Role of productivity under circumstances of rising inflation

Rinalds Sluckis, CEO of business technology company “Digital Mind for

Living in the shadow of the pandemic for almost two years, businesses have adapted to the new reality relatively good and the operational restrictions caused by Covid-19 cannot shake up business as much as before, because remote work and provision of digital services have become a day-to-day practice. The spectre of the pandemic has now been replaced by another threat – increasingly rising inflation, and not only in Latvia, but practically all over Europe. As Eurostat data shows, our neighboring countries were among the leaders in the eurozone – monthly inflation in Lithuania reached 8.2%, in Estonia – 6.8%, and we are also not lagging far behind – compared to October of the last year, prices in Latvia have increased by 6%. Financial analysts forecast that the inflation increase in the first half of this year may continue; therefore, entrepreneurs will have to consider carefully the impact of inflation on their business. The main stumbling block of our businesses is low productivity – it is one of the lowest in the European Union, which, in such a difficult economic situation, is particularly critical to retain competitiveness of products or services.

Increase in price or reducing costs

One of the main reasons for inflation is an increase in prices of energy resources, which affects practically all sectors – whether it is a production or service sector. The increasing prices cause pressure from employees to raise their wages, as the price increase already exceeds the increase in wages. To raise wages, additional income is required; in its turn, to do so the prices of services and products have to be raised, also costs have to be reduced in a smart manner, without compromising quality, or more products or services have to be generated and the business has to be extended, using the same resources.

Which way to choose – it will be the main dilemma faced by entrepreneurs in the nearest months, having to find a solution. If nothing is changed, the medium-term consequences may be an outflow of the workforce, because wages are higher in other countries, or, by the costs increasing and without an increase in revenue, decline in profitability and competitiveness, as well as decrease in profit may follow.

Shortage of workforce

The problem is made even more complicated by the situation in the labor market, which is not encouraging from the point of view of entrepreneurs. Due to a systematic decrease in population, which, most likely, will continue also in the future, finding qualified employees will become an increasingly more difficult task. A mandatory requirement of vaccination for certain jobs makes this issue even more complicated. As the information of the European Job Mobility Portal shows, in the medium- and long-term Latvia will have a particular shortage of highly qualified employees, which will affect practically all sectors. 2 This means that the potential of highly qualified employees has to be used 100%, not loading them with simple routine works, and also raising of skills of lower-qualified employees has to be promoted. Whereas tasks that repeat on a regular basis, are routine and bring relatively small value-added, have to be entrusted to someone else.

Technologies as a solution

Since Latvian politics is not particularly favorable for attracting workforce, especially low-qualified, from abroad, practically the only solution is entrusting the simplest tasks to technologies. Currently, there are digital solutions available, which are suitable for businesses of all sizes and sectors, significantly facilitate the work, and promote the raising of productivity – from very simple record-keeping and accounting programs up to partially or fully automated processes for production companies. Also in terms of costs the range is very extensive, one only has to define own needs and find the most suitable solution for strengthening own company. Various digital communication tools can reduce the time spent in meetings, software robots can perform routine, repeated data processing operations instead of employees, content and information integration – speed up the processing of documents, use of cloud services – avoid downtime in case, when the business IT systems have become unavailable.

Another aspect to be considered is that technologies become outdated, namely, companies that have introduced digital solutions 15 years ago, definitely have to revise their conformity to the modern circumstances and needs. Most likely, much more efficient automation and system integration tools can already be found at the present moment, which will provide much higher value-added in a long-term perspective than maintaining the old ones, as frequently more modern solutions also require less support on the part of IT specialists.

Digitization is definitely a process, which can help to raise productivity, thus overcoming the inflation surges with less damage, and also solving the problem of the future workforce. The introduction of technologies is one of the main ways of retaining competitiveness in the future, because the digitization process has started its course, and there is no way back.

We – Digital Mind are business technology experts. We help organizations all across Baltic Sea region to bridge the gap between Business and IT, by assisting in the development of an overall digital strategy and by implementing software solutions that improve the efficiency of various business processes, thus increasing revenue and reducing costs. Contact us and take the first step towards digitization!