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Capital One Financial Corp. CEO Rich Fairbank delivered a sobering message to investors and analysts in a conference call last month. “We are managing the company today as if a recession were already here,” he said, and went on to emphasize the U.S. giant’s cost-savings initiatives.
Other leaders and senior executives should take note. The increasingly uncertain economic outlook means a strategy shift is in order, or at least illustrates the urgency of planning for a downturn. So many years of economic growth have made some corporations complacent, and now is the time to prepare for worst-case scenarios. “Managers are either young and haven’t dealt with a downturn before, or they dealt with one seven years ago,” says Michael Stern, CEO of executive coaching firm Michael Stern Associates in Toronto. “It’s not the kind of thing that people get too much practice with.”
Winners and losers will emerge during any economic change, and mistakes can be all the more costly during a recession. To avoid getting sunk, the first thing to know is that a recession is not a time to hunker down, pull back and hope to come out unscathed. A downturn can actually be good for a well-managed company. “It’s a priceless opportunity to improve your position relative to your competitors,” says Adrian Slywotzky, a managing director with consulting firm Oliver Wyman in Boston. “That’s the opportunity that’s usually missed.” And the only way for management to take advantage of that opportunity is through extensive planning.
Take customers, for example. Every company has customers who are more profitable than others, and a downturn is a time to focus on those who bring in the most cash. A decade ago, Singapore Airlines recognized its best customers were business and first-class travellers flying transcontinental routes. So management cut back on short-haul routes, added long-haul routes, and invested US$300 million to improve business and first-class service. When East Asia fell into a recession following the currency crisis in 1997, Singapore Airlines stayed profitable and still remains more successful than other Asian airlines, according to Slywotzky.
Companies in the business-to-business space should recognize their customers will also be struggling through a recession. Anything a company can do to ease the pain for its customers can have a huge payoff. “It’s extremely important because it builds a stronger relationship with the customer for the post-recession period,” Slywotzky says. A company also has to be nimble enough to implement any cost-saving solutions across many different accounts. “If that kind of replication readiness isn’t there before the recession, it’s often difficult to do it during,” he says.
Saving costs is one thing, but a firm also has to reinvest in other areas. Slywotzky abides by the principle of “cut two, invest one.” That phrase might sound a tad mystic, but indiscriminate cost-cutting can have dire results. In response to the 1998 Russian financial crisis and the blowup of hedge fund Long-Term Capital Management, Merrill Lynch cut 3,400 staff, mostly in its fixed-income and emerging-market groups. The move may have made sense at the time as bond trading fell out of favour, but the investment bank was caught off guard and short-staffed when the rebound came sooner than expected.
On the other hand, Intel Corp. provides an example of how spending more during a recession can be beneficial. During the 2001 recession, management boosted investment in manufacturing innovations that allowed the silicon titan to produce cheaper, smaller and faster computer chips. Intel was able to launch new products months ahead of schedule when the recovery came a year later. When the products hit the market in the third quarter of 2003, Intel reported its highest growth rate since 1996.
Acquisitions aren’t out of the question either. Though a firm has to have enough cash squirrelled away, of course, asset values fall during a recession, making potential targets cheap. Management at DuPont anticipated as far back as 1999 that a slowdown was on the horizon due to weakening demand in its primary customer markets. As a result, the chemical giant slashed capital expenditures by about US$5 billion between 2000 and 2001, just as the recession hit. Because DuPont had been hoarding cash for a year, it was able to buy up seven companies.
Advertising is another area where companies can boost spending. Typically, advertising dollars drop in a recession, creating an opportunity to take advantage of the reduced clutter in the marketplace. It was during the 1991 recession that Intel launched its successful “Intel Inside” campaign, after all. Similarly, computer maker Dell Inc. increased its marketing budget by more than 300% during the same recession, which helped to boost its market share.
But embarking on capital-intensive projects right now might not be such a wise idea given the wild swings in the market. Ryan Brain, a partner in the financial advisory practice at Deloitte in Toronto, suggests that managing for a downturn is a slightly more distant challenge than the immediate threat: managing through volatility. “You don’t want to make big, bold decisions that are going to potentially tie you down,” he says. Companies should strive to be agile if attempting to undertake large investments, and look at outsourcing or joint ventures.
Managers need to reassess their companies’ balance sheets to determine their cash positions in preparation for the downturn, Brain says. If the balance sheet is in poor shape, managers should look at renegotiating lending terms and refinancing, or figure out other ways to acquire new capital. “Don’t wait until you absolutely need to before doing something to your balance sheet,” Brain says.
Recessions inevitably result in job cuts, and managers have to be prepared to cull staff. That requires taking a hard look at employees to identify those whom the company can’t afford to lose, says Brian Wilkerson, national practice director of talent management at consulting firm Watson Wyatt. Performance is just one factor; employees with in-demand skills are important, and keeping workers in positions with steep learning curves may also be crucial. Ideally, managers should know all of this before a slowdown hits, and should work with the human resources department to develop a system for ongoing reassessment of employees. “Companies can get here through extensive discussion, but they need to be constantly monitoring what they’ve got, so when a recession comes, they’re prepared,” Wilkerson says.
But hanging on to talented employees will be difficult in a downturn. “The people who don’t have a lot of options stick around, and the ones you want to stay will leave as soon as they get the opportunity,” he says. In previous recessions, workers typically waited for the rebound before reassessing their options. Not this time. Given the increasingly mobile nature of work, many people feel there are plenty of other opportunities around the world.
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