Achieving Margin Resilience in a Disruptive Economy

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In today's world of unprecedented technology, geopolitical, and regulatory disruption and the resulting uncertainty, businesses are struggling to achieve their growth and earnings targets. Persistent inflation, rising interest rates, strong employment numbers, and stable consumer spending complicate the narrative and the path forward. CFOs must find a way to balance margin pressures with investing in new technologies and capabilities if they want to grow and remain competitive.

A recent Deloitte survey of over 300 senior business executives sheds light on how companies balance the capture of near-term value from cost reduction and use transformation to drive margin resilience and advance new capabilities in the face of prolonged disruption. The results were eye-opening and provide valuable insights into the actions companies and business leaders should take for margin resilience and sustained value creation.

Executives cite inflation, talent shortages, and supply chain constraints as the top external barriers to success. Not surprisingly, those same three external barriers are also the top factors driving the need for margin resilience and broader transformation. However, many executives admit they are falling short of their margin targets, despite their best efforts (more than 70% of those surveyed).

Executives can’t cost cut their way to profitable growth without making significant changes to how they operate. Sales growth is the top priority for nearly two-thirds of the companies surveyed, twice the number prioritizing cost reduction and talent. Bringing up the rest of the top priorities (approximately 25% of executives surveyed) are customer experience, digital enablement, and technology implementation.

Talent Shortages

That said, talent shortages continue to challenge organizations: 42% of surveyed companies cite the inability to attract and retain key talent as a major barrier to their success. Approximately 90% of the companies surveyed are experiencing adverse operational effects from talent shortages. Nearly half are seeing an impact on steady-state operations, finding it difficult to take on special projects, and are having trouble scaling from growth. There is an acute shortage in the critical skills and capabilities vital to operate in a digital economy leading executives to seek alternative sources of talent.

Our survey found that, consequently, companies are shifting their margin priorities from small-scale and isolated initiatives to building new technology-based capabilities that help reduce labor needs while providing a foundation for transformation, flexibility, and growth. Instead of focusing on small-scale or isolated cost initiatives and zero-based budgeting, companies are pivoting and looking to automation and cognitive solutions, such as artificial intelligence and machine learning, to help drive transformation.

Executives are increasing the speed and scope of transformation efforts. Transformation efforts are often “all-encompassing” with companies pursuing all available options -- pursuing standard cost levers, such as procurement and organizational restructuring, and shifting to technology-driven cost levers, such as AI, automation, and cloud.

Successful transformations help companies cope with disruption and achieve both growth and margin targets -- generating sustainable cost savings that endure by enabling new capabilities, new revenue models, and new ways of doing business. It can also improve flexibility and scalability, helping businesses maintain operational excellence and respond rapidly and effectively to challenges and changes in the marketplace.

Success Factors

What are the key success factors for achieving margin resilience? As a starting point, the Deloitte report found that based on survey results companies need solid tracking and reporting (72%), a clear business case (65%), effective change management (64%), investment in technology improvements (62%), and realistic cost targets (58%). Companies also need dedicated leadership, governance, guidance, discipline, and investment to help ensure success.

What can you do to help your company achieve its profit margin, transformation, and growth goals? Many companies fail to achieve their margin and transformation goals because they approach the effort as a portfolio of disconnected projects without the necessary sponsorship, coordination, discipline, and investment. They don’t provide the right governance and guidance and don’t define success in a consistent way. They overwhelm people with change and don’t learn from their mistakes. By using data and technology enablement to transform the business and establish new capabilities, leaders can build resilience into margins and create sustained value.

Constant disruption and prolonged uncertainty are creating an urgent and ongoing need for margin resilience and technology-enabled transformation. Success requires a balance between old and new: applying and refining tried-and-true methods to enhance margins while at the same time investing in new capabilities. Using technology-enabled transformation to reimagine the business and how work gets done is crucial to further growth, to deliver on margin goals, and to create longer term value.

Raed Masoud is a principal in Deloitte Consulting’s Mergers & Acquisitions practice and leads Strategy, Diligence, and Value Creation for Tech, Media, and Telecom. His professional career combines more than 20 years of advisory and direct industry experience. From strategy to execution, he brings breadth and depth of experience in advising senior executives and leaders across large, global technology and Fortune 100 organizations through large scale transformation, restructuring & margin expansion initiatives, and M&A transactions.Prior to Deloitte, he held key positions in engineering & design, research & development, and product management. Raed holds a Bachelor of Science degree in Aerospace Engineering from Saint Louis University and an M.B.A. with a concentration in New Product Development & High-Tech Marketing from the Rensselaer Polytechnic Institute Lally School of Management & Technology.