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
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.
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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
“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
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.