Avoiding financial distress will become complicated in the future

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One of the biggest risk factors when it comes to the Covid-19 Pandemic is that the future of work will be so different from the current reality that companies face that it will be a significant risk factor when it comes to placing companies in financial distress. If not managed appropriately, this may well prove to be an unwelcome reality.

Nokia and Blackberry faced similar challenges when Apple launched its first iPhone announcing that this is the way that the future of communication will go. Hedging your bets on an unknown and unquantifiable reality is risky business.

In order to avoid financial distress companies need to go back to basic and make the necessary adjustments to their operating models to account for this unknown and unquantifiable risk.  McKinsey reports that the Pandemic has accelerated three broad trends that may reshape work after the pandemic recedes. Addressing these may decrease the risk of financial distress.

Remote work and virtual meetings are likely to continue

The report points out that perhaps the most obvious impact of Covid-19 on the labor force is the dramatic increase in employees working remotely. To determine how extensively remote work might persist after the pandemic, we analyzed its potential across more than 2 000 tasks used in some 800 occupations in the eight focus countries.

Considering only remote work that can be done without a loss of productivity, we find that about 20% to 25% of the workforces in advanced economies could work from home between three and five days a week. This represents four to five times more remote work than before the pandemic and could prompt a large change in the geography of work, as individuals and companies shift out of large cities into suburbs and small cities. We found that some work that technically can be done remotely is best done in person. Negotiations, critical business decisions, brainstorming sessions, providing sensitive feedback, and onboarding new employees are examples of activities that may lose some effectiveness when done remotely.

The report adds that some companies are already planning to shift to flexible workspaces after positive experiences with remote work during the pandemic, a move that will reduce the overall space they need and bring fewer workers into offices each day. A survey of 278 executives by McKinsey in August 2020 found that on average, they planned to reduce office space by 30%. Demand for restaurants and retail in downtown areas and for public transportation may decline as a result.

AI has already added benefits to plenty of industries
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Remote work may also put a dent in business travel as its extensive use of videoconferencing during the pandemic has ushered in a new acceptance of virtual meetings and other aspects of work. While leisure travel and tourism are likely to rebound after the crisis, McKinsey’s travel practice estimates that about 20% of business travel, the most lucrative segment for airlines, may not return. This would have significant knock-on effects on employment in commercial aerospace, airports, hospitality, and food service. E-commerce and other virtual transactions are booming.

The report points out that many consumers discovered the convenience of e-commerce and other online activities during the pandemic. In 2020, the share of e-commerce grew at two to five times the rate before Covid-19. Roughly three-quarters of people using digital channels for the first time during the pandemic say they will continue using them when things return to normal, according to McKinsey Consumer Pulse surveys conducted around the world.

Other kinds of virtual transactions such as telemedicine, online banking, and streaming entertainment have also taken off. Online doctor consultations through Practo, a telehealth company in India, grew more than tenfold between April and November 2020. These virtual practices may decline somewhat as economies reopen but are likely to continue well above levels seen before the pandemic.

The report adds that this shift to digital transactions has propelled growth in delivery, transportation, and warehouse jobs. In China, e-commerce, delivery, and social media jobs grew by more than 5.1 million during the first half of 2020.

Covid-19 may propel faster adoption of automation and AI

This is a major barrio when it comes to avoiding and recovering from financial distress. Companies are facing massive liquidity issues and may not be prioritizing this kind of investment. McKinsey believes that this is a problem.

The report points out that wo ways businesses historically have controlled cost and mitigated uncertainty during recessions are by adopting automation and redesigning work processes, which reduce the share of jobs involving mainly routine tasks. In our global survey of 800 senior executives in July 2020, two-thirds said they were stepping up investment in automation and AI either somewhat or significantly. Production figures for robotics in China exceeded prepandemic levels by June 2020.

Many companies deployed automation and AI in warehouses, grocery stores, call centers, and manufacturing plants to reduce workplace density and cope with surges in demand. The common feature of these automation use cases is their correlation with high scores on physical proximity, and our research finds the work arenas with high levels of human interaction are likely to see the greatest acceleration in adoption of automation and AI.

The trends accelerated by COVID-19 may spur greater changes in the mix of jobs within economies than we estimated before the pandemic.

McKinsey reports that a markedly different mix of occupations may emerge after the pandemic across the eight economies. Compared to pre-Covid-19 estimates, we expect the largest negative impact of the pandemic to fall on workers in food service and customer sales and service roles, as well as less-skilled office support roles. Jobs in warehousing and transportation may increase as a result of the growth in e-commerce and the delivery economy, but those increases are unlikely to offset the disruption of many low-wage jobs. In the United States, for instance, customer service and food service jobs could fall by 4.3 million, while transportation jobs could grow by nearly 800 000. Demand for workers in the healthcare and STEM occupations may grow more than before the pandemic, reflecting increased attention to health as populations age and incomes rise as well as the growing need for people who can create, deploy, and maintain new technologies.

Before the pandemic, net job losses were concentrated in middle-wage occupations in manufacturing and some office work, reflecting automation, and low- and high-wage jobs continued to grow. Nearly all low-wage workers who lost jobs could move into other low-wage occupations—for instance, a data entry worker could move into retail or home healthcare. Because of the pandemic’s impact on low-wage jobs, we now estimate that almost all growth in labor demand will occur in high-wage jobs. Going forward, more than half of displaced low-wage workers may need to shift to occupations in higher wage brackets and requiring different skills to remain employed.

25% more workers will switch occupations in the future
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As many as 25% more workers may need to switch occupations than before the pandemic

While many companies may regard property, vehicles or manufacturing equipment as their main asset, the reality is that employees are a company’s most important asset and losing key skills may be a root cause of financial distress.

The McKinsey report points out that, given the expected concentration of job growth in high-wage occupations and declines in low-wage occupations, the scale and nature of workforce transitions required in the years ahead will be challenging, according to our research. Across the eight focus countries, more than 100 million workers, or 1 in 16, will need to find a different occupation by 2030 in our post-COVID-19 scenario, as shown in Exhibit 4. This is 12 percent more than we estimated before the pandemic, and up to 25 percent more in advanced economies.

Before the pandemic, we estimated that just 6 percent of workers would need to find jobs in higher wage occupations. In our post-COVID-19 research, we find not only that a larger share of workers will likely need to transition out of the bottom two wage brackets but also that roughly half of them overall will need new, more advanced skills to move to occupations one or even two wage brackets higher.

The report adds that the skill mix required among workers who need to shift occupations has changed. The share of time German workers spend using basic cognitive skills, for example, may shrink by 3.4 percentage points, while time spend using social and emotional skills will increase by 3.2 percentage points. In India, the share of total work hours expended using physical and manual skills will decline by 2.2 percentage points, while time devoted to technological skills will rise 3.3 percentage points.

Workers in occupations in the lowest wage bracket use basic cognitive skills and physical and manual skills 68% of the time, while in the middle wage bracket, use of these skills occupies 48% of time spent. In the highest two brackets, those skills account for less than 20% of time spent. The most disadvantaged workers may have the biggest job transitions ahead, in part because of their disproportionate employment in the arenas most affected by Covid-19.

In Europe and the US, workers with less than a college degree, members of ethnic minority groups, and women are more likely to need to change occupations after Covid-19 than before. In the US, people without a college degree are 1.3 times more likely to need to make transitions compared to those with a college degree, and Black and Hispanic workers are 1.1 times more likely to have to transition between occupations than white workers. In France, Germany, and Spain, the increase in job transitions required due to trends influenced by Covid-19 is 3.9 times higher for women than for men. Similarly, the need for occupational changes will hit younger workers more than older workers, and individuals not born in the European Union more than native-born workers.

Mitigate financial distress risk factors

If companies are going to avoid financial distress, they need to pay attention to these trends and determine how they impact their companies.

At least two if the trends are driven by the adoption of technology and the growth of the Fourth Industrial Revolution. While companies may be reluctant to invest in technology, they need to pay attention to tech enabled companies such as Netflix and Zoom. These companies grew significantly during the Pandemic. While they may be facing attrition at the moment, the gravitation towards technology is a permanent change that will ensure sustainability provided that they focus on their core strengths.

The challenge is for turnaround professionals do conduct a full diagnosis of their clients and their operating models to determine the best path to avoid financial distress.

The Mystery Practitioner is an industry commentator that focuses on the shifting dynamics and innovative thinking that BRPs and turnaround professionals will need to embrace in order to achieve success in their businesses.