How to insulate your business from the inevitable recession

The inevitability of a bad deterioration in the economy is now absolute. No more fluffing around with nice, reassuring words, the  consequences of this Corona pandemic will be an economic and social clusterf**k.

So, in these circumstances, how do you insulate your business from the effect, and even make some competitive and strategic headway?

Five things I have learned over my 45 years in business, the last 25 of them helping SME’s improve, and from time to time, survive, often in adverse circumstances. Over the course of that 45 years, I have lived through a number of events that caused significant distress at the time, and resulted in massive changes to the way we live and work. However, none I suspect will be as cataclysmic as this current crisis. Nevertheless, the lessons from the past can be applied to the present, so long as we do so recognising they will not be just copies, they will have their own characteristics, and some nasty traps for the unwary. 

Have a strong balance sheet.

This means having cash reserves. In tough times, nothing is as valuable as cash, it delivers flexibility and options, without which you are at the mercy of others. In days of low interest rates as we have, many have been seduced by the siren song of leverage. It is the ‘ make your assets work harder‘ pitch of those in the financial leverage game. Leverage however, works both ways, and in a downturn, accelerates the rate at which you go broke.

If you are leveraged, deleverage as hard and fast as possible, and hoard your cash.

Have a plan

While plans are made to be broken, at least you are able to track where the divergence happens, figure out why, and how to do it better next time. Planning effectively requires that you have a common strategic objective, broken down into ‘nested’ tactical objectives. This cascading of objectives ensures that priorities are clear, that the required resources and capabilities are delivered to the points they are needed to achieve the objectives, and deliver the best return.

Have a spring clean

Every enterprise carries the imprint of its past, often deeply buried. Many should be jettisoned  during the bad times, when it is easier, which has the effect of delivering a leaner more responsive enterprise as things improve. Apply the Pareto principal to everything you have and do: customers, processes, product lines, employees, inventories, fixed assets,  and suppliers. Clean out the ones that do not deliver value in excess of cost, and that are inconsistent with the more focussed strategy you will have developed. Hidden deep in most businesses are transaction costs, which are almost always a source of significant cost reductions  and ‘no-cost’ capacity increases. Eliminating the friction that generates these costs, will save time and money, deliver ‘no added cost’ capacity, and make customers very happy.

A question I ask my clients at some point is: ‘What would a VC do if they bought this business? Everyone understands a VC investment is always on the basis of a fast profit. Invest, optimise, sell. The question and subsequent conversation focusses the mind on what actually generates the value customers are prepared to pay for. Sometimes there are regulatory costs, and there will be a core of necessary cost that enables operations, but the rest is on the block. 

Focus on getting money in, not just cutting costs

Cost cutting is the reflexive response to a cash crisis, and short term it works, but not in the longer term. To use a sporting analogy, you cannot win a game by being defensive, the very best you can do is have a draw. Having a draw in these circumstances means you go down the gurgler with all  the others. No, you have to find a way to expand, get new money in the door.

Let the inmates run the asylum.

Post this Corona crisis, the world will not just go back to the way it was. Many of the changes necessary to beat this thing will be baked into the way we interact with each other. Work and the expectations of our institutions will be forever altered. Setting out to manage these changed dynamics without the appropriate level of change in management processes and behaviour will lead to inevitable failure. Following are a few thoughts on the pivotal changes necessary

• Remote work. The most obvious is that we will all be more attuned to working remotely. While it was an increasing trend prior to the bug, it has become a tsunami in the past few weeks and it will not go into reverse. Therefore, the management  task is how to harness and leverage the capabilities of a remote workforce. Most senior managers are of the vintage that did  not grow up with digital as an automatic and natural part of their lives, and for many this is a scary prospect. Most have accommodated the digital revolution in some way, but the institutional cultural barriers that remain in their hands, need to be dismembered.  
• KPI’s need to be set on outcomes, not activity. No longer will presence at a desk, and seemingly adequate levels of activity be enough, it is the outcomes that will dominate. This change requires a whole rethink of the manner in which performance is measured in most organisations.
• Management behaviour has to change. The best leaders and managers BB (Before Bug) spent a significant part of their time ‘walking around’, and communicating face to face. Time spent understanding the problems and opportunities for individuals, and groups of individuals at every level paid dividends. This face to face, personal interaction will no longer be practical. Leaders need to develop processes that deliver that sense of personal interaction to employees and contractors operating remotely. This means they have to have in place systems that deliver emotional security and stability while focussing individual and group effort on achieving a common goal.
• Transparency creates accountability. Instinctively, we all know this, but for so long, information has provided power, so it has become the default to hang onto it. No longer will this be the case. Leaders will create accountability by being transparent themselves, and forcing that transparency through the organisation structures to the lowest levels. This change will be very uncomfortable for many, and will lead to a wholesale turnover in older managers who simply cannot make the changes necessary. This will lead to a social challenge for us all. However, those managers will be replaced by younger ones who are more attuned to accountability based on outcomes rather than presence. All those who have not read Ray Dalio’s book ‘Principles’, should use this downtime to do so. It lays out a comprehensive and compelling argument for what Dalio calls ‘radical transparency’. This will become, I think, the emerging  default.
• Communicate, communicate, communicate. The options for communication have exploded, in the post bug world leaders will be using all of them, continuously. The communication is an essential ingredient in the mix of creating transparency, accountability, and focus on a common objective. It will require entirely new processes and habits to be developed, replacing old ones, and a radical reordering of the priorities of many managers.
• Creativity will flourish, if you let it. Crises always lead to creative solutions to existing problems, and innovation to create opportunities in areas not previously recognised. The two world wars last century led to an explosion of technology, Microsoft was launched during the 1970’s oil crisis, the iPod launched in the aftermath of the dot com bust, and the 2008 meltdown led to Uber and Airbnb. All of these were spawned outside any corporate boundaries, except perhaps the iPod, but Apple was as good as broke at the time, so had little to lose. 

When you need the wisdom of having lived through it all before, and learnt from the experience, give me a call.