What a year to run a business! An unprovoked war triggers a global energy crisis, the worst inflation in decades threatens to derail the global economy, and geopolitical forces push even harder for a rolling back of globalization.
Corporate leaders can’t expect a respite in 2023. Inflation may be showing signs of easing but high interest rates, energy shortages, and residual pandemic supply-chain issues are likely to slow global growth to 2.7% in 2023 from 3.2% in 2022, according to the International Monetary Fund.
Companies will need to make tradeoffs as they face these and other challenges, including climate change and China’s shifting COVID policies. But this is also a time to experiment, to try new strategies, and to question long-held assumptions. Mistakes will occur, but failure also is an opportunity to learn and to innovate.
Research, plan, experiment
Businesses need to be nimble, prepared, and willing to experiment in 2023. Now is the time to review what worked this year and what risks could arise next year from macro and micro trends. Some are universal — a changing workforce, access to capital, climate change, supply chain bottlenecks — but others are industry specific.
Companies should ramp up their data collection and analysis to better understand their customers and colleagues. What products are customers likely to abandon if they have to choose between higher energy costs and groceries? Data can help provide answers.
Business leaders also need to understand their people. Do your employees have the skills they need or are you about to have a brain drain as experienced managers retire? What benefits do they value and what are they willing to give up? Use the data to build best- and worst-case scenarios. That way business is ready, whether it’s to relocate a factory or acquire a competitor, shrink a product line, or provide new benefits.
Businesses and consumers had grown accustomed to low interest rates and easy access to credit. But that disappeared in 2022 as central banks raised rates to tame inflation. Capital in 2023 will be harder to get and cost more than in the recent past, when lenders would provide cash for a good idea without a product or overwhelming proof that it could become a money-making business.
Companies will now need a solid track record and business plan to get cash. But tight credit also could lead to more acquisitions as businesses collapse or seek mergers.
Add links to the supply chain
While many of the pandemic-era bottlenecks have cleared, lots haven’t, and protectionism is creating shortages and pushing up prices. Companies need to identify these and other potential supply-chain risks, whether they could come from geopolitical tensions or severe weather shuttering a plant.
A growing number of companies are trying to avoid these challenges by diversifying suppliers, factory locations, and shipping strategies. Companies are now prioritizing security, access, and stability but are taking cost and friction into account by building more time into projects to ensure that plans are realistic.
Embrace your new team
Despite economic weakness, business will continue to face a war for talent, especially as experienced baby boomers, the youngest of whom are 60, continue to retire. Business needs to adjust — and quickly — to Gen Z. These digital natives will account for 30% of the workforce by 2030. Born between 1997 and 2012, they have very different expectations about work from older generations.
The pandemic trauma left them more focused on personal health and less on traditional careers. They expect far more than remote work and appropriate pay. They want benefits that align with their focus on holistic health, and opportunities to grow at their own pace. Companies should experiment with different hybrid options to see what works best for their culture. Many are successfully using job sharing, flexible hours, and four-day work weeks to attract and retain talent.
Digital assets are here to stay
2022 gave us the most brutal of crypto winters, but CEOs should not write off digital assets. The sector shows real promise of useful innovations, and the underlying distributed ledger technology continues to gain ground in real world applications, such as the European Investment Bank’s recent 100 million-euro bond issued on a permissioned blockchain. In financial markets, this will translate to the “tokenization” of stocks, bonds, and other assets, bringing major efficiencies and reducing liquidity needs and operational risks.
Meanwhile, digital currencies will assist in the increasing digitalization of the economy, including in the metaverse, with central bank digital currencies, private sector stablecoins, and bank-issued tokenized deposits all playing a role. There is also strong potential for decentralized finance (DeFi) to eliminate expensive and time-consuming human-centric processes, although it will be challenging to ensure DeFi solutions are truly safe.
The spectacular disasters of 2022 — principally the collapses of crypto exchange FTX and the Terra/Luna stablecoin platform — and their ripple effects underline the need for guardrails to protect consumers, investors, the financial system, and the wider economy. Fortunately, policymakers are in the process of designing laws, regulations, and supervisory approaches appropriate for the digital assets sector.
More climate pressure
Company leaders will need to make tradeoffs as, on top of current economic challenges, they face climate-related pressure from multiple angles. This includes employees, consumers, and regulators who are often pushing for faster progress and increased transparency, and a spectrum of shareholder views, from the climate committed to those who think corporates should stick to purely focusing on the bottom line.
Developing detailed transition plans could help provide stakeholders comfort that executives are getting it right. The clock is ticking. About three-quarters of consumers say they want businesses to act on climate change, according to a recent Oliver Wyman Forum survey of those in the United States, United Kingdom, and Brazil.
Government pressure also is growing, with several committed to mandatory external disclosures. Earlier this year, the US Securities and Exchange Commission proposed a mandate for public businesses to disclose their greenhouse gas emissions, while more than 1,300 of the largest UK companies have to disclose climate-related financial information, including transition plans, as of April 2022.
Transition plans that articulate the long-term value of a low-carbon business — and explain the cost of inaction — may help executives walk the line of differing stakeholder expectations.
What can mainstream finance learn from crypto? A lot, actually, notwithstanding the collapse of the FTX exchange group and a fresh downturn in cryptocurrency markets.
Decentralized finance, which uses blockchain-based smart contracts to automatically execute financial transactions, has the potential to be the next great technological innovation in finance. To do so, though, it will need to incorporate the same, or higher, levels of security standards and safeguards that have been developed over decades in the traditional finance industry.
The Oliver Wyman Forum, in partnership with Singaporean bank DBS, Onyx by J.P. Morgan, and Japan’s SBI Digital Assets Holding, believes the time is ripe for just such a breakthrough. In a new paper, we make the case for Institutional DeFi, a system that combines the power and efficiency of DeFi software protocols with a level of protections and controls that regulators demand and customers expect.
The three financial institutions recently demonstrated the feasibility of this concept in a pilot project under the auspices of the Monetary Authority of Singapore. The pilot carried out foreign exchange and government bond transactions (both live and simulated) against liquidity pools of tokenized currency deposits and government bonds. It used a public blockchain network with regulated institutions acting as “trust anchors,” issuing and verifying the credentials of participating entities. The transactions used digital identity solutions and logic adapted from existing DeFi protocols.
More work is needed by individual firms, the industry, clients, and regulators to make the leap from proof of concept to real business, and to scale that business to make an impact on global markets. But the cost savings and new opportunities of streamlining trillion-dollar markets in foreign exchange, equities, bonds, and other assets could be substantial for issuers, investors, and financial institutions.
The Institutional DeFi opportunity is here. The time to build the future is now.
No matter what happens in 2023, the Oliver Wyman Forum will be there. We wish you a happy holiday and look forward to providing research and opportunities to convene in the year ahead as we work together to solve the world’s toughest problems. Happy New Year!
In case you missed them, here are a few highlights from 2022.
- The New People Shaping Our Future
- It's Time To Explore Institutional DeFi
- The Economic Potential of Web3 Metaverses
- The Urban Mobility Readiness Index
- Why Fixing Global Supply Chains May Be a Long Haul
- How Urban Mobility Will Change by 2030
- Are Cryptoassets Tulips or Dot-coms?
- The Right Moves to Navigate Economic Uncertainty
- Nature Into Numbers: Measuring the Impact of Business On Ecosystems
- How to Help Gen Z Turn Climate Anxiety Into Action