Seeking operational efficiencies

Despite the muted economic outlook, 88% of business leaders in Europe remain focused on pursuing long-term priorities to thrive, with 48% also combining them with short-term survival activities. A much smaller group is focusing solely on immediate survival.

When asked to choose between improving operational efficiencies versus investing to innovate and grow, 78% are focused on operational efficiencies, although the majority of these are aiming to tackle both, simultaneously. But is doing both feasible?

In last year’s HLB survey, 86% of European leaders expressed greater confidence in their ability to innovate than in pre-pandemic and doing so at faster speeds than in the past. However, the majority also selected “lack of time” and “insufficient funding” as the key barriers to innovation. This year, leaders have even less time or investment capacity to innovate due to the disruption caused by rising energy costs, inflation, interest rates, and geopolitical tensions.

At the same time, many face workforce constraints, as cited earlier. Understaffed teams are now asked to achieve more in less time and on a smaller budget. 76% of leaders based in Europe (Q4) plan to increase headcount to improve productivity, however, the majority of these (47%) are, at the same time, cutting staff in other areas to save costs. Workforce optimisation is a natural ‘coping mechanism’. When immediate growth isn’t an option, cost cutting and efficiency improvements become necessary priorities. For 64% (Q2) improvements in operational efficiency performance are the key priority for 2023, followed by cost reduction (43%) and new technology adoption (40%). That said, leaders can only cut costs once. To thrive in the longer term, they will need to consider a broader range of operational changes.

Revving up the engine for growth

Given the market conditions, it’s not surprising that Europeans remain cautious in the short-term, but more optimistic on their future outlook. 88% are focused on both transformation and survival. As a leader in the agriculture sector commented, “this [crisis] will pass, make good choices in the interim. Fix and lock things down to determine operational performance, do not speculate.” So how can European leaders operate at faster speeds and at a lower cost?

Eurostat 10 suggests that the real labour productivity per hour worked figure has been continuously increasing over the past five years, even through 2020-2021. The EU  also benefits from having a relatively high percentage of the population with a post-secondary degree. Despite these factors, Europe appears to lag behind in terms of high-tech innovation.

In 2020, European companies curtailed spending on research & development (R&D) projects — and so did regional investors. Even prior to the pandemic, many leaders were treading carefully with investments in information and communication technologies (ICT). As a result, European companies now trail behind the US and China in terms of R&D growth rates, according to the EU Industrial R&D Investment Scoreboard 11 in sectors such as ICT products, healthcare, and ICT services.

Interestingly, European business leaders are more focused on building organic growth than their global peers who are more likely to be launching new products and services. With less capacity for innovation activities in 2023, they appear to be pinning their hopes on maximising the value of their current product/services portfolios. Yet, as a European CEO in real estate and construction noted: “New opportunities are born from a crisis. Look forward and be prepared to supply what will be needed in the near and further future. Don't become the Nokia within your business.”

Supply chain and sustainability

Supply chain was selected as the third area which will require bolstering in 2023. The majority plan to fix ongoing challenges by simultaneously applying ‘lean’ and ‘just-in-time’ principles and creating surpluses where needed.

Since “rising resource costs” is an acute risk for businesses today and one which they expect to rise over the next five years, this is a sound strategy. Logistical issues have placed regional supply chains under significant stress since the start of the decade. Bottlenecks in container shipments, lockdowns in Asia, and port congestion lingered for months throughout 2020-21. Early signs of stabilisation in 2022 soon vanished on renewed geopolitical tensions.

Energy security has been disrupted in the region and European countries have had to rapidly find new energy supply routes to adapt to rising oil, gas, and electricity prices. High energy costs have prompted some businesses in Europe to reduce their operations, which has further strained supply chains.

These factors remain ongoing concerns, but they may also prompt leaders to reconsider earlier practices and move towards more sustainable sourcing and operating strategies. It is not surprising that renewable energy features in the top three technologies most important for European businesses over the next five years.

The importance of sustainability has increased in the aftermath of the War in Ukraine, the impacts of climate change and other incidents seen globally. Many businesses are already making important choices in response to societal concerns, such as safeguarding workers in dangerous location or changing their operations in Russia. However, less than half (46%) plan to rethink the broader ESG responsibilities and more than half (54%) don’t consider ESG as a priority for 2023, in contrast with stronger intentions around ESG shown by their global peers. This may be an oversight as in the words of one of our survey respondents: “The impending regulation that will come our way means we need to think about and act on it sooner rather than later.”

Reluctance to act on ESG may be explained by a limited understanding of ESG and potential future reporting requirements. Only 38% of European leaders have a good understanding of what will be required - and more importantly, how ESG can be deployed to enhance competitive positioning (from the supply chain to talent acquisition and customer consideration).

Strong ESG performance also opens access to new capital in the form of government subsidies, tax rebates, and investment schemes. Green taxation initiatives are underway at both the EU and Member State levels. The European Investment Fund (EIF) plans to allocate 50% of its financing to companies, pursuing climate-related initiatives.

At the same time, ESG disclosures are becoming mandatory. The Corporate Sustainability Reporting Directive (“CSRD”), approved at the end of 2022, will require publicly listed and enterprise-sized companies to report information on risks and opportunities arising from  ESG issues, starting in 2024. The reporting requirement will extend to smaller companies over the following four years. From 2028, CSRD will also reply to non-EU parent companies, which have at least one EU subsidiary and generate over €150 million in net turnover in the region.

A number of other ESG reporting frameworks have emerged. Sustainable Finance Disclosure Regulation (SFDR) requires financiers and asset managers to make investment decisions based on ESG factors and provide wider product-level disclosures for goods labelled as ‘sustainable’.

The Regulation on the EU Climate Transition Benchmarks also establishes two new tools investors can use to assess future investment decisions in Europe  — the EU Climate Transition Benchmark (EU CTB) and the EU Paris-Aligned Benchmark (EU PAB).  Individual companies can also follow guidelines on non-financial reporting to report on generated carbon footprints and greenhouse gas emission levels.

ESG reporting frameworks offer an opportunity to benchmark your business against regulatory targets and locate underperforming areas. Improvements in these can give your company a competitive advantage in terms of greater investor, shareholder, and customer support. HLB advisors would welcome discussion on ESG reporting and opportunities, generated by sustainability-led actions.  

How other leaders are re-thinking ESG responsibilities

ESG is an undeniably complex subject. Each component — environment, social, and governance — includes multiple sublayers of best practice guidelines. As part of our survey, we asked what ESG actions European leaders take to meet wider stakeholder expectations. Below are some of the strategies they plan to pursue this year.

CEO in a Financial Services industry:

1. Building a sustainable world, by reducing our own ecological footprint with concrete actions (housing, renewable energy, reducing consumption, recovering rainwater, etc.);
2. Solidarity for a more humane life;
3. Commit to supporting local investments;
4. Environmentally conscious mobility;
5. Favour quality education;
6. Employee welfare.

Italian CEO in the Hospitality & Leisure

“Attention to governance aspects, paying attention to the expectations of Personnel, the adoption of the legality model L. 231, the adoption of extremely clear contractual relationships with Suppliers.

Under the social profile, we will create, in a new location to which we will move, an area that will be dedicated to encouraging discussion and development of ideas by Researchers, Start-ups, and Undergraduates.

Environmentally, we will equip the new headquarters with natural energy generation facilities and install charging stations for electric cars in our parking lots, which can also be used by third parties." [translated]

German CFO in the Transportation & Logistics

“Preparation of ESG/CSR reports, the appointment of sustainability officers, compliance with supply chain due diligence requirements”. [translation]

Executive in the Agriculture Sector

“We are working in Vertical Farming and with growers. A lot of what we do is around food security, food sustainability and fewer food miles. As we evolve we need to also get closer to Net Zero and look at alternative sources of power”.

Strong leadership is required for the times of crises 

Leading through the storm isn’t easy. With the high degree of uncertainty, few leaders can produce accurate “readings” of the current markets. Previous best practices lose their potency and companies must continuously reinvent themselves to meet the new risks and navigate around constraints in revenue growth. 

No wonder “flexibility” emerges as the most important quality for successful leadership in times of crisis. “Willingness to change and adapt to the environment is key to personal growth and success,” one a leader from the business services sector further elaborates. Whilst a CFO from the Manufacturing sector also notes that leaders shouldn’t be “afraid to make mistakes but learn from them and move on.” 

Leaders who can respond flexibly to new challenges will succeed. However, they must also act with integrity, rather than look for shortcuts to success. Honesty and empathy are important to make customers trust you, trust is uttermost important,” a CEO in the Retail industry says. European leaders must rally support from employees, customers and wider  stakeholders to maintain a positive brand reputation, essential for long-term success.

“Do not let yourself be ruffled”, a CISO from the tech industry says. Every storm eventually passes, but while it rages you have to maintain a strong posture to reassure the people around you. Compelling communication was the third top essential behaviour European leaders selected. Maintaining a positive public image during turbulent times when societies are polarised and dealing with constant misinformation requires timely, candid, and open communication both with your people, customers, and broader society. “Motivation, courage, endurance, and innovation” are the qualities that will help you survive and thrive in the challenging business environment, according to a financial services leader.