It might just be the end of the beginning, but it’s nowhere near the beginning of the end. At around 1.30pm in Brussels today, Sir Tim Barrow handed a letter from UK prime minister Theresa May to the European Council president Donald Tusk (pictured) signalling the UK’s wish to exit the EU, and so start the most important, complex, and uncertain negotiations the UK government has ever entered into.
The only sure thing about the next two years of fraught bargaining is that every twist and turn will be covered in minute detail, and expert after expert will be wheeled out to pontificate on what it could mean for a “post Brexit future.” Indeed, much of the commentary will be mere speculation, given that so little is certain, so much of the UK and EU’s public relations are overblown rhetoric designed to engineer a negotiating position, and there is no historical example to provide a guide for anyone. Senior management teams – even those with extensive operations on both sides of the English Channel – could be forgiven for tuning out at times in the months to come.
But there is a difference between filtering the useful information from the noise, and simply waiting to see what happens. No business can afford to tread water for the next two years – to put off big investment decisions, such as pursuing an acquisition target, or scaling-up production of a promising product line – until everyone’s more certain of what the future holds.
In-depth analysis of corporate performance across the past 20 years shows that the handful of firms that have managed to be successful through that time consistently make bigger, riskier growth bets than their competitors. Brexit is exactly the kind of situation that will lead many leadership teams to be cautious, and so leave a brave few to reap the rewards of being more decisive over the next five to 10 years.
First, Understand Brexit’s Implications
Bold decision making is, however, a far cry from reckless decision making. If they haven’t already, management teams should first forge a common and comprehensive understanding of their company’s “ecosystem;” its sources of labor, capital, and goods and services, its operations, and the markets and customers its sells to. And then must take the time to learn how the more likely Brexit scenarios will affect each and every part.
For example, strategic plans must have explicit measurable goals so that the management team – and Brexit taskforce – can understand their progress towards them. The plans should also be underpinned by a list of major assumptions about customers, competitors, macroeconomic data, new technology, and regulatory change, and a clear understanding of what type and size of change – the establishment of a hard border between Northern Ireland and the Republic to the south, for example, or sterling falling below a certain level against the euro – will render the strategy unworkable, and so require a rethink.
CEB members all have access to a comprehensive tool that will help them establish and run a Brexit taskforce to carry out just this kind of task on their dedicated member websites. There are also two webinar replays, and a whole host of resources, that are publicly available.
Then, Be Bold
Once management teams have this common and deep understanding of where the firm is going, and what will make a rethink necessary, they need to work out where the opportunities lie.
The research is clear that the most successful big companies of the past two decades have not outperformed competitors by being operationally excellent. In fact, they are on average 16% less efficient with SG&A spending (i.e., they have higher SG&A costs as a proportion of revenue), have a 4% higher effective tax rate, and their turnover of working capital is 36% lower than their less successful peers and competitors.
But they are far better at making growth bets and making use of the assets they already have. They have seen a 32% greater return on assets than the control group and a 10% greater return on invested capital. They hold 28% less debt as a percentage of total assets, and enjoy a whopping 79% greater return on their R&D spending.
All this points to management teams that know their company, their industry, and their markets inside out, know where they want to take the firm next, and what constitutes success. And markets clearly reward this kind of approach to business; the best companies of the past two decades have seen a 7% annual shareholder premium compared to their peers.
If nothing else, this should show management teams that there is a path for negotiating the Brexit landscape and coming out a stronger company on the other side. But only if they act now, and before their sharpest competitors do.