Why Great Companies Invest in Data & Analytics During Market Downturns

COVID-19 has profoundly impacted our nation’s economy. While there are health metrics and indicators that provide reason for optimism that our country is nearing the peak of this pandemic, most market forecasts view a recession as increasingly likely due to the gradual, phased approach to reopening the economy.

How can companies best prepare for the unique and complex challenges that lie ahead? Independent, third-party research published by Harvard Business Review helps paint a clear picture that many companies would be wise to consider investment in data & analytics during the current market downturn.

Why Investment is Critical During a Recession

Before discussing the paramount importance of investment in data & analytics during a recession, we first must establish the importance of investing at all during a recession. After all, doesn’t conventional wisdom tell us that companies should hold tightly to cash and adopt highly conservative strategies amid unfavorable and uncertain market conditions?

Harvard Business Review’s research highlights why most companies should incorporate both cost reduction and investment/growth initiatives into their recession strategies:

  • Only 21% of companies that prioritize cost reduction alone during a recession emerge as a market leader three years after a recession concludes¹
  • 37% of companies whose recession strategy prioritizes both investment and cost reduction emerge as a market leader three years after a recession concludes¹
  • More than 70% of companies that create significant revenue or profit growth during a recession maintain that growth thereafter²
  • Less than 30% of companies that experience notable revenue or profit decreases during a recession fully recover thereafter²

In other words, not only are companies who balance investment with cost reduction almost twice as likely to be successful after a recession than companies who focus on cost reduction alone, they are also likely to maintain the growth and success resulting from their investments long-term. If a company is financially able to allocate funds towards investment, there are several notable benefits:

Ability to Preserve Long-Term Growth Potential

When cost-reduction is the linchpin of a company’s strategy, there is a tendency to sacrifice long-term potential for short-term savings by relying heavily on workforce reductions and branch/store closures. While sometimes these moves are necessary, oftentimes they result in stunted growth and recovery long-term. We need only look back to the Great Recession to see how this strategy plays out; industry giants such as General Motors, Citigroup, and Circuit City took this approach – cumulatively accounting for 100,000+ layoffs and 100+ store/plant closures – and these companies have either yet to recover or have since permanently closed. When investments are part of the solution, ROI has the ability to contribute towards savings and reduce or even eliminate the need for layoffs and closures. Investment shouldn’t always be viewed strictly as a cost, but as a tool capable of improving the bottom-line and mitigating the need for more drastic measures.

Optimal Deployment of Capital

Companies should certainly be conservative in protecting cash reserves during a recession. However, many companies have a tendency to protect all of their cash in challenging economies regardless of how much cash they truly need. If a company does have adequate cash reserves, investment provides an opportunity to put their money to work. Just as individuals are advised to place excess cash in interest-bearing investment vehicles, companies should deploy their excess cash in opportunities for growth. The key word is “excess”; at the end of the day, each company must decide for themselves how much cash on hand is needed.

Ability to Gain Market Share

In times when peers are likely to employ more conservative initiatives, companies are presented with an opportunity to expand their market footprint by investing in growth and improvement.

Investment during a recession isn’t the right choice for every company – some companies may find themselves in a precarious financial situation that leaves no other alternative than devoting all time and effort to cost reduction – but for many companies it should be a core component of their recession strategy.

Why Data & Analytics Investment Should be a Priority

Agility. Flexibility. Adaptability. In times of turbulence, senior executives stress the need for their companies to embody these qualities. But how? Swift, effective, fact-based decision-making serves as the catalyst. Unfortunately, without best-in-class data & analytics tools and processes, decision-making inevitably suffers. Data & analytics are to a business what racecars are to Formula One drivers. Formula One drivers undoubtedly have an elite, unmatched level of talent and skill and are the best drivers in the world. However, if you give a Formula One driver a Toyota Prius instead of a pristine, well-tuned racecar, they are likely to fare poorly compared to their peers.

Likewise, data & analytics needs to be a critical, foundational component of business strategy, as it allows companies to maximize the talent and resources at their disposal. Companies who invest in data & analytics have real-time, accurate data feeding into consumable, executive-friendly reports that enable quick, informed decisions. Companies that have not invested in data & analytics will be greatly inhibited by a lack of information – no matter how well thought out their recession strategy or how bright and talented their workforce might be.

As Harvard Business Review puts it, “according to Katy George, a senior partner at McKinsey, the first reason to prioritize digital transformation ahead of or during a downturn is that improved analytics can help management better understand the business, how the recession is affecting it, and where there’s potential for operational improvements³.”

Some companies have historically shown resistance to prioritizing data & analytics initiatives. These companies view data & analytics as a function that only concerns the IT department. For most companies, IT is viewed as a critical function of the business, but a non-revenue generating, back-office, support function nonetheless. Unfortunately, as a result, data & analytics is often characterized in the same light.

Here’s why corporate leaders need to challenge this way of thinking:

Cross-Functional Impact

While it is true that data & analytics processes are typically managed by IT, the impact and value derived from data & analytics is primarily felt by non-IT departments. Finance is able to improve forecasting and automate many reports that traditionally take hours of analyst time to compile. Supply Chain receives the quality and granularity of data needed to embark on strategic sourcing initiatives. Sales & Marketing can better understand consumer behavior and how product/service demand is changing during times of volatility.

Most corporate executives agree that data & analytics are needed to support enterprise-wide decision making. However, one of the most fundamental variables that dictates an organization’s effectiveness at using data & analytics is how well-aligned data & analytics strategy is with overarching business strategy. The need to reevaluate business strategies is intuitive to most executives in times of crisis. If business strategy must evolve and the success of data & analytics capabilities is contingent upon the alignment of data & analytics strategy and business strategy, it should also be intuitive that data & analytics strategy must also transform during times of crisis.

Top-to-Bottom Org Chart Impact

Not only do data & analytics have the ability to impact every department across a business, it also has the ability to impact all levels of the org chart. Junior analysts spend less time on aggregating disparate data sets, cleansing and manipulating data, and generating reports, leaving more time for value-add interpretation and analysis of what the numbers are saying. Meanwhile senior executives receive facts and insights to better support top-level decisions.

Bottom-Line Impact

It would be a mistake to say that data & analytics investments are non-revenue generating, back-office, or simply supportive in nature. Investment in data & analytics directly impacts a company’s bottom-line in numerous ways:

  • IT Cost Reduction Through Agility & Automation: Leading technologies such as WhereScape, Snowflake, Matillion, Tableau, and Alteryx promote agility and automation in various ways. Back-end data processes and data manipulation that traditionally required significant manual effort can be automated via data pipeline tools. Drill-down and exploratory analysis that traditionally required an endless series of pivot tables and Excel charts can be streamlined through dashboards. Some companies leverage these benefits to streamline headcount, while others use them as a means to reallocate the time of resources to other high-priority initiatives.
  • Support of Cross-Functional Cost Reduction: Strong data & analytics capabilities allow companies to dynamically address “What if?” questions and drill deeper into data than ever before. This integrates closely with the cross-functional impact noted above. For example, Supply Chain can’t engage in strategic source cost reduction efforts if the underlying data isn’t there to support the initiative.
  • Revenue Generation: While a number of companies are skilled at using data & analytics to cut cost, few are using data to impact revenue. In some cases the monetization is direct, as many financial institutions and tech companies are beginning to turn their data into customer-facing products. For other companies, their revenue impact is indirect. A wave of companies is beginning to use analytics to optimize pricing, identify opportunities for cross-selling, and clamp down on revenue leakage. Some of those companies are even beginning to dive into predictive analytics to associate the probabilities, potentials, and risks associated with their various customer segments.

How to Integrate Data & Analytics into Your Market Downturn Strategy

Data & Analytics strategy will not succeed unless it aligns with overarching business strategy. Companies must articulate business objectives and then rely on resources who have the right balance of business acumen and technical prowess to translate business objectives into data & analytics strategies, roadmaps, and blueprints. For many companies this proves challenging; the siloed nature of many organizations leaves few resources who are able to bridge business and analytics. At Resultant, we have deep experience helping companies develop actionable data & analytics strategy, as well as implementing and executing those strategies in partnership with companies.

If your team is looking to improve data & analytic capabilities, we would welcome an introductory call to learn about what data challenges your company is facing and how we might be able to help.

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