GETTING RECESSION READY:
LEVERAGING PROCUREMENT TO BEAT AN
ECONOMIC DOWNTURN

White Paper

INTRODUCTION

  • Given the steady, positive trend exhibited by economic fundamentals in recent times, one may conclude that the US economy is healthy and going strong. The GDP has been growing steadily, inflation has been largely under control, the stock markets have been rising, and companies have posted stellar results over the last couple of years. However, a closer look at some of the other economic indicators and recent events across the globe warrant a prudent market outlook. The yield curve is inverted, and GDP growth projections have seen downward revisions for several major economies including the US. Add to that, the subpar S&P 500 earnings growth which stands at 2.3% against the projected 7.6% for 2020, the rosy picture quickly seems to turn pale. These factors along with a slowing global economy plagued by trade wars are certainly signs to take caution. Time will tell if these are transient disturbances or signs of a major recession, but companies simply cannot afford to ignore them.

Yield Curves of Major Economies

  • United Kingdom
  • United States
  • EU
  • This yield curve plots yields/ interest rates of government bonds in UK, US and EU for different maturity dates.
  • Normally, long term interest rates are higher that short term rates, but when the yield curve inverts, short-term interest rates become higher than long-term rates. This type of yield curve is considered to be a predictor of economic recession
  • Some of these worrisome signs have been around for a while, which has increasingly led the experts to believe that a recession may be on the horizon, so much that Google searches show a spike in recession fears since the Fed cut interest rates in July 2020 for the first time since the financial crisis. In fact, a recent survey showed that a majority (65%) of the Finance professionals feel that the next recession is imminent in the next 24 months. In a scenario where the economy does face a recession, Finance and Procurement professionals need to be prepared as they are the company’s first line of defense to combat an economic downturn.
  • When asked to comment on their preparedness for a recession, an alarming 30% of Finance & Procurement professionals said they did not know or did not feel adequately prepared. What’s more interesting is the fact that when responses of only senior leaders and C-Suite executives were considered, only 35% felt adequately prepared for a recession. This number highlights the urgent need for Procurement & Finance teams to create an action plan to mitigate the impact of a future recession.
  • Based on Valorant’s experience of advising and working with financial services companies, below are some Procurement strategies and techniques which can help the business mitigate adverse impacts of an economic downturn.

Procurement Strategies to Mitigate the Impact of a Recession

Optimize Third-Party Spend with Company-wide Strategic Cost Reduction initiatives

  • Procurement can help reduce third-party costs for financial services firms. By adopting a comprehensive, structured and collaborative procurement strategy, companies can ensure business continuity and save millions of dollars which can be instrumental in helping them overcome a recession. Valorant recommends that to prepare for a recession, Procurement should collaborate with Finance and BU stakeholders to:
    • Proactively identify quick-win cost reduction projects like vendor negotiations to realize immediate savings
    • Identify and implement demand management opportunities with effective change management
    • Align on an action plan with Finance to ensure that Procurement’s efforts support the strategic financial goals of the company
  • The savings accumulated in this phase could subsequently be invested in other business areas like Marketing. This could help boost business growth and gain a competitive advantage as the company prepares to bounce back from recession. The CFO should leverage this opportunity to introduce formal procurement procedures in the organization for increased control on spend.

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  • Download full PDF report to know more about how a best in class procurement function can help your organization in mitigating the impacts of a recession

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