China’s zero-COVID shutdowns, the war in Ukraine, the energy crisis, and the tight labor market have all come together to form the perfect storm of supply chain chaos. And now, just when we thought it couldn’t get any worse, it’s looking like supply-chain woes and the resulting inflation have significantly increased the likelihood of a recession.
According to the Bloomberg Economics model, the probability that a recession will occur in the next 12 months has increased to 38%, up from 0% just several months ago.
For most of us, the word recession brings to mind the 2007-2009 crisis brought on by the housing market's collapse. While it’s often helpful to look to the past for ways to manage future uncertainties, unlike the financial drivers of the past recession, this time around, the issues are different, and the supply chain drivers require a unique approach.
Financial risk is a given during any recession but understanding the risks a possible recession poses to business resilience today requires taking off the financial blinders to enable a more comprehensive view. What leaders need now is radical transparency not just within their own organizations but also across the full spectrum of risks in their supply chains. This radical transparency can enable leaders in sourcing, procurement, supply chain, and risk to take proactive steps now to ensure resiliency - recession or not – to manage through whatever’s next on the horizon.
Early signs of a recession
When a business anticipates a downturn, the obvious first consideration is cost cutting. Although it’s often prudent to consider this approach, cutting costs is not without risks.
Often the first step in cutting costs is staff reduction. The recent tech layoffs could indicate that this may already be happening in the USA. As of mid-July, more than 28,000 US tech sector workers have been laid off in 2022. Additionally, some of the largest businesses are conducting mass layoffs and hiring freezes in preparation for the economic downturn. A talent reduction at third parties could impact new solutions and service levels and further exacerbate supply chain delays. For this reason, it’s essential to be aware of labor issues and metrics such as attrition at your third parties.
When a business anticipates a downturn, another possible consideration is the reduction or postponement of investments in R&D, infrastructure, security, etc. While we haven’t yet seen a widespread pullback, those with more minor cash positions have already incorporated reductions in their near-term plans. It’s essential to be aware that these cutbacks could result in increased third-party operations risks, including reductions in the quality of services or solutions provided or increased cybersecurity vulnerabilities.
Consider that 82% of CIOs already believe their software supply chains are vulnerable The risk often multiplies when a business decreases spending on cyber resources and cybersecurity technology. Cybersecurity providers are vital to protecting the confidentiality, integrity, and availability of computer systems, networks, and data. Cutting a cyber budget or resourcing can expose customers, partners, and internal operations to significant threats. If you’re working with a third party that is reducing tech investments in any department, you need visibility to understand the possible domino impacts on your organization.
External investments from venture capital and private equity are the other side of the investment coin. In this case, we are already seeing a downtick in valuations and a slowdown in funding. Restricted access to capital could significantly impact early-stage companies providing innovative solutions to enterprises. For these third parties, a slow budget could dramatically reduce their runway and ability to meet contractual obligations. As these impacts could be imminent, it’s critical to understand which of your third parties could be at risk.
Risks to monitor next
Other priorities take a backseat when financial considerations take the driver’s seat. It’s critical for businesses to keep driving other initiatives forward and to monitor for a broad spectrum of risks – especially since these threats are early indicators for upcoming financial catastrophes.
During an economic downturn, ESG initiatives like ethical and sustainable sourcing, climate change, and DEI (diversity, equity, and inclusion) can be put on the back burner. But with society’s attention to these issues, enterprises need to be aware that postponement of these initiatives could significantly increase reputation risks.
A recent release by Bank of America’s (BofA) Global Research team estimates that more than $600 Billion of market capitalization for S&P 500 companies has been lost to “ESG controversies” over the last seven years. Simply put, businesses can’t afford to overlook supply chain ESG risks in a recession. As more customers and employees demand supply chain ESG accountability, it’s critical to understand third-party performance in these areas. Unknowingly partnering with a supplier tied to modern-day slavery in China or extreme environmental harm can damage your reputation, negatively impacting customer sentiment and possibly degrading financial performance.
If a recession does occur, the impacts could vary greatly between countries. Our highly complex web of interconnected global supply chains means that location challenges can cascade with difficult-to-predict consequences. Take for example, the economic crisis in Sri Lanka that is causing disruptions to their maritime shipment activity. As Colombo’s port is a key transshipment hub in the Southeast Asian region, this disruption has cascading impacts beyond Sri Lanka’s borders. Case in point, it is reported that the Colombo port handles 60% of India’s transshipment cargo. Managing supply chain risk requires radical transparency deep into the supply chain beyond third parties and into the locations from which services and products are sourced.
Enabling radical transparency
The risks mentioned here are just scratching the surface of what could emerge in an upcoming recession. Increasing resiliency in the face of a recession requires proactive risk mitigation. But you can’t mitigate what you never saw coming. Businesses need radical transparency for a current and comprehensive view of their entire risk landscape including their third parties and locations.
Unfortunately, most third-party and supply chain risk programs rely on legacy practices like periodic assessments that fail to provide this view. Especially during times of economic uncertainty, risk is dynamic. Consequently, your risk landscape and your third parties' and locations’ health and risk profiles can deteriorate rapidly between assessments. Effectively avoiding disruptions requires the early warning of trouble that only continuous monitoring can provide. Continuous risk monitoring capabilities constantly scan for changes in the risk landscape and provide actionable real-time alerting to enable proactive and agile risk mitigation actions.
Additionally, resiliency requires a comprehensive view that goes beyond the traditionally monitored financial and cyber risks. During times of economic uncertainty, these risk events are often lagging indicators of trouble. Proactive mitigation requires widening the aperture of risk programs to also include compliance, operation, ESG, location, and Nth party risk. Often the earliest signs of risk occur in these risk domains.
Hope for the best, prepared for the worst
We cannot direct the wind, but we can adjust our sails. To ensure your business can effectively navigate the storm, it’s time to get prepared. By enabling radical transparency across the full spectrum of risks, leaders will have the real-time and continuous intelligence needed for agility to change course, avoid disruptions, and ensure resiliency.