Have you prepared your stagflation gambit?

You dream you are someone of exceptional strategic ability – a grandmaster at chess, say. At first, the game goes well, the way it always does. Then suddenly, the pieces and the board begin to melt. It’s your move, but everything is swimming in front of you, and the rooks are looking wobbly.

For many, that’s what it’s like to be a finance professional now in the UK, with inflation now running at 9% annually – on average. Commodity prices, component costs, wages and interest rates – many factors that have been predictable your entire career – are now extremely unstable. Then the impending reality of stagflation hits you: the latest “waning growth forecasts” makes it a challenge to also pass any cost increases to your customers, and demand for your product and services may also falter.

Fortunately, although the game has changed, you aren’t out of good moves. A good start, to continue the chess metaphor, is the financial equivalent of ‘castling’, key moves that will leave you in a safer defensive position with more strategic opportunities:

• Understand your cost structure. Even in non-inflationary times, it’s important to understand your cost structure and its drivers. With inflation, it’s absolutely critical, as inflation can vary wildly between categories. If you are in an industry that requires a lot of highly skilled labour, your risk profile is likely to look very different than if you are in a business that faces a lot of commodity risk. As vendors start demanding price increases, you need to know which are justified, which are not, and how much you will need to raise your own prices to cover those shifts.
• Know your suppliers. Beyond having a clear idea of the cost drivers in your industry, you need to understand the strength of your vendors. How vulnerable are they to price hikes? Can you find out if any of their inputs are locked into long-term contracts, in which case they don’t actually need the price increase they are likely to ask you for in the near term?
• Convince your organisation that this is a serious challenge. It’s may be tempting at first to think of inflation as a math problem – your costs go up 9%, and your prices will eventually adjust — but in practice, it’s almost never that easy, particularly if it turns into stagflation and you can’t push your prices up enough to maintain your margins. Inflation is a dangerous time for every aspect of a business and demands a coordinated response. Make sure you have buy-in from both senior management and other key parts of the business by making inflation a priority in your next planning and forecasting cycles.
• Align every business unit’s tactics to optimise your results. As a business partner, you need a dedicated effort from every department to maintain price and cost discipline. A recent study The Hackett Group surfaced the need to formalize how Finance partners with Commercial, Marketing, R&D and G&A.
• Keep an eye on your own team. As demand for smart finance professionals rises, the best members of your team may be considering new opportunities. Make sure they understand they are valued and that they have interesting opportunities ahead in your company. At the same time, you should start scouting for talent yourself, both as a defensive move if they leave and because stagflation requires extra brains to manage. Some CFOs we talk to anticipate increasing their planning staffs by up to 40% and doubling their indirect sourcing and procurement teams. If you are going to need to expand that much too, you should start looking for those people now.

One of the most frustrating moments in a chess game is when you find yourself in Zugzwang – a chess term for a situation in which you are obliged to move even though any move you make will worsen your position. Inflationary times can feel like that but fortunately with preparation and an active response you can avoid some or all of the potential pitfalls, and win both the game and the match.

Gilles Bonelli is an associate principal at The Hackett Group and the finance, enterprise performance management and business intelligence executive advisory practice leader for Europe.

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