Unfreezing Inflation Fears

Last year, the executive was focused on a several pressing crises: supply chain implosions, staff working in their pajamas, COVID-19. Though he heard the drumbeat of inflation, he responded to it mostly by forwarding foreboding articles to his CFO. As far as the executive was concerned, inflation presented fewer day-to-day concerns than the other matters on his desk.

Today, a year later, inflation is topping 8%. Experts say few companies have responded sufficiently, despite the threat to bottom lines that prolonged inflation presents. Blame COVID-related issues. “Supply chains were already on their heels,” says supply-chain expert Melissa Hadhazy, a senior client partner at Korn Ferry. The response in most camps has been to simply increase prices, which has only raised the ire of many consumers.

On its face, the lack of a strong corporate response to a major financial crisis seems unusual, but experts point out that most leaders today have little experience with the days of soaring inflation decades ago. Consider the context, psychologists say: when alarms are blaring, the human mind struggles to separate catastrophic troubles from ongoing annoyances.

“We were all frogs in a saucepan,” says business psychologist James Bywater, a senior client partner at Korn Ferry. “There were so many panic notes on the fringe that recognizing the real ones was tricky.” Many firms were reeling from dropping 15% to 20% of their workforce right at the start of COVID, and facing unpredictable labor costs.

Then came a surprising development in 2021: an jag of positive financial numbers that, for many organizations, was unexpected. No one pushes the panic button when profits are flowing. Again, executives tabled any response to inflation. “They got lost in their excitement about all the profits made against expectations during and after the pandemic,” says psychologist Kamma Braham, head of assessment and succession in Copenhagen for Korn Ferry.

The billion-dollar question is what levers to pull now. Raise wages? That helps workers but fuels inflation. Raise prices? That stresses customers and compounds existing pricing problems. Most firms are focusing on change in one particular area. “All of our clients are taking a new and fresh look at supply chains,” says Seth Steinberg, senior client partner at Korn Ferry. Companies are asking whether their shop bags need to be ordered from Italy, or whether it’s possible to produce fabric in both Vietnam and India, making the choice on a case-by-case basis. Can the tolerance of the steel be shifted, opening up multiple supplier options? 

For her part, Hadhazy sees companies moving away from large supply chains operating across whole categories to smaller supply chains serving each business or department and optimizing for that one niche. At the same time, companies are training people, like procurement officers, to be aware of the wider supply chain around them, and providing them with the visibility, authority, and information to make joint decisions. That last part—providing real-time information—is critical, says Hadhazy. “There’s a need for digital maturity,” she says.

As far as responding to workers’ own inflation struggles is concerned, experts say that structural changes, such as increasing compensation, are not advisable at this moment due to wider financial uncertainty. They say that this an excellent moment for symbolic efforts, however. “There are goodwill gestures that are more empathetic,” says Andrés Tapia, Korn Ferry’s global DE&I strategist—for instance, employees appreciate meals and gas-reimbursement cards. The communication around these is an opportunity, says Kristi Drew, global account leader in financial services at Korn Ferry. “Be very clear about why and what the plans are,” she says. “It’s an opportunity to connect.”

Read more This Week in Leadership articles