Thoughts of Recession: Before you cut the costs 3

Sunday’s business section of The Sunday Times fell open to the headline ‘Britain facing huge job losses’. Suddenly breakfast didn’t seem so palatable and indigestion loomed. Apparently, the latest research amongst employers reveals that 38% – very nearly 2 in 5 – plan redundancies over the next 3 months.

The point that I’ve made in earlier blogs is not to let the spectre of a recession become a self-fulfilling prophecy at least at the level of your firm or organisation. My argument is that recessionary times are periods when the primary question for management is not limited to cost cutting – but how can we be more innovative and more flexible. After all, a recession is a period of economic re-adjustment – the engine has overheated. But the engine will return to normal operating temperature (unless the entire capitalist system collapses) and your firm must remain in a fit state with a strong market position whilst others engines seize up and fail. The position that I take is rather than entering a period of management depression we should consider what opportunities a more challenging climate may provide.

Looking back over some earlier Executive Briefings together with experiences from recessionary periods in the 1980s and early 1990s, there appear to be some clear dos and don’ts if a recession really does become a reality.

Some of these dos and don’ts might apply to your business:

(1) Don’t think that a recession means that you can’t grow your business. Research tells us that firms do grow their businesses and in fact new sector leaders can and do appear during a recession. So instead of a time for retrenchment and inwards thinking, it is a time for planning possibly to take sector leadership whilst others adopt a more negative and potentially inwards looking focal point. If you are a sector leader the clear challenge is how to defend that position as there may be others chasing your tail. In short, the new sector leaders may appear and excel at a balance of organic growth and M & A activity in times of a recession.

(2) Costs are important when times are tough and we cannot hide from that. The critical questions however can also include:

  • What is our minimum critical size?
  • How can we increase the flexibility of our cost base? For many, particularly the sector that I grew up in – insurance – Web technologies should have transformed the cost base of the organization – and provided the means to reach an increasingly flexible or recession resilient cost base.
  • What is our exposure to ‘frictional costs‘? I raised the issue of ‘frictional costs‘ in an earlier Executive Briefing – Strategic Reinvention – Asking the right questions. To understand and excise frictional costs you have to understand the value chain – those activities that should, eventually, produce value for the final customer and stakeholders. It helps to have an idea of these activities, their costs and benefits across the entire value chain from first supplier to final customer – not just those activities within your firm – although that is a good place to start. Look for activities that are duplicated – either within your firm or elsewhere in the value chain. Then look for activities or cost structures that once were the bedrock of value creation but that now or in the future might not add real value. Technology has been a powerful force in redefining what are either strategic assets or strategic millstones. What was the bedrock of value creation may in a couple of years be no longer. As the online retailer Amazon has demonstrated, what was once a very necessary strategic bedrock or cost base – physical bookstores – can be turned into a strategic nightmare.

(3) Do consider how you can improve your firm’s ability to broaden the scope of its products and the customer base that it serves. Whilst in times of distress there may be some cut price acquisition bargains out there, and successful firms are good at picking up such bargains, recessionary periods are times to ‘get innovative or get dead’ to borrow one of Tom Peter’s expressions. In short, we need to protect and develop our innovative capability to broaden the customer segments that we serve and the scope of our products. And that means understanding the ‘innovation trail’ or how your firm innovates or should innovate from ideas through to finished products and offerings. In many cases, the best ideas are generated through customer contact and dialogue so consider how these processes can be improved. If you are thinking about outsourcing – which can be an effective route to minimizing critical size – be careful to protect your innovation trail – don’t outsource and lose control over it. Have a look at my briefings dealing with BPO and outsourcing problems. Recession is time to think about getting closer to your customers.

(4) When cutting costs or downsizing be careful to protect the firm’s memory or experience. This is a personal hobby horse of mine so apologies to those of you who have heard it all before. In an earlier decade when downsizing or ‘rightsizing’ first reared its head, delayering or getting rid of middle management was popular. What after all did all those people do? Well, many firms found out the hard way. Some of those people in ‘middle management’ held the firm’s memory, knowledge and experience of past years of organic growth. They had the ‘how to’ knowledge that others might not have had. Just the experience that you might need over the next couple of years. Remember getting good at just cutting costs won’t ensure your firm’s long-term survival – losing the competences to grow organically was one of the key unexpected side effects of the last decade’s downsizing efforts.

So to sum up the question isn’t just:

How can we cut costs the quickest?

But possibly a series of challenges:

(a) How can we reduce the minimum critical size of our operation?
(b) How can we increase the flexibility and therefore resilience of our expense profile?
(c) How can we maximise the efficiency of our innovation trail to take market leadership through organic growth?
(d) How can we protect and redeploy our firm’s memory in new markets and new product areas?

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