Global business pulse

Inflation becomes a clear and present danger

After flagging the approaching threat of inflation in our last review, we see from a range of troubling indicators that it has now arrived. On the input side, some 59% of mid-market companies globally are now concerned about labour costs, meaning it’s jostling with economic uncertainty for top mid-market constraint. And concerns about energy costs are also up sharply, with 56% of companies highlighting this as a key concern.

This mirrors economic trends being seen around the world.[ii] In the US, consumer inflation rose to 6.8% in November 2021, the highest level in nearly 40 years. Though less of a concern in Asia, in the EU the rate was 4.9%. Brazil recorded a rate of 10.7% and Russia 8.4%.

“Inflation is now a major challenge for businesses and what was once a boat on the horizon is now a ship in port,” says Mike Ward, global head of advisory at Grant Thornton International Ltd. “This is an environment which most business people have not seen in their careers. In most major Western economies there hasn’t been an inflationary environment for close to 50 years so there are very few people who remember the lessons from the past.”

Higher costs can squeeze profitability unless selling prices offset them, but also bring the prospects of higher interest rates to control inflation, which can dramatically slow demand and push up costs of borrowing. Encouragingly, a little over half of companies (51%) expect to increase their selling prices in the next 12 months. This is the highest level on record, and helps explain why mid-market leaders expect no material change in profits yet. Some 57% of companies expect to increase their profits in the next 12 months, 1 percentage point up on the H1 results.

Hopefully this confidence is justified and it is certainly a good time to increase prices given the strong demand. However, our leaders stress the need for companies to draw up plans to manage inflation now, given the risks and growing uncertainty over its duration. In December 2021, the Financial Times commented that talk of inflationary pressure being temporary or ‘transitory’ was gone and that central banks in the EU, US and UK are now concerned that inflation is becoming persistent.[iii]

Some suggested starter actions are to manage costs carefully and creatively – buy more in advance to lock in prices, hedge where possible, even look at reverse auctions – but also try to become more efficient and do more with less. Technology is the key to efficiency, and we’ll be exploring digital and IT opportunities more in upcoming content.

For those companies facing supply constraints, Mike suggests they use this period to look at the profitability of their products and customers, and really consider where to focus.

“Generally, you wouldn’t want to get rid of customers when you have excess capacity, but when you are capacity constrained and have to make tough choices anyway, now is a good time to look at your customer base, and weed out those that may not have been too loyal or have a disproportionately high cost to serve.” Activity-based costing or management cost accounting will help you understand the true costs and profitability of serving customers – talk to Grant Thornton in your country if you need support with this.

Another strategic move that will help at the present time is to increase pricing power by focussing on product or service differentiation. While this is not an overnight exercise, Robert Hannah, leader of the international business support function at Grant Thornton International Ltd, describes it as being “absolutely vital”. “You need to focus on your unique point of differentiation that adds value to the customer and allows you to stand out from the crowd to ensure you achieve the price point you are after.”

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The war for talent gets even fiercer

‘War’ is the only fitting description for the intensity of contest for labour skills and it’s getting even fiercer. The underlying problem is the shortage of available skills. That’s clearly seen in the fact that a record 57% of all mid-market companies now see this as a constraint to their growth, nearly twice the long-term average.

The shortage of skills is an issue across every country and region monitored by our research, and in North America it’s reached the level where more than two-thirds of businesses say it’s a constraint to their growth.[iv] This chimes with research done by Grant Thornton US which found that two-thirds of US HR leaders believe there is now a ‘war for talent’, and also shows that 33% of employees are actively looking for a new job.

Tim Glowa, Principal - Human Capital Services at Grant Thornton US says, “The talent shortage is either the number one or number two issue facing US organisations. And it’s not just an HR problem, it’s a C-suite problem. Because if you have talent shortages, you are not going to achieve your growth objectives.”

In addition to driving higher labour costs, the skills shortage is also behind the sky-high numbers of companies planning to pay higher salaries in the next 12 months. 71% of the mid-market are expecting to pay salary increases that are at least in line with inflation in the next 12 months. What is even more concerning here is that competition for skills may only intensify, given that 52% of companies plan to increase their employment in the coming year to support their growth plans.

There’s no single way to win this talent war, but Tim stresses the importance of understanding the needs of employees and developing rewards packages that they value and that really differentiate you as an employer. “Our State of Work research found that 55% of employees think their total reward programme is no different to what’s available elsewhere. They can get the same benefits by crossing the road and joining a competitor.” Robert suggests companies may even want to think about options like profit sharing and share ownership to help buy loyalty and really differentiate offerings to employees.

In this skill-sellers’ market, our experts stress the importance of also looking well beyond financial rewards to keep good talent and make companies attractive in the market. In light of COVID, a new model of leadership is needed to enable organisations to thrive. Engendering innovation, collaborating and communicating across the business, and adapting to change have become operational necessities for C-suite leaders, while empathy and inclusion are the keys to team performance.

Grant Thornton has provided a wealth of good ideas for creating an working culture that is diverse, inclusive and psychologically safe enough to attract and retain talent in this competitive landscape.[v]

It’s also important to fish from the global pool and embrace the opportunities of remote working, but beware. Richard Tonge, Principal - Global Mobility Services in the US, says there are still a raft of tax risk considerations and practical monitoring challenges associated with a more international workforce. He notes that companies are looking at different models of engaging talent to meet need in the competitive environment, be this as contractors or through professional employment organisation or separate legal entities.

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International opportunities zoom ahead for mid-market

The final headline is that the stampede of mid-market companies looking to expand internationally continues, despite the added challenges of transport costs and disruptions. The percentage of companies expecting to increase exports in the next 12 months remains high at 45%, while the percentage expecting to increase international revenue has risen 3 percentage points to 44%.

Peter notes, “The shift by many companies towards engaging with international customers shows how the digital commercial environment is opening up opportunities to expand internationally and enabled faster speed to market.” Earlier this year we found that most international companies now primarily sell to and service their customers virtually. For many, this shift to virtual has opened up greater opportunities to expand internationally and enabled faster speed to market, which many industries, like professional services and healthcare, have been quick to exploit.

The downside is that there are growing concerns about customer loyalty and more of a focus on price, with 30% of international businesses saying it has already put more focus on prices in the sales process. To counter this, Robert advises that companies need to try to better communicate their culture and brand – including background, history, values, and what kind of experience employees have – which really resonates with customers, particularly larger corporates and governments.

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