Staying One Step Ahead
Smart Investment Key to Emerging Stronger Once Uncertainty Lifts
According to the latest data from the International Business Report (IBR), Grant Thornton’s global survey of mid-market companies, business leaders are cautious about their future investment intentions. Across the board, in the second half of 2022, plans to invest were down slightly compared to H1 2022. Investment in staff skills fell from 55% to 53%, research and development intentions decreased from 55% to 51% and investment in technology from 60% to 57%.
Some businesses are understandably wary about investment in light of the current economic and geopolitical uncertainty. However, more than half of mid-market businesses are maintaining investment in skills, R&D and tech, demonstrating their desire to keep moving forward. Business leaders who maintain focused investment during the current economic headwinds are likely to be better positioned to sustain value and grow once economic uncertainty lifts.
Smart investments in technology and digital transformation have the potential to increase efficiency in the short term and cost-effectively add value in the long term.
Shona O’Hea, partner at Grant Thornton Ireland, says, “Mid-market firms are becoming increasingly savvy when it comes to investing in technology. A few years back there was more appetite to do large-scale transformations, buying chunky software sold as silver bullets to solve all the company’s problems. Now business leaders have realised you can’t get everything done in one push of the button. So there is more deliberation before embarking on a large tech transformation that may take years to implement.”
Trevor Dunne, partner and head of technology consulting at Grant Thornton Ireland, comments, “Even in the face of market instability and potential worldwide recession, a careful sense of optimism surrounds tech-related expenditures. IT leaders anticipate their budgets to either rise or remain stable as organisations aim for expansion while incorporating resilience and heightened efficiency.”
However, he notes that technology can also be a source of frustration and a constraint for Irish business leaders. He explains, “Business leaders in Ireland continually recognise that technology holds immense potential to foster growth and enhance quality. However, they often express frustration over the inability of their business and IT to deliver more than just basic operational maintenance.”
He continues, “Despite the ongoing buzz around AI and other emergent technologies, many leaders still demand a concentration on business objectives, advocating for changes enabled by technology rather than focusing solely on the technology itself. This approach often focuses on getting the core of the business working well and resolving any data-related issues before attempting to scale more niche technologies. In the meantime, AI and machine learning often remain as one-off or isolated projects. The ongoing concern about skills, which has been prevalent since the pandemic, may be driving this viewpoint. Employers acknowledge that success hinges on their employees. In Ireland, persistent challenges, such as remote working conditions and the ongoing shortage of housing, continue to pose difficulties for businesses in their quest for talent.”
Scenario Planning and Investment in Long-Term Sustainability Key
The business leaders who will be best positioned for growth when economic conditions improve are those who scenario plan and look past the immediate challenges to the opportunities beyond. Organisations must be future-focused to ensure they remain sustainable over the long term. Innovation can lead to higher productivity and new markets, which can positively impact the wider economy and, if done sustainably, improve the social impact of the organisation and benefit the environment.
Catherine Duggan, head of sustainability at Grant Thornton Ireland, explains, “Most businesses have sustainability on their radar, but their levels of investment to date vary depending on their maturity and bandwidth. Capacity building—either through internal training or additional resourcing—is one of the most important steps to embedding sustainability within a business. Meeting stakeholder expectations, building resilience, accessing capital and acting on the opportunities that the transition to a low-carbon economy will bring all depend on having access to the right skillsets, so investing in this capacity building is a crucial aspect of a sustainability investment strategy.”
Claire Scott, partner at Grant Thornton Australia, comments that “Many mid-market businesses are only at the beginning of their ESG journey. We’re not yet at the stage where a firm’s sustainability significantly impacts their attractiveness for investment, but we’re certainly heading that way. And, when it does come, it will actually happen quite quickly, not least because there are regulatory changes coming in that are going to force a shift in thinking.”
Productivity Remains Elusive
Firms with the Right Strategy Will Find Ways to Evolve
Over the last several years, productivity growth has been sluggish in many developed markets. The World Economic Forum reveals that while digitalisation has been a game changer for some firms, not all businesses have been able to reap the benefits of digital investment. New technologies, including AI, may offer a new boost for certain businesses, but identifying the areas with the biggest impact on productivity is critical.
Ian Pascoe, managing partner at Grant Thornton Thailand, explains, “Over the last 20 years global productivity growth has been virtually stagnant. It has either flatlined or, even worse, actually declined. This is all during a period where we have had some of the greatest technological changes ever seen, we're more connected than we've ever been, and yet that has not led to an increase in productivity. Firms making investments in these areas really need to think about how it will impact productivity, because so far it often hasn't happened as business leaders would have hoped.”
Investment in technology remains the investment priority for business leaders at 57%. Meanwhile, only 44% of firms see investment in plant and machinery as a key priority and investment in new buildings remains at the bottom of the list, cited by just 36% of businesses (down from 40% in H1 2022).
Business leaders’ fears over a shortage of finance have eased somewhat over the last year, but for many it remains a real concern. Just under half (47%) of business leaders cite access to cash as a constraint on their growth, compared to 50% in the second half of last year. However, when it comes to R&D and technology, business leaders can benefit from making smart, selective investment decisions.
Sasha Kerins, tax partner at Grant Thornton Ireland, explains, “The scarcity of resources and talent globally means businesses all need to do more with less. Investment in technology and R&D across all sectors is paramount for doing so. The pandemic saw an exponential acceleration in how we use technology in both our work and family lives. This acceleration is set to continue, and those businesses investing in R&D are the most likely to succeed. To manage their cost base, Irish businesses are being more selective to ensure R&D is market focused, delivering for end-user demand. Ireland is perfectly placed to support innovative R&D projects given our effective tax relief for qualifying spend.”
Oupa Mbokodo, head of advisory at Grant Thornton South Africa, notes, “It rarely makes sense to hold back on investment during an economic slowdown. The bigger risk for businesses is that, when the uncertainty ends, you may be behind your competitors. Business leaders may also miss out on an opportunity to create (invest in) new revenue streams. While it is important to hold on to cash, it is equally important to have a robust investment strategy for an organisation. You need to understand the market in which you operate, understand the cycles of the economy, and know exactly under what circumstances your specific organization can thrive.”
When inflation is back under control, advanced economies’ central banks are likely to bring real interest rates back towards pre-pandemic levels. The IMF suggests that recent increases in real interest rates are only temporary, but this assumption provides little solace for business leaders now. Globally, 12% of firms see interest rates and funding as a significant threat. This challenge, combined with other global threats, will continue to undermine firms’ investment ambitions, meaning they need to plan carefully to make sure they are as attractive as possible to investors.
Assessing investment should be a continuous improvement activity. Mid-market firms must harness their entrepreneurial spirit and remain focused on continually improving their processes and innovating. Leaders who achieve this mindset and put the right plan in place to weather the challenges of persistent inflation, rising costs and skills shortages will be in a position to grow as markets begin to recover.
