Sailing round the storm

The silver lining in the current downturn, if one can find it, lies in the ruthless way in which the outgoing economic tide has exposed all the frailties and falsities inside an organisation.

What can be seen can be fixed, provided management has enough resources left to throw at the task. There are also, of course, the opportunities for cut-price acquisitions that every prolonged downturn throws up.

By highlighting weaknesses in both strategies and processes, the credit crunch has given management a chance to get ship shape and to adjust to new realities. Managing through the downturn, in other words, should be about far more than battening down the hatches and sitting on one’s hands, waiting for the squalls to pass. Plot the right course to take advantage of the trade winds.

Steve Bottomley, head of commercial lending at HSBC, for example, makes the point that with the European Commission forecasting that the UK, Germany and Spain are all likely to slide into recession in 2008, companies that want to generate profits through the downturn need to be looking to exploit markets outside the eurozone.

This kind of thinking shows the advantage of avoiding a “slash-and-burn” mindset where the focus is purely on cutting expenditure to the bone and the idea of investing substantially in new markets becomes difficult to conceive of and nigh-on impossible to execute.

It will surprise some to discover that a large number of companies are, indeed, considering growth strategies in the depths of the downturn. According to a survey of 5,300 UK businesses carried out by HSBC and published in a report entitled Business without Boundaries, around 80% of UK companies plan to grow over the next 12 months, despite concerns over the economic climate.

Almost half of those surveyed said they expected this growth to come from trading internationally and around 8% of the sample, who were not already trading abroad, said they intended to start doing business internationally within the next six to 12 months.

“It makes perfect sense to look abroad if your own economy is slowing,” says HSBC’s Bottomley. “If you harness yourself to one economy and it takes a dip you are in deep trouble.” Bottomley points out that the emerging economies might have slowed slightly as a result of the global crunch, but they are still posting very reasonable growth figures (India 5%, China 9%) at a time when developed economies are stagnant or going backwards.

Keep hiring, keep acquiring
Staff issues are, of course, right to the fore in any recession. Clive Wright, a principal with HR and reward consultants Mercer, says that the first instinct of management when the economy really dives is to take a scythe to the staff base and forget the longer-term view.

“The proxy for cost becomes the headcount and that is all that counts. The professional answer, however, is that this is precisely when management needs to review where the business is going and what you expect to happen either to generate present growth or to cope with future growth when things pick up,” he says.

In his view, the downturn should be seen as a kind of corporate gymnasium, where companies can shed the fat and get fit again. “During the good times, as an American friend of mine used to say, companies get fat, dumb and happy. In a recession, the really good management teams take the pain, just like everyone else. But they manage efficiencies and look to position themselves to take advantage of any forward momentum they can generate,” he says.

What this comes down to in practice is that you do not do a knee-jerk withdrawal of all funds for training. Instead, you cut non-essential training and really focus your training budget on where it is going to generate the maximum returns. You don’t cease recruiting. You get much more selective and you try to find places for your competitors’ best people. If that means finding wo rk for them, such as getting them started on projects to enter new markets, then you do that.

“There is no generic map that fits every business here. The key, however, is to avoid panic. The HR director and the finance director need to work together to develop the business for the future,” Wright says.

David Tilston, a former finance director of three plcs, and now an interim finance director, argues that, though there is no doubt deal volumes have fallen away as the credit crunch has started to bite, now is the time when companies with something left in their war chest should be investigating the market with an eye to purchasing weaker competitors.

“The trick for any company in a cyclical sector is to look to enter the downturn in a favourable cash position. That way it can pick up bolt-on acquisitions at the bottom of the cycle when prices are cheap,” he says.

There is an absolute inevitability about the fact that companies under extreme financial stress will have to give up assets ­ potentially valuable subsidiaries and divisions ­ at knock-down prices in order to survive and those companies that have been managing their assets more conservatively through the boom times will be able to snap these up.

Tilston warns, too, that companies need to revisit their banking relationships and test them to see if they still hold up. Now is certainly the time to get close to your bank and to share your plans for growth, he says. But companies also need to keep their feet on the ground and to be aware that some banks that have made great play out of the importance of relationship banking, will want to dump the client rather than take on additional liabilities.

Other banks may want to help, but they won’t be able to get deals or refinancing applications through their credit committees. “The message now has to be: take nothing for granted. Expect to have to work hard to secure financing for any project or deal,” he says.

Check the compass
Tilston adds that finance directors need to revisit the quality of their financial information and they need to re-examine the strength of their internal controls. “When you want and need leading indicators to be giving you a steer on the real picture, you do not want duff management information,” he says.

Companies need the flexibility and the timing that early warning systems can give, particularly if they intend to grow and to pour energy and resources into projects during an unfavourable economic period. The risks are that much higher and you need to be sure that you really do have the maximum visibility your systems can give you.

“Right now, if companies are hitting anything that is going to constrain their ability to grow, it is going to be cash shortages, not profit constraints. You can have longer-term problems with falling profits, particularly with respect to bank covenants and milestones, but falling profits won’t kill you in the short-term; a shortage of cash will,” he says.

The answer is to make sure you have a regular rolling cash-flow forecast and that you monitor the accuracy of that forecast continuously. Growth projects have to be carefully budgeted for and they have to perform on budget. There will be little room for error.

Alan Leaman, chief executive of the Management Consultancies Association, says that one of the paradoxes about a recession is that it provides companies with a powerful incentive to look back at any recent mergers and acquisitions that they might have undertaken, to see if they can drive more efficiencies from them.

“There have been a great many mergers over the past decade that have not yet delivered all the efficiencies they were supposed to do. So this is a great time to revisit those mergers and to do the things you never had a chance to do when everyone was chasing sales,” he says.

Leaman says the word from his members is that everyone knows that the ‘flow of plenty’ has gone and that they are all braced for tough times. His advice is for companies to look at strategies that are going to help them keep their key people through the downturn.

“You may want to over-service your key customers for a while, for example. We are publishing a report on productivity in UK companies shortly and it is a fact that productivity drops down the agenda in the good times. However, in a downturn, it rises sharply back up the agenda and really does now have to become core to how you run your business and reward your staff,” he says.

Increased productivity can come from a number of factors, but it often follows from increased skills. So if employees have a bit more time on their hands, now is the time to be training them. Supplier relationships, he points out, can get fairly fraught during tough times and the temptation is to push hard on the supply base to try to drive down costs. The trick here, he says, is to make sure that your procurement process is tight, without strangling your suppliers.

Above all, he argues, companies which are positioning themselves with an eventual upturn in mind, need to be thinking about reputational risk. “One of the key assets of any business in a downturn is the quality of its reputation in the market. Everyone is watching to see if the business really does live up to the values it says it espouses when the going gets tough. So you really have to pursue a twin-track of reputational enhancement and efficiency gains,” he warns.

Clear the decks
Chris Gibson, associate director of retail banking at banking consultancy Navigant, says that for any company with a distribution sales force, now is the time to put one’s house in order. “You need to do the things you always meant to do but were too busy to do,” he comments. Gibson expects to see outsourcing becoming a major factor, particularly in the banking sector.

“Until now the processes and back-office functions in the banks have not really been standardised to the extent that, say, the life companies have. So the life companies have been able to outsource far more. We expect this to change, with areas like mortgage servicing, which really does lend itself to a process driven approach, being outsourced more over the next few years.” Outsourcing, he argues, is an excellent way for companies across all industry sectors to look to drive efficiencies through the organisation.

Sure, going back to basics and the “opportunity” the downturn provides companies to examine where they have become lazy might be painful. But no one wants to go the way of, say, Lehman or Merrill Lynch.

FDs should focus first and foremost on balance sheet strength, the resilience of capital flows to the business and the company’s cash generating capacity. Survival is best assured through assertive action. Companies need to find growth points and those that can’t will be locked into a game of watching their resources dwindle while they pray for calmer waters.