Rules for a recession: stick to core business and hold on to great talent

Banks are essential to everything we do, and while the media have been quick to jump on the sector’s headline-grabbing $7.15 billion dollar profit increase, published in KPMG’s Financial Institutions Performance Survey 2022 (FIPS), there are other concerns and insights that businesses need to be aware of.

If the numbers paint a picture, the recent ones in KPMG’s survey are indicative of a strong financial position, but one where Kiwi businesses will need to tread cautiously, according to John Kensington, KPMG partner, audit division.

“The first message is that our banking system is in a good place right now and that is important because they may have to assist the country through a recession. The other point is that banks recognise that they have a social obligation to help people,” Kensington says. 

He cites the pandemic as an example of where banks assisted their customers with mortgage deferrals and enabled them to access interest-free periods as the country came to a standstill, and businesses shut down.

With an incoming recession, he says banks will need to look closely at how they support their customers, but they are well positioned and equipped to manage risk in a volatile environment.

The impacts of a recession are yet to be felt, but businesses across every industry need to be prepared. 

“It'll be challenging for everybody because we still have inflation and I don't really think anybody is going to be immune from it. So, it's about awareness that the recession is coming and it is important to be talking about it, so that it doesn't come as quite a shock.”

As part of the preparation, Kensington urges boards and businesses to stick with what they know, including focusing on core business - looking carefully at costs and incurring only those needed to ensure margins are appropriate.

Being on top of the basics is imperative at this time, and that means having adequate cash flow, organising financing early and assessing it. For instance, if a loan is due to mature in the year ahead, it might be wise to negotiate replacement funding before that happens.

Kensington says all of the above needs to be done simultaneously and on a cyclical basis, especially now with little to no room for reticence.

Depending on the type of business there will be different additional considerations. Those involved in manufacturing need to ensure they are selling their products for more than it costs to produce them. And businesses involved in importing or exporting need to think about whether they are hedging their risks around foreign dollar imports, or conversely, taking foreign exchange coverage, if they are exporting. Similar considerations apply to hedging any lending they may have.  

“It’s about being a lot more alert and focusing more on the things that could challenge you, and having strategies to deal with them in advance,” Kensington says.

For boards wanting to diversify as part of their overall strategy, Kensington warns caution is needed before throwing new ideas into the wind.  

“For example, if you were a lender and your expertise is in car loans, keep doing car loans. Maybe take on another dealership because that's car loans you're used to. But don't go into personal lending, or into a product that you're not familiar with, even if it looks similar.”

Since the pandemic, talent shortage has remained an issue for boards and businesses, and attracting the right people will always come at a cost. So how should boards be prepared to navigate a continued resource shortage in the midst of a looming recession? 

Kensington says now is a crucial time to hold on to great talent “because if you have to replace it, it will be more expensive. So I think you need to understand what talent you've got, what talent you need, and try and find it”. 

Loss of talent equals a loss of institutional knowledge, which takes time to build and will invariably be more expensive. In sourcing talent, Kensington suggests a need to think innovatively. That might include looking within a company’s wider internal network, especially if it has offices overseas.

In this case, tailoring contracts that allow for flexibility if you have international talent that enables people to return home during the holiday period, which helps businesses retain great staff and hold onto specialist skills and expertise.

Kensington says having staff working across different time zones can also benefit the workflow if people are collaborating on projects. He emphasises, too, the importance of companies making arrangements that allow an employee to pursue passions that might take them out of the workplace, especially in the instance of a competitive sport they might play, or an art form that they want to pursue that is important to them.

“It would be really wise to try and find a way to make it work for both of you,” Kensington says.

But money also speaks volumes in an increasingly competitive recruitment landscape where people want to be paid well, but are also looking for roles where they can contribute effectively, feel valued, and have a sense of purpose in their work.

Illuminated in KPMG's report, is the success of banks in attracting and poaching talent from other industries, particularly in tech-related roles. With new innovations and services in banking creating a demand for skill sets in technology, where does that leave other industries, and what does it say about the finance sector’s ability to appeal to prospective employees?

“I think if you talk to banks they'd probably say they are no more successful than anyone else in doing this, but I think there's still a little bit of a mystique around banking, which attracts people to the sector,” says Kensington. 

While the battle for top-tier talent might not look like an even playing field, Kensington says banks will continue to face the same challenges as other businesses.

But regardless of whether the recession is engineered or happens organically, there may still be opportunities to be found amid the turbulence of an ominous economic cloud. The only question is where?

Kensington says boards need to recognise that they will be operating in different times compared to what we’ve had. He says focussing on running a business will mean looking after customers - future stakeholders, in particular, are behaving in a different way than they did in the past.

For all sectors this is true, but he emphasises for financial institutions, providing support to their customer base is essential during tough times that are likely to get even tougher.

“We are reliant on banks and we need them. In the profit world that's the way you think, but in a more environmental, social ESG-type world, it's actually about them needing to be respected, and needing to be trusted because they are playing a pivotal support role in society.”

Kensington says banks and societal perceptions of them can be easily damaged, so trust and respect is more pertinent now than ever, now that younger people are more likely to do their research before investing in goods and services. 

“They aren't going to bank with the same brand, or just buy a car from the same brand as their parents. They’re thinking about their future needs, and going to businesses that have purpose.” 

It seems this might be the perfect time for businesses and boards to carefully consider how they demonstrate their purpose to all of their stakeholders, including current and potential customers and employees.

“It is a big opportunity in the years ahead,” says Kensington.