Even before Bank of England Governor Mervyn King officially mentioned the "r" word on Oct. 21, all the economic and performance indicators had been suggesting that Britain was slipping into a recession. A credit squeeze and higher commodity prices have triggered upheaval in the financial services sector and a squeeze on household budgets. The implications are now extending to every corner of the economy.
Faced with slowdown and abiding by a new set of business rules, my organization, the Management Consultancies Assn., worked with our members to answer a simple but pertinent question of importance to their clients: How should leaders of organizations respond to the enormous challenges they now face? The dilemma is particularly acute because many senior managers working in business and the public sector are "downturn virgins," with no previous experience in their careers of sustained economic problems.
Before recommending any action, we felt it was first important to review the lessons of previous recessions and to analyze how this one might be different. Four key themes stand out.
First, business is a lot more global than it was 15 years ago. Globalization means there's nowhere to hide because competition is everywhere. However, at the same time globalization provides more opportunities. Some companies will adjust to the downturn by shifting their energies and resources to locations where growth remains stronger.
Second, previous rounds of cost-cutting mean that organizations have less operational fat to trim to maintain their profitability. And customer expectations of service and quality remain high, meaning that organizations should not compromise these in a rush for savings.
Third, the way in which many companies now do business is different. Organizations have defined their core business ever more tightly and are thus heavily dependent on complex networks to supply essential goods and services. This increases their exposure to risk in a downturn.
And finally, the increased role of debt in our economy is going to have a particular impact in this downturn—much more than before. The financial engineering that looked so attractive in the good times is going to take its toll in the bad.
Our analysis leads to 10 recommendations for senior managers and executives, which we have presented in a report called Dealing with the Downturn, excerpted here:
1. Demonstrate leadership
Many managers do not know how to handle a recession. A survey by consultancy Pentacle earlier this year suggested that as many as 70% of managers do not know how to react. Leaders therefore need to be stronger and more focused than ever.
The greater the level of uncertainty and turmoil, the more important it is for organizations not to react precipitously. Slashing costs indiscriminately could destroy the ability to compete in the long term. Cutting prices in order to maintain volume could leave organizations worse off when the expected increase in sales doesn't materialize.
2. Invest in planning
Organizations have to improve their ability to plan and forecast so that they are better able to gauge the impact of economic changes. One of the frustrating aspects of the current situation is that it was, in the view of many economists and strategic thinkers, quite predictable. Why then do so many businesses appear to have been caught on the wrong foot?
3. Rethink strategy
There has been a degree of economic blindness: Businesses have tended to focus on operational and human resources issues and on immediate financial metrics rather than the wider economic environment that is now starting to affect them.
Organizations need to have a better economic understanding and use careful planning and forecasting to anticipate the challenges ahead, rather than simply react to them. This approach will deliver the strategies not only to survive but to succeed in a recession.
A truism of recession is that the unwillingness to do anything new is matched only by reluctance to stop something in progress. Organizations need to decide which functions and initiatives to concentrate on, and which should be outsourced or stopped altogether. If outsourcing is deemed to be the solution, organizations need to beware of rushing to appoint new suppliers and to take due care in planning and negotiating contracts.
5. Seize the opportunities
If an organization is prepared to act, the opportunities can be significant. Downturns are famously the best times for buying assets at knockdown prices; good people can be recruited at more reasonable salaries.
6. Look after your customers
One thing that does not change in a downturn is consumer expectations. Someone spending less in a supermarket still doesn't want to wait at the checkout. Maintaining ever-increasing standards of customer service will be crucial. Rather than fighting to increase share in a shrinking market, organizations would do better to focus on keeping the customers they have.
7. Improve productivity
Cutting costs indiscriminately will only result in short-term gains and may damage an organization's ability to compete in the future. Organizations have typically invested the most in technology, but forthcoming research from the MCA indicates that there are far more benefits to be had from changing the way people behave.
8. Look after your suppliers
Organizations need to look after their suppliers as they now rely on a far more complex supply chain than was the case in the early 1990s. Forcing suppliers to cut costs can have a negative impact on quality and ultimately on sales and customer retention. A better approach is to use the downturn as an opportunity to work with suppliers to increase market share by improving quality and service.
9. Look after your employees
One of the biggest risks in a downturn is that whole functions or departments may be axed, often with little regard for the quality of people being lost or the long-term messages being sent to the labor market. Rather than focusing on whom to let go, organizations should start by identifying who they need to keep.
10. Don't expect the government to solve the problem
Good management, aided by an appropriate regulatory response, is the key to recovery.
In summary, the 10 critical actions highlighted in Dealing with the Downturn will help to answer the questions that thousands of leaders in companies and other organizations are now asking themselves. It is vital that leaders do not underestimate the challenges that lie ahead; they are about to prove their real worth.
The full Dealing with the Downturn report is available online.