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Don't panic; start planning.
Leaders everywhere keep getting hit by the seismic fallout from the pandemic: Historic inflation, the supply chain crisis, The Great Resignation, and more. Now, another menacing disruptor is waiting in the wings: recession.
Now that Q2 GDP numbers have been released, some say that we're technically in a recession. Despite that, the best economists can't decide if it's actually happening given other positive indicators. Watching the debate is like watching the economic Super Bowl (can I buy an ad?). Given the raising fears, it's probably a good time to sharpen your recession strategy (and pray that it gathers dust until the next threat occurs).
In Part I of this recession strategy series, a group of Strategex leaders discussed what to do if the economy cools. They covered expectations, contingency planning tactics, and key takeaways from the last "big" recession. The big theme? Don't panic; start planning.
If you are in leadership, do yourself a favor: read their advice and apply their recommendations when and if the time comes.
More leadership advice for recession strategy from Strategex experts: Bill Holl, Marc Fooksman, Carmelle Giblin, Joe Hahn, Barry Holt, Kay Cruse, and Paul Taylor.*
*Note: These business titans are not economists, rather they are 80/20 leaders who spent years at the helm of major manufacturing companies. If you’re wondering whether a recession is coming, please consult your local economic advisor.
Is it possible to win during a recession (aside from having products that are countercyclical and/or inelastic)? If it’s not possible to win, what should you do?
PAUL TAYLOR: Absolutely. If you focus on your critical elements, you will gain an opportunity to win more wallet share with top customers and perhaps even pick up a few large new accounts. Use a downturn to clean out complexity and to tighten the organization around its most important elements. If you do this, you’ll be better positioned to bounce out of a recession faster than your competitors.
MARC FOOKSMAN: Winning during a recession is all about recovering faster than the competition. To do that, you protect what is critical to your business: people, products, and processes. For example, if you continue to nurture your top customers with a superb experience, their spend will come back. This may mean you have to be flexible with their payment terms if they need help. Better to extend terms than reduce margin. Think of it as an opportunity to increase loyalty.
JOE HAHN: A recession is a great time for target selling. You can still win new, big clients.
BILL HOLL: Volumes and revenue will certainly decrease, but you can gain share. You can win whatever business is out there.
Are there any KPIs that signal leaders that they are poised to withstand a recession, or that they are in big trouble?
ALL (IN UNISON): The Key Ratio!
I should have known. Any other KPIs?
JOE HAHN: What percent of your costs are variable? If well more than half are variable, say 75%, you'll be ok. If not, trouble. Whatever you do, during the recession, keep the key ratio at a level of at least 2 to 1.
MARC FOOKSMAN: That’s right – the key ratio is very telling. Also, if your operating income percentage is already in the single digits, you’re in trouble. If your Net Promoter Score (NPS) is low, you risk customer loss. I also recommend comparing your operating income percentage (OP%) to return on invested capital (ROIC) – ROIC should be equal to or better than OP%. This ratio shows whether your invested capital is in line with your profit.
BILL HOLL: Aside from the key ratio trend line, I have a short list of KPIs that I have leaders monitor:
• Quote win rate
• Sales forecast +/- 5%
• Top customer growth in revenue and margin dollars
• Voluntary termination rate for both hourly and salaried
• DSO and % over 60 days past due
• Days of Inventory
• Inventory turns
BARRY HOLT: These are all appropriate. You might also want to track:
• Revenue/margin performance – trend analysis
• Quotation rate reduction (and slowdown of order placement)
• Deteriorating accounts receivable performance
Where should one invest at the beginning of a recession?
ALL: Avoid capital investments, especially capital goods/equipment!
PAUL TAYLOR: Investing in a downturn is not something that you are going to do without very careful consideration. In my view, the first step would be to pump the brakes and reconsider investment decisions that are currently in process. There may be reasons to pause investments that may not be as attractive today as when they were approved a short time ago. There are scenarios where you would invest in automation that positively impact your ability to serve your best customers with your best products.
CARMELLE GIBLIN: Don’t invest unless it’s strategic. If you have recession-proof products or businesses, make sure they are resourced well. Otherwise, don’t get caught without a free cash fund.
BILL HOLL: If you can, invest in your best people. They are your most valuable assets.
BARRY HOLT: Yes to people! Take time and care of key employees for they are the key to getting the enterprise through the crisis. A “crisis” provides an opportunity to uncover the next generation of leaders – you will be surprised at some of the talent that inevitably gets uncovered.
How does one adjust his/her goals during a recession?
CARMELLE GIBLIN: If the recession hits your industry (you will know a downturn is coming when you evaluate your supply chain’s performance), it is likely that you’re not going to hit your revenue targets. If you lose 5% or more, it will be time to execute your contingency plan.
Also, you should re-evaluate long-term investments and adjust for modeling.
BILL HOLL: If you don’t hit your goals, you need to be honest to your people, your shareholders, your banks, and your board. Be realistic and don’t sugarcoat it. Be clear in your forecast. Tell them why and how you intend to move forward.
JOE HAHN: During a recession, you focus on market share. Look at percentages, not dollars. If applicable, shift focus to recession-proof/counter-cyclical businesses. Be flexible and prepare to abandon ideas just conceived yesterday.
We’ve already mentioned the elephant in the room – cutting people. Any other advice on this?
PAUL TAYLOR: It is likely that you will need to eliminate positions at some point in your career - more likely during times of economic downturn. Of course, it’s very important for you and your leaders to be very thoughtful in how you approach this. Don’t just focus on the details of the separation and the announcement. The thing that many leaders miss is the attention that is required following an event like this. The remaining team will need reinforcement from you. Communicate the vision for the future and how important their role is therein. Take the time to be present with them. Communicate, communicate, communicate…and when you think you’re done, communicate again.
BARRY HOLT: The key to “rightsizing” is to protect critical resources. Releasing good and experienced employees is an expensive and costly exercise – consider the bigger picture after the crisis.
CARMELLE GIBLIN: I mentioned salary cuts and furloughs; I have seen them work and would encourage leaders to consider them. Otherwise, don’t make sweeping “across the board” cuts – start in areas that do not contribute to profit, and where performance is lacking. Also, if you already know you need to close part of the business because it’s suffering already, consider doing it now while the job market is still active. Some of your people can get a new job with a bonus tomorrow; this may not be true in six months.
BILL HOLL: The manner in which you handle a lay-off will determine your reputation as a leader. How benevolent do you want to be?
Any other key action items that leaders should do before and/or during a recession to improve results?
BARRY HOLT: Be able to execute swiftly – organizational agility is everything. Time is not your friend. However, do not panic and make rash decisions that you will regret later.
CARMELLE GIBLIN: Identify your best people and “put your arms around” them.
BILL HOLL: Carmelle is right; but also, never let a good crisis go to waste. This may be a great time to reorganize and shed underperformers.
KAY CRUSE: Your customers will be hit and will push you on price. Take time now to document the value and benefits that you provide uniquely to your top accounts. Teams should be prepared to communicate that value when the conversation arises.
MARC FOOKSMAN: We talk about our teams, products, and customers but don’t forget about your key suppliers. They need to be forewarned if your orders decrease. Treat them like a partner so you don’t lose them. Also, stick to your strategy.
What mistakes have you seen others make in recession strategy?
PAUL TAYLOR: The worst mistake a leader can make going into a recession is to do nothing and try to weather the storm.
JOE HAHN: Cutting prices to gain/keep share. Bad mistake.
CARMELLE GIBLIN: Across-the-board, non-strategic cutting and going too slowly. If you hit a trigger point, you must execute your plan.
KAY CRUSE: People lose sight of their customers and the need to maintain an excellent customer experience. Remember: your customers are people, not dollar signs. Continue to engage, collaborate, and provide solutions.
BARRY HOLT: Companies and leaders being far too optimistic that a downturn will not affect them. And, leaders not being clear and decisive with regard to vision and strategy.
MARC FOOKSMAN: Chasing revenue, not profit.
If planning doesn't act as a calming tonic, remember this: recessions don’t historically last very long. The average duration of a U.S. recession since World War II is less than a year, at about 11 months. U.S. recessions are also fairly common. Since World War II, we've endured approximately one U.S. recession every five years; we even just had a quick 2-month recession at the start of the COVID pandemic.
If you are concerned that you are not positioned to withstand another downturn, do not hesitate to call for a quick consultation.