Viewpoint: A Volatile World Requires Better Use of Data

Michiel Steeman

date: October 16, 2020

The successful harnessing and sharing of data will be key to the survival of businesses as the Covid crisis deepens across Europe.

After a summer of relative freedom, the threat of a second wave of Covid-19 in Europe has forced governments to take a tougher stance on restrictions, ensuring that what started as a health crisis will evolve into a serious economic crisis with long-lasting impact.

Conflicting and often-changing government messages about lockdown policies, decisions on whether workers should return to the office and uncertainty about what financial support is available are just a few examples of the volatile world we now find ourselves trying to do business in.

While we all hope the governments’ measures will help contain the virus, there is inevitably a concern about the impact on our livelihoods. The business acronym “VUCA” – which describes an environment of Volatility, Uncertainty, Complexity, and Ambiguity –  was created in the 1980s, yet seems to perfectly encapsulate the world we find ourselves in today.

Where do businesses even start to try and manage the risks of operating in this environment?

There has been an evident spike in demand for people with risk management and scenario planning skills to help companies navigate these difficult times. Businesses need greater agility than ever to manage sudden changes in supply chains, shutdowns of factories or delays in moving goods across borders. While the global Covid-19 pandemic alone presents more than enough challenges to businesses, corporates also must contend with the climate crisis and a host of other geopolitical risks.

And it is not going to get any easier. As I mentioned in previous columns, I’ve frequently disputed that the global economy will have a ‘V’ shaped or ‘U’ shaped recovery following this pandemic, believing  instead that we’ll see the economic impact of the initial health crisis evolving in four waves.

The first wave was defined by supply chain disruptions which began with the closure of factories in China and then moving into Italy, France, Spain, and the rest of Europe. The first half of this year saw companies scrambling to find suppliers for certain components as restrictions began to tighten. This wave came to an end in May as production resumed for some industries and companies secured new suppliers.

I anticipated the second wave to emerge in May and take the form of a liquidity crisis with companies running out of cash as demand slowed. However, this phase was temporarily delayed by swift government action to provide financial support programmes.

Unfortunately, this liquidity problem will become more evident as governments reduce their funding packages.

This will trigger the third wave of the crisis as cash-strapped companies will want to reduce their costs by cancelling planned investment and making redundancies.

The final phase will take us well into 2021 and beyond as governments grapple with their mounting debts. Italy’s debt to GDP ratio is predicted to rise to almost 160 percent this year, while in the US, debt is set to reach or exceed 100 percent of the country’s GDP next fiscal year for the first time since World War 2. The UK’s debt exceeded its GDP in August too as public spending soared.

I anticipate that governments in Europe and the US will make major budget cuts in the first and second quarter of next year, coupled with lower investment levels which will act as a drag on economic growth.

And while it is possible for governments operate efficiently with large debt to GDP levels – look at Japan’s financial record since the 1990s – I wonder how governments in EU will deal with it and whether EU restrictions on national budgets could force companies and governments to take extraordinary measures to reduce debt such as enforced privatisations or cuts to pensions or healthcare.

This uncertainty will hang over the market for the next two to three years only further slowing economic growth.

With this worrying outlook for the future, businesses and supply chains must start focusing on data – and more specifically the ability to gather the right data and transform it into valuable and easily-accessible information that will enable companies to make swift decisions.

Data can inform a company whether it needs to quickly change suppliers, ramp up production at a different plant or how it can make the best use of its working capital. Data can give companies earlier insight into what is happening in their market and how to react to it quicker than their competitors.

While the collation and analysis of data could be conducted via a variety of different technologies, it is the effective analysis and use of the data that is most important.

Tech giants such as Amazon and Google have already recognised the power of data transformed into information. They know what their customers want, and they know what their suppliers are looking for and can swiftly match the two parties together.

Indeed, it has long been recognised that data-driven companies will be able to better target customers, provide a higher degree of customisation of their products or services, optimise their working capital, and reduce operational risks.

And yet I have seen corporates taking far too long to transform their business models, allowing the larger e-commerce players to nestle in as the ‘middleman’ and suck all the profit out of their business exchanges. This trend has undermined the fabric of local communities and pushed smaller firms out of business.

The arrival of the Covid-19 crisis has only accelerated the need for companies to harness the power of data to survive. But for this to happen, companies – and particularly treasury departments – need to share data with their business partners, whether they are their suppliers, buyers, banks or fintechs.

I see a higher degree of data sharing within the physical supply chain, but when it comes to the financial supply chain, there is an evident reluctance among corporate treasurers.

For too long, certain treasurers have been overly concerned about only optimizing the internal finances of a company with little regard to the wider financial ecosystem they operate in. Some treasurers may have focused too much attention on improving their company’s DPO ratio with little concern to the suppliers’ costs and their need for reasonable payment terms, for example.

As mentioned in my previous column, the effective collection of data could help take supply chain finance to the next level, allowing financial institutions to lend money further up the chain in the form of purchase order financing. High quality data and analysis would make it easier for banks to assess the risk of financing and provide much-needed liquidity to suppliers and buyers.

If the last six months has revealed anything, it is the interconnectedness of the world economy and reliance companies have on a global network of suppliers and buyers. Treasurers must wake up and look beyond the boundaries of their own company. They must overcome reluctance to share data and start co-operating with their business partners.

In this way, companies can place themselves in the best position to manage this volatile, uncertain, complex, and ambiguous world.

Michiel Steeman

Professorship at Windesheim University of Applied Sciences

Michiel Steeman was selected in 2013 as the inaugural holder of the Supply Chain Finance Professorship at the Windesheim University of Applied Sciences in The Netherlands. He is also the founder and chairman of the Supply Chain Finance Community that has already brought together over 30 leading business schools from more than 20 countries around the world who actively collaborate with companies, banks and governments in the developing field of Supply Chain Finance.