Changing times for the North East

May 28 2010 by Sarah Green, The Journal

The business environment of the next decade will be significantly different to what might have been expected just two years ago, says Sarah Green.

THE financial crisis and the recession that has followed have altered operating conditions by imposing new challenges and exacerbating existing ones. Businesses will respond across the organisation, moving to a more flexible, collaborative and leaner model.

Over the next five to 10 years businesses will face major changes to finance and capital conditions.

Finance will be more expensive and its availability will be constrained by regulation and changes to the banking market. From an era in which finance was cheap and readily available, these changes will drive adjustments to corporate finance models and investment behaviour.

Businesses will also need to adjust to a less benign economic backdrop. The next decade will almost certainly be characterised by a higher level of economic volatility and increased risk – clouding the certainty required for long-term planning.

The financial crisis has accelerated three other existing drivers of change, or has changed their character. Public trust in business and markets, already in decline, is now at a low ebb. The profit motive is distrusted, and the onus is on businesses to demonstrate their ethical credentials.

There is greater scepticism about our model of capitalism and its ability to deliver desirable, efficient outcomes – greater political activism, and government intervention can be expected. Businesses’ approach to social and demographic change will also alter as a result of the recession.

Retirement will still accentuate existing shortages of critical skills, but plugging these gaps will have to be the responsibility of business rather than government, whose spending will be constrained. In addition, pension problems will force some to work longer, requiring businesses to manage staff with wider age ranges, expectations and motivations than before.

Lastly, the recession has altered the economic climate in which business needs to move to a low-carbon economy and improve resource use. The ability and preferences of government and some consumers to pay for this movement have been compromised.

At the same time, trends in technology change are set to continue and, as over the last decade, will have a significant impact on business models and ways of working.

These drivers will alter “business as usual” and businesses’ actions. In particular, the shape of business after the recession will be characterised by even greater collaboration and flexibility. The move to more collaborative, flexible business models, accompanied by other changes, will be reflected in four key operational areas:

1. Capital and investment: Businesses will reduce gearing and their reliance on debt, the attractiveness of which has declined. Wider sources of capital, such as supply chain finance and sovereign wealth funds, will become more important and CEOs will be more cautious in their use of capital for investment and innovation.

2. Workforce: Businesses will respond to skills gaps by refocusing employee development through collaboration and achieving a greater return on investment in training. A new more flexible work contract with employees will be sought, building on the flexibility introduced in the recession.

3. Governance and sustainability: Sustainability and ethics will be further integrated into the business model rather than as “add-ons” to existing activities. Businesses recognise that demonstrating their accountability will be part of the new “licence to operate” and will take a more extensive approach to governance. For larger firms this will be an evolution of existing processes rather than a step change.

4. Organisation and location: New organisational structures will be created in many businesses as they continue to rationalise. Businesses will shift from transactional to collaborative relationships with a wide range of partners, including suppliers, universities and competitors. Supply chain dynamics will be much more complicated as risk becomes a more significant factor in decision-making.

Taken together, the impact on the economy in the next three to five years will be to create slower, more sustainable growth. But, the UK will maintain and build its competitive advantage as a place for flexible business development. In the longer term, investment in building flexibility, collaboration and new work structures will make UK businesses stronger.

Sarah Green is regional director of the CBI