions may be needed on scaling back activities which in the short term at least, could be seen as ‘nice to haves’ rather than essentials.

Scenario planning

The sector is already well versed in stress testing, and this should continue to be at the forefront of discussions at Board and Executive levels over the coming months.

Organisations should also push the assumptions to see what will really test the organisation – e.g. 12 months ago no one was predicting inflation at current rates. Scenario planning shouldn’t just be theoretical, it should result in robust plans which can be implemented quickly if the worst happens.  It should also extend beyond financial planning – what happens if there are energy blackouts (how should tenants be supported)? What if a supplier collapses (have you got resilience elsewhere)? What if a proportion of the workforce goes on strike (what do you stop doing)? Nothing should be off the table.

Organisation review

The pandemic has led to many organisations reviewing their operating models and cost structures. Few in recent times have had a singular focus on cost reduction, but that may change now. Alongside scenario planning, CEOs and Boards should have a clear understanding of where the costs sit in their business and what can be changed quickly if immediate action is required. This may include simply having contingency plans in place, or it may mean speeding up current technology programmes to move more quickly to more efficient digital-based ways of working.

Talent

With significant gaps in the recruitment market, there’s pressure to attract and retain talent. With more strikes forecast and high demand from employees, the upward pressure is only likely to increase. Last year we saw the cost of living awards across the sector ranging from 2% – 6%, next year could be even higher. But don’t just focus on basic salaries – not only does that add to the overall inflationary pressure (the housing sector acting in effect as an echo chamber – where one organisation increases, others will need to follow), it might also not deal with the root cause.

Employees don’t tend to leave an organisation simply for a slightly higher salary in a similar role. Focus therefore on the overall talent value proposition including – the wider benefits package, organisation culture, learning and development etc. which all together make the organisation a good place to work. As we progress into a recession, individuals may also be more reluctant to move, so focusing on the fundamentals of being a good employer, may be a better medium-term approach.

Procurement and supply chain

The procurement function must be seen as a strategic partner to the CEO and Executive Team in particular. Not just focusing on the process but getting the best value from current procurement exercises is key. Working closely with and managing your supply chain will be essential. Engage with them to plan work / costs / scenarios for the next 12 months so shocks can be avoided. Suppliers and service providers will be under significant pressure too, and a stronger partnership arrangement will avoid costs being simply passed up and down with a longer-term approach in place. Remember you need them as much as they need you, so it is in everyone’s interests to work collaboratively.

Inflationary environment response teams

One thing that worked well in many organisations during the pandemic was the creation of special pandemic response teams. There is a strong case for similar inflation response teams to be created to deal with this crisis. The impact will be cross-organisational and there will be a need to ensure a coordinated response, especially across larger and more complex organisations. Reporting directly to the CEO will also provide control and agility in response.

Compassionate approach

Throughout this period everyone is dealing with the same pressures – whether a customer, employee or supplier – professionally and personally. It is easy in times of crisis for things to become adversarial and difficult. But a compassionate, collaborative approach has significant benefits – especially as we emerge from the other side.

These next few months will bring challenges, many of which we are not yet forecasting. Getting ahead and planning now, will be critical in ensuring organisations have the resilience to manage the uncertainty.

To learn more about how we can support your organisation, please contact info@altairltd.co.uk  or view our range of services here.

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