How To Manage In A Downturn

HOW TO MANAGE IN A DOWNTURN
By Ed Parker

Many of today's managers have grown up in an environment of uninterrupted business expansion. But the recession has arrived and without previous experience many executives and front-line managers have been slow to react. What has become necessary is to do something. The question is how to go about this task.

INTRODUCTION

Many of today's managers have grown up in an environment of uninterrupted business expansion. This is not to mean that there have been no downturns on an industry sector or individual company basis. Industries facing uncertainty, such as the on-going deregulation of the energy sector, have not participated in the general upturn. Similarly, the downturn in the .com sector started over a year ago, and the automobile industry faced hard times when bad tire data received nationwide attention in early 2000.

At the end of 2000, however, it became apparent that for at least one quarter the economy had posted negative growth figures. Were this trend to continue for another two quarters the United States economy would officially be in a recession. However, to many executives, the old maxim of "When you lose your job it is a recession; when I lose mine it is a depression" has already become a very real threat.

Without previous experience in such economically gloomy times many executives and front-line managers have been slow to recognize and react to current business conditions. Examples abound of blame fixing rather than action. What has become necessary is to fix the problem before fixing the blame. The question is how to go about this task.

FIRST, RECOGNIZE THE PROBLEM

The most human reaction to bad times is to wish they would go away. This feeds the rationalization machine stored in each of us to produce a paralysis fueled by the thought that the condition won't last. In business this is particularly unfortunate, because reporting mechanisms are often timed well after the events they chronicle. This again reinforces that helpless feeling. The company is already in deep, and the stringency of corrective measures might well appear draconian.

Nobody wants to appear to be the bad guy. After all, even bad business effects will end sometime. Running around yelling the sky is falling is distinctly unpopular. The trick to the moral of the Chicken Little story is that the result that is never talked about was fricasseed chicken. Being a hero seldom has a reward once the necessity for heroism is gone. This moral is well demonstrated throughout the history of mankind. It is intensified in our modern times by cultural and educational precepts that place a premium on getting along with our fellows, sometimes to the exclusion of good corporate sense.

Thus the first problem is not in recognizing that times are not so good for the corporation, but surviving the public explication of this fact. This will be solely at the discretion of the person bearing the message. If it is the CEO then the task is immensely simplified. However, anyone within the senior team of a significant corporate component can advance the suggestion that corporate-specific preventative actions might be prudent based on general economic conditions. How this plays out will vary enormously, but this mild indirection can often work as the excuse for direct action without direct blame fixing.

SECOND, CHOSE EASY TARGETS

Initial success will be necessary to gain acceptance for progressively less popular actions. It is easier to delay purchases of supplies when adequate supplies exist by changing the automatic reorder levels. Computers rarely complain. Similarly, using a travel agent to work the web for corporate travel, while requiring at least two weeks advance notice of intended travel unless specific management authorization is secured, is logical and can be surprisingly cost effective.

Attacking the informal perks of an organization without tying management up in approval and enforcement loops will take a little ingenuity and should be specific to the organization. A surprising amount of data will be available, often even relating to cost benefits obtained from specific expenditure categories. The data will have been rarely looked at since in good times overhead control is unpopular and rarely seen as necessary. Discretionary budget items with broad titles and little demonstrated benefit will be added progressively between downturns, and it has been over fifteen years since the last real squeeze.

THIRD, REVIEW THE BUDGET

Now we enter the murky world of office politics. Budgets over time become progressively more related to individual power than to business need. This is the truth behind the bureaucratization of an enterprise.

Bureaucratization is a function of age. The quintessential example is the federal government. There are a plethora of programs that were needed when enacted, but now have little if any effect while having the biggest budgets in their history. A bureaucracy will proceed seamlessly from measured results to the assumption that no results means the program is working, and reversion to bad times instantly awaits cancellation of the program.

Part of the problem is rooted in the fact that good times attenuate the need to consider priorities. Avoiding power struggles is more important than selecting profitable targets since the successful times allow both to exist. One method of mitigating office politics is to co-opt the players in a new competitive game of budget reduction without staff layoffs.

Incentives and rewards should be scaled to support this activity, with explicit recognition that reductions will not reduce organizational stature. Implicit will be the fact that if the office holder cannot achieve the necessary degree of reductions then management will. Combined sessions using external facilitation can really help, since with the proper approach and tools competition is fostered with the direct support and acknowledgement of immediate management.

FOURTH, REVIEW PLANS

Existing business plans will have been based on rosier assumptions than current facts will support. These plans will have been blessed by data that is extrapolated on past trends equally inappropriate to current circumstances. The situation will be complicated by the fact that those with the most to lose in revising the plans will have a real stake in defending them. However, in a downturn where an optimistic forecast is maintenance of market share or sales levels, plant expansion could be inappropriate or at least delayed without deleterious future effects to the enterprise.

The long term planning function is probably still valid, but short-term activities and assumptions will need to be closely reviewed. Typical corporate plans do not adjust well. They tend to be strategic exercises rather than tactical, with little expected schedule accuracy. Such plans are inappropriate to a downturn, where the focus is immediate and will involve many levels of the organization in changes that will need to be tracked. New metrics appropriate to the time frame of management corrective action will need to be created. These metrics should be as simple as possible, and should be produced with as little delay between measurement and report as possible.

Above all the planning basis needs to be expanded to include as many employees in as direct and as concrete a manner as possible. Tools and techniques exist for achieving this. These tools are also effective in soliciting ideas and "contributions" to profitability through procedural change or cost control from all levels of the organization within the context that directly contributes to management measurement and control.

FIFTH, PROTECT THE BASE

The above has concentrated on a graduated program of achieving cost control internally without staff reductions. Simultaneously it will be necessary to protect the customer base and sales of the firm from encroachment. If sales erode significantly, or significant market share is lost, then it will become increasingly hard to support the organization as currently constituted. This would include options such as organizational revamping, staff reductions, and changes in executives and management.

Care must be exercised to insure that economies that affect the customer are truly directed to "fat" and have been explained to the customers to modify their expectations. Telephone and e-mail can be used to replace some but not all face-to-face contact, if the customer understands and agrees. Further, entertainment can be reduced with their consent and concentrated on those customers that are maintaining or increasing sales, including new sales.

Customers will simultaneously be pressuring for reductions to meet their downturn effects. How critical this will be will depend on the competition. The corporation should take pains to learn where the competition is coming from, and how long a threatening posture can be sustained. This information is obtained from research and from direct meetings with competitors at association meetings, etc. a further source is your staff, who probably know individuals on competitors staffs' and who have contact with customers being visited by competitors.

SIXTH, WATCH CASH FLOW

Fewer companies declare bankruptcy due to liabilities exceeding assets than from liquidity problems. There is a tendency in a downturn to postpone decisions, and to wait for normal reporting cycles. Both these tendencies must be resisted, particularly where cash flow management is concerned.

A downturn implies fewer sales, more delays in payments received, and in the absence of management intervention, adherence to already formulated and approved spending plans. These plans may be based on planning assumptions that may no longer be valid. Delays in shortening the reporting cycles for cash receipts and expenditures may cause an avoidable crisis, or worse a rolling series of crises as management chases altering payment ageing data with inefficient or ineffective spending reductions. It is quite necessary to synchronize as closely as possible cash flow receipts and spending data, and to make realistic projections of immediate future cash flow. Curtailing spending plans can then be done realistically, hopefully avoiding crisis management and project curtailment with minimum benefit to the corporation.

SEVENTH, UTILIZE THE IMPROVED COMPETITIVE POSITION

After a prolonged period of upturn managements tend to be less decisive ands slower to act than a downturn may warrant. However, there are rewards for managements that act swiftly and decisively. They will have improved the competitive positions of their firms in relation to the industry, and can become prudently aggressive in the pursuit of new customers and increased market share. Additionally, the decisive firms will be ready to recognize the end of the downturn, and be positioned to restore product development and expansion plans sooner than their competitors.

Risk taking is facilitated when executives, boards, and the financial community recognize the soundness of a firm in relation to its competition. Being there first with the most, as General N. B. Forrest said, wins battles. This is no less true in business than in war. The management prepared to utilize this maxim will be the management that has best used adverse business conditions to its own advantage.