The Caution Flag is Out

Despite better-than-expected economic indicators, many British firms are spending carefully. What’s prompting the new risk avoidance?

The numbers couldn't be better. By all accounts, and according to recent data, Britain's economy is growing at a surprisingly brisk pace. But you might not know that from how firms here are acting.

According to recent figures, UK employment increased by 250,000 in the past three months, a remarkable tenfold jump over last year’s third-quarter bump of 27,000. Inflation has dropped to 8.7% from 11.1% last October. And the economy just registered eight straight quarters of growth. All of this couldn’t be further from the gloomy economic forecasts of last autumn. But experts say business leaders have other worries at hand, from a labor shortage that threatens revenue growth to the rising interest rates that have traditionally stalled the economy. The result: a renewed emphasis on cost control and efficiency across the board.

"There is a big focus on return on investment," says Ben Angold, a London-based senior client partner and leader of sales and development for RPO at Korn Ferry. That means a lot more scrutiny of spending for new equipment and/or services. Or as Daren Kemp, Korn Ferry’s country chair for the UK and Ireland, sees it, “The marketplace is not growing. It's now about market share, and that's making business leaders opportunistic and cautious."

The same goes for advertising budgets, as consumer-focused companies brace for a slowdown despite the economic uptick. Grant Duncan, Korn Ferry's London-based managing director and sector lead for media, entertainment, and digital, says consumer-product corporations are pulling back on budgets, which had run ahead of the economy, as pessimism about the future grows. “All the data show it’s down and that it will stay there,” he says.

Without a doubt, rising interest rates remain the key issue on the minds of UK business leaders. Hoping to battle inflation, the Bank of England recently increased interest rates for the twelfth consecutive quarter, and analysts are not expecting the hikes in the UK to pause as they just did in the US. The repercussions have severely constricted the housing market and hence consumer spending. Meanwhile, the aftereffects of overpaying employees during the so-called Great Resignation have hit the bottom line at many firms. “It’s something of a storm brewing,” says Duncan.

In response, some firms are being cautious about not just capital expenses, but also human capital. Many are doing more outsourcing, for example, Angold says. At some organizations, external contractors are increasingly managing services like desktop support and auditing. The growth of outsourcing, which allows companies to avoid fixed expenses, is expected to double by 2027, according to research firm Statista.

Organizations have also changed the way they deal with employees. While many tech companies have been shedding workers by the boatload lately, others have been trying to keep existing employees happy, Duncan says. He notes that many non-tech firms trimmed staff and transformed themselves into lean organizations staffed by top performers. Now, in an extremely tight UK labor market, attention is on retention rather than hiring, even if that means making hefty counteroffers to keep people. "It's better and cheaper to up the offer than to find someone to replace that person," he says.

There's also a reluctance to gamble on inexperienced new hires: "People who have held the role before get priority,” Duncan says. In a flourishing economy, employers will sometimes take a high-risk, high-reward approach to hiring, if they think a candidate has a chance to excel.


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