Morten Wierod, President of ABB Electrification, explores the additional pressure that soaring energy costs are putting on businesses worldwide.
Energy costs have been at the forefront of the global news agenda during the past year. While much has been written about the ‘cost-of-living’ crisis for consumers and society, less has been highlighted about the ‘cost-of-operating’ businesses are facing, caused by global uncertainty, including the potential knock-on effects on profitability and growth and investment in the workforce.
ABB’s recently commissioned Energy Insights Survey of 2,300 business leaders globally found that energy cost and stability challenges are impacting businesses across the board, with 92% of survey respondents indicating rising costs are threatening their company’s competitiveness.
Much of the impact stems from tough decisions companies are reluctantly having to make about their cost and investment allocations. Respondents made it clear that dealing with energy challenges will override spending plans that would normally enable their organization to develop talent or invest in new technology capabilities for greater productivity, agility and speed.
But how can businesses maintain their competitiveness whilst addressing fluctuating energy costs and the challenges that come with it?
Pressure on workers and businesses
The cost-of-living challenges have been putting an additional financial burden on society, with people struggling to afford their everyday bills and food due to unprecedented price increases. This has resulted in pressure for businesses to increase salaries to compensate employees at a time when they are facing their own price increases. With continuing uncertainty about energy prices, for many organizations this is just not possible.
With more than 9 out of 10 businesses stating that energy costs are impacting their profitability, this has resulted in reduced investment in the workforce in the last year. If energy challenges persist, this trend is expected to continue over the next three to five years, with three of the top five business areas highlighted for budget reductions related to the workforce: 42% say they will spend less on recruitment; 38% will decrease spending on salaries, overtime, and bonuses; and 37% will reduce investment in staff training and development.
With Industry 4.0 and the increasing digitalization of many businesses, it is vital that organizations can invest in their own development of products and services, as well as the back-end data and software to enable their delivery. The potential cutting or reallocation of this investment may have negative effects on a business, yet 38% of respondents said that they had reduced spend on technology, 33% on infrastructure and 18% on R&D investment in the past year.
The global digital transformation market size per revenue surpassed $594bn in 2022 and is expected to have a continued annual growth of more than 20% to hit nearly $1,550bn by the end of 2027. Competitors who continue their R&D efforts will inevitably have the upper hand when it comes to bringing products to market. By diverting investment elsewhere to survive, the reality is that businesses may lose out to their competition.
Many manufacturers, for example, are rethinking their production lines to automate processes, requiring investment and new skills to implement these. Organizations are shifting from on-premises data centres to cloud-based services and increasing leaning on edge computing to support that shift; all of which takes time and money and requires not only investment in technology but also a digital skillset of specialists who can help businesses to embrace the digital opportunity.
Businesses are facing pressure from all directions. Pressure to digitize their businesses, to increase salaries in line with the rising cost-of-living and also to reduce their carbon footprint.
The report shows that more than 58% of business leaders said the cost of energy could delay achieving their sustainability and carbon reduction targets by anywhere between one and five years. Reducing energy costs is now ranked as the top priority for 61% of companies. Overall, these concerns about energy prices and the action businesses are taking to reroute investment to pay rising energy bills could delay progress on climate change globally, with businesses focusing less on decarbonization and prioritizing reducing their energy costs instead.
We need to move more quickly on both the supply and demand sides of the equation by harnessing technology tools and new ways of working to optimize energy across the value chain. Supporting businesses in the take-up of proven technologies in energy management, efficiency, as well as renewable energy generation and storage will help to insulate them from the impacts of fluctuating energy costs and security concerns.
This is where partnering with an expert in electrification can address the challenges that businesses are facing. As global technology leaders in electrical distribution and management, ABB collaborates with customers and partners to enable energy efficiency and deliver a sustainable future for their business, their employees and society.
The good news is that, with the right approach, businesses don’t have to trade off climate and growth goals. Reduced energy costs and increased energy reliability should alleviate cost pressures and enable investment in key areas of people, business growth, and sustainability to be maintained. This should help to attract the next generation of digitally skilled people that are so vital to drive the energy transition forward.