So what will COVID 19 mean in the medium to long run? Here are a few of my own thoughts.
SYSTEMIC RISK
Supply Chains: Relying too much on markets to supply and facilitate transactions and meet human needs. The markets and the supply chains, in particular, have failed. Generally, these have had design principles such as centralisation (china as the workshop of the world), tightly networked (just-in-time, daily needs production, minimal stock holdings), lacking in redundancy whereas if one link in the chain breaks the entire system (masks, ventilators), built and optimised for velocity and efficiency (which effectively increased the risk profile of these systems). There will be a global re-think of supply chains and whether these remain in the free market space as much as has been the case..
Business Models: Many business models fundamentally broke in this crisis. Risks were shown to exist that no-one appreciated.
Among the broken business models:-
Retail - There already was a trend to armageddon with the shift to online, I suspect that trend has been dramatically accelerated. Half of all stores in US malls are clothes retailers and in this pandemic, when did you last buy clothing?
Mall operators - see above, How good was Frank Lowe’s timing!
Airlines - In the last 10 years travel has doubled but COVID may have taken the glamour away.
Foreign students - Has been the main thing holding universities up as well as shifting student debts into the future.
Cruise ships - Another industry where the appeal has been debunked by our collective realisation that they are germ factories at sea and a bit gross.
Hospitals - Totally reliant on elective surgery, without which, they can’t fully provide the care we had assumed was there in a crisis
Aged care work - underfunded, under-resourced, under-staffed, resulting in poor stakeholder outcomes.
Prisons - A model invented 200 years ago, very exposed in a pandemic
Gyms who knew they were germ factories
Hotels - completely tied to travel (business and tourism) and requiring higher occupancy for profitability that we will likely foresee in the future
Restaurants - cooking at home has taught consumers new behaviour, cookware stores have been trading like its 2x Christmas
Cafes - these have the lowest margins, no barriers to entry, and could get smashed if there is a new work-flexibility boom. As many as 20% may never re-open.
Car Companies. The model has been to maximise profit, distribute dividends, load up with debt. The effect is that these companies cannot re-tool, are not investing in research, are not innovating, are cost-cutting, have no plans to build renewable mass-market cars (despite what they say). They are hooked on advertising, cannot afford volumes to fall and have a broken model. COVID will kill most of them off because volumes just went off a cliff and these Companies have no room in their balance sheets to do anything meaningful.
All of these industries now face existential risks as the trends play out. Note that these sectors are by-and-large very large employers.
Safety nets: Having 30%+ of workers in low paid insecure work whilst at the same time having a banking system (Eg: housing loans) that assumes regularity of income turns out to be problematic. These people can vote and you’d better believe that politicians are taking note. We have seen 40 years of eroding rights for workers/citizens and this is an important moment to determine if we are now too unbalanced. The tax system would be the first conversation in this space post-COVID.
Housing: Australia pretty much has the highest private debt holding in the world, foreign property buyers are gone and not coming back, unemployment is a major risk to debt servicing. All it is going to take is 2-4% of people to go under and there could be an almighty rush for the exits by investors and other groups. One other key point is that when people look for housing in the future one of the things they are likely to consider is suitability for home working.
ECONOMIC TRENDS
Cash: We used to look at PE ratio’s, profit multiples, profit forecasts, margins, and other factors to value Companies. COVID taught us that cash was always king even if we forgot it. We have loaded Companies up with debt to leverage balance sheets and show good multiples and active balance sheets. Virgin is a good example. $5.3 Bn of debt later, and no assets such as owning planes, left it wide open to a liquidity shock.
Social Licence: The most common question for 2020 will be “what did your Company do when COVID hit”. If the answer is to jettison the workforce immediately then you are going to have a problem getting talent and trust - both intangibles that are crucial drivers of business agility and creativity and demand.
SOCIETAL TRENDS
Leadership went missing: Trust in institutions has been waning for a long time and people have been looking for someone, anyone who looks like they care about them. We have seen the rise of the populist demagogue. We forgot to add competence to the selection criteria and country after country has seen needlessly high death rates as a direct result of leadership failures at the highest levels. Teams make better decisions than individuals and those countries that took a team approach (including cabinet and bi-partisan teamwork) have handled this better - South Korea, Australia, New Zealand, amongst them. To get a Bolsanaro, Trump, Putin, Kim, Erdogan, Johnson, etc, once is unfortunate. If it happens again its careless.
New deal: I suspect that we will come out of this concluding a few things with significant implications as to whom is allowed to lead Countries into the future:-
It’s not OK for a huge proportion of your citizens to be wholly at the economic whim of the market and decisions by individual Companies, casualisation, etc. I suspect this will be a big election issue around the world.
It’s not ok for people to have no access to social security, or access to the health system because of economic participation factors.
It’s not OK for leaders to obviously put themselves, their friends, and their personal interests ahead of the interests of the society and community.
Nature is still there (for now): People saw the Himalayas from the Ganges plains for the first time in 40 years, we had no large scale agricultural burn-off this year in Asia, there were dolphins in Venice, species were seen that were thought extinct, CO2 pollution levels were lowest in decades. If the plan is to burn coal, continue to subsidise oil, slow the investment in renewables, allow the rich to take 98% of the wealth, and dump waste into rivers and sea’s then people just might have seen the possibility of something better. It’s not too late.
Tele-Everything: The social experiment we have just had in regards to flexible working has also spilled over into other spheres of life. Meetings, courts, research, doctors appointments, sales calls, church services, medical treatments, fitness, etc - all now proven possible. Next, we might have voting and what a fillip that would be for democracy.
Loneliness: We saw single persons stuck at home without the skills to engage with other humans remotely. Calls to counselling services exploded as people reported being socially isolated. This has to be a big market opportunity for some savvy entrepreneur.
Domestic violence: We saw an explosion in calls for help from people (mostly women) who were forced to shelter with an abuser at a time when unemployment, economic uncertainty, social isolation and other triggers were present. COVID has taught us that this is a problem that needs to be solved immediately.
THE WORKPLACE
Remote work: The main thing that was holding flexibility back was distrust by middle and senior managers that people would be working when not in the office (and also technology was a drawback). We have just concluded a major social experiment and turns out that people were working hard even if we couldn’t see them and the technology worked great. Also, all of the bosses worked from home too and kind of liked it. 74% of CEO’s believe they will encourage more flexibility in work patterns in the future. 90% of workers say they liked this period of flexible working. This genie is not going back into that bottle. Remote work is here to stay.
From now on work is something that you do, not somewhere that you go.
Contingent Work to access capability: Why do you need a HR person, or lawyer, or procurement person etc, 55 hours a week when the CEO needs them for 2 hours. The likelihood is that the rest of the week they will be working on lower-level stuff. Why not get someone who is worth $500K for a day or two a month to work on the big issues rather than someone that you can only pay $250K full time. More and more companies are thinking this way as the interim management trend grows. More and more companies are also building an ecosystem of capability and talent around the company rather than thinking that the best way to get work done is via employed talent. This is likely to lead to more talent sharing. Pressure on innovation, agility, change, uncertainty, and cash and drivers of this trend. Traditionally contingent work has been regarded as risky and insecure, as compared to a “stable, corporate job. I think all that has changed. If you have skills and 5 clients you are less likely to be exposed to wholesale income loss at the same time as everyone else.
Adaptability is a new critical capability: In a VUCA world (volatility, uncertainty, change, agility) there is a good chance that the old model of risk management does not work so well as shocks get bigger and more likely to be asynchronous If you cannot anticipate change the next big choice is to have an adaptive, agile, culture. This needs the right leaders and talent. No-one predicted COVID but those who responded in an agile way did well. These Companies and organisations had good leaders and constructive team-based cultures with lots of experimentation and trial.
Focus on Output: Working from home forced us into talking about goals and deliverables rather than hours and other inputs.
Design: So many of our workplaces were designed for the equipment rather than the people. They considered efficiency rather than effectiveness. We saw meat plants fall over because the workers were required to use knives while touching elbows. We saw strikes at warehouses where picking areas were incompatible with good health. Postal depots had to rent alternative shop-floor space. Hotels could not socially distance in those lobbies where the main feature is the desk. We had furniture and hard surfaces that were incompatible with hygiene, and many other examples. I would expect COVID to give a big boost to the already accelerating megatrend around human-centred design. Of course, the simplest, safest and most certain step a company can make is to remove the humans completely so COVID is likely to accelerate the trend toward automation, AI and robotics.
Will COVID change things? I suspect in ways we never would have thought possible.
Consider that the Great Depression of 1929 devastated the U.S. economy. A third of all banks failed. Unemployment rose to 25% and homelessness increased. Housing prices plummeted 67%, international trade collapsed by 65%, and deflation soared above 10%.
Stay safe, and be ready for anything!
Comments