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What to do if the economy cools
The “r-word” is in the air; it has been the inescapable echo of the summer. If you’re like me, you’re chewing your fingernails down to a pulp in anticipation of The Bureau of Economic Analysis’s July 28th announcement. Currently, there might be as many signals that say “no” as say “yes,” but it seems like a good time to talk about what to do when the economy cools.
When the media waxes on about an impending "r-word," when headlines send shivers down my spine about the economic future, I seek advice from people who’ve been there before. I’m lucky; I share a job with a bevy of leaders who rose like proverbial phoenixes from the ashes of the last recession (gasp! I said it!), and who’ve guided CEOs to growth through the latest disruption. These people have had successful P&L responsibility and track records of profitable growth. In short, they know what to do in times like these.
If you are in leadership, do yourself a favor: read their advice and apply their recommendations when and if the time comes. No pressure, the global economy just might be counting on your success.
Without further ado, I give you:
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.
If a recession hits, what will keep leaders up at night?
BILL HOLL: There are a lot of pressures a leader must face during a recession. At the start of a recession, the stress is getting behind the cost/price curve of inflation, and not being able to rid themselves of costly inventory at a satisfactory margin. That’s what forces people to make tough decisions as we go deeper into the recession.
PAUL TAYLOR: It comes down to making their financial plan commitments – hitting their numbers – and people. The worst part of leadership is having to let people go, and if leaders aren’t preparing now, they’re going to have to let a lot of people go.
BARRY HOLT: Declining revenue streams and margin freefall, the capability of being able to deliver stated and agreed plans (financial and non-financial), and talent retention – always the potential of ‘flight risk’ during uncertain times.
JOE HAHN: They’ll stay awake thinking, “How do I cover my fixed costs? How do I avoid doing a lay-off? How do I explain my poor numbers?”
If you survived other recessions as a business leader, what were some key takeaways?
BILL HOLL: Most of us were still young in our careers during the 80s recession which is a similar scenario; that recession was triggered by tight monetary policy to fight inflation. I don’t know if an upcoming recession will be like the 2007-2009 recession, and we need to keep that in mind.
That said, first and foremost, you must focus on what drives your business – the people, products, processes, and customers – protect and defend them. Secondly, you need to invest capital wisely, only where expected returns will be high. Thirdly, you need to manage physical inventory closely: be ahead of the curve on inventory because costs will go up, and prepare to sweat your inventory.
CARMELLE GIBLIN: When I think about the last recession, I remember the importance of protecting our people, and feeling the weight of responsibility to do the least harm given the circumstances. If it comes to it, I’d recommend furloughs and salary cuts as opposed to lay-offs.
I would also tell people not to hesitate - if you hit a trigger point, you must execute your plan immediately. Finally, since we are at the beginning, you should look at predictive industries and indicators that will forecast your own business’s downturn; for example, you can look at the front end of your supply chain to predict when/if an economic slowdown will hit. You can adjust in advance accordingly.
BARRY HOLT: Invest time to review the organization’s key personnel and build a plan to retain them – it’s so difficult to replace experienced employees. Second, ensure that the enterprise is well prepared for the upturn (it will happen). For example, are operations/manufacturing in a position to “turn on the tap” quickly and efficiently when the time comes?
KAY CRUSE: Be sure you are aligned with your top customers’ needs and expectations. Make sure to factor your key customers’ feedback into your strategy. Their feedback is vital to customer retention.
JOE HAHN: Don't panic. Remember: It's just a math problem, and it's temporary. It will get better.
PAUL TAYLOR: Businesses that embrace segmentation are better positioned to deal with downturns compared to larger matrix organizations. Each business segment has its own data set, P&L, Key Ratio, and a smaller set of customers and products to manage. This structure allows business leaders to make more informed business decisions faster.
MARC FOOKSMAN: My business survived the last recession because we went into the recession as a healthy business. A lot of leaders are going to learn the hard way that the time to fix a business is when things are going well. A good analogy is that if a person is unhealthy going into an illness, it will take longer to recover. The same holds true for a company going into a recession.
How can business leaders best prepare for a recession?
MARC FOOKSMAN: The question isn’t ‘if there will be a recession,’ but ‘when?' Knowing that, recession-preparation is about maintaining the overall health of your organization. 80/20 companies are decentralized, efficient, and focused on profit – so they are typically prepared to withstand and recover more quickly from a recession. 80/20 leaders should make sure they continue to commit to their strategy. All companies should identify what is most important to their business – customers, products, employees, and suppliers – and plan to protect them.
JOE HAHN: Marc’s right; 80/20 companies are likely going to be fine – unless they deviate.
It doesn’t matter if a recession is coming; plan for one. The simple answer is to limit vertical integration, keep costs variable, and prepare in advance for three scenarios: top line down 5%, down 10%, down 20%...document what specifically would be done in each case. Plan it in advance and then there need be no hand wringing when/if a level of reduction occurs.
CARMELLE GIBLIN: I agree; document plans using different revenue reductions as trigger points – and make sure those plans are all aimed at protecting your core business.
At 5%, you’ll need to cut non-essential overhead costs, at 10% you may have to make the horrible decision to cut people – but there are ways of doing it that will hurt less. Furloughs and salary cuts will keep your team intact and buy you a year.
What can leaders expect?
MARC FOOKSMAN: One, you will be tested. For example, 80/20 companies know that not every customer is a profitable customer. But, in a recession when revenue is down, even the strongest can get tempted by the short-term gratification of a sale. The problem is, when the recession ends (which it will), you’ll be stuck with bad, unprofitable business.
Two, you will be scrutinized. As a leader, you must overcommunicate and be transparent with all stakeholders. If you have a headcount reduction, employees will ask “Will there be more cuts?” Prepare to answer that question honestly. Additionally, you need to be consistent. Don’t fly a private jet to announce bad news that affects people’s lives. Don’t implement a freeze in merit increases and then announce the CEO is getting a pay increase. These send the wrong message and ruin your credibility.
CARMELLE GIBLIN: Your workforce will have a hard time personally. The stress of recessions can really take a toll on families. So, you should put an employee assistance program in place if you don’t have one already.
JOE HAHN: There will be panic. Stay calm. Watch the competition. Industries are always in the grip of the stupidest competitor. Make sure that isn't you. But be aware that you may have to do comparably stupid things for a while until the stupid competitor runs out of cash.
In part two, we will discuss relevant KPIs, labor reduction advice, and how to win during an economic downturn.