Written by Peter Ward, 24 August 2022
Preparation, mindset, and honesty: Essential in the negotiation of tough times
Walking through some of our earlier work, I came across a piece on ‘rightsizing the right way’. Written just prior to the last but one recession. Without wishing to be a harbinger of doom, it does seem that we are heading towards a very difficult time for global trade and arguably even more difficult here in the United Kingdom. From experience of rather too many past downturns, I reckon there are five potential outcomes for organisations:
There will be those who do not have the financial and psychological resilience to survive.
There will be those who decide ‘enough is enough’ and cease activity or sell up.
There will be those who have been ‘built to last’ and have the experience to flex their business model to meet the new conditions without undue disruption.
There are those who are in a business that either feeds off poor trading conditions (e.g. the insolvency sector) or those where demand is unlikely to tail off (er.. funeral directors? But even they may experience margin pressures).
There will be those (and possibly most) struggling to develop an action plan to ‘right size’ the business.
It is the last of these categories that we were addressing previously and offer the following thoughts as we enter another period of uncertainty for many of our businesses. These are drawn from experience of working with companies with a ‘built to last’ mentality.
I am going to make the assumption that the balance sheet is strong enough for our thinking on resilience to be confined to the psychology. If our balance sheet is too weak, then, regrettably we may be in the first of these categories and will have few choices available to us.
Let’s start with the mindset that we want to develop. For every recession there is a recovery. The next recession may be longer and possibly deeper, but it will be followed eventually by a return to more positive trading conditions.
I recall working with a client in a highly cyclical industry in Texas. The need was to reduce the headcount to a level where profitable trading was possible at around 50 per cent of previously recorded sales levels. Midway through the exercise, the sales director (he had been in the industry forever!) pulled together what appeared to be random bits of data and announced that he could see the end of the constraints and the start of the next boom. The impact was to change the psychology of the activity. Yes, there was the continuation of cost reduction, but with much more caution and with an eye to the resource that would be needed should boom times return. It opened up a different way of reducing costs:
Making it possible to re-hire those who will again become essential. More emphasis on creating as positive an ‘exit’ experience as possible (challenging but not impossible).
Developing an optimal resource model for a recovered business.
Retaining those resources difficult to replace: treated as an investment, rather than operating expenditure (which was in the headlights). Similarly recognising that there is an investment element in some operating expense that needs to be protected.
Exploring shorter working hours or job sharing rather than cutting some completely from the workforce.
Identifying factors leading to high performance so development plans can be initiated (but not committed) in readiness.
This leads onto a second thought: communicating the truth. We talk about ‘rightsizing’ but it is a euphemism that is not helping us to convey the brutal truth. People are going to lose jobs and that is going to be tough for many individuals. Tough on those leaving the business, but also tough on those who will be retained. The guilt of the survivor! I have always found it curious that we never feel bad about adding jobs, even though we know that not all will be staying until retirement. Indeed, many of our recruitment practices are built on lasting employment (pensions, additional leave for long service and similar). Maybe our experience in reducing numbers will impact on future discussions on joining, but for now, our emphasis should be on ensuring that all know exactly where they stand and how the business is faring. Let’s remember that actions taken to get the cost base into shape are protecting jobs that otherwise would be threatened through continuing sub-optimal performance.
An ‘outplacement’ specialist once told me that the best thing you can give people who are going to leave is time. So, being clear about the prospects for the business ahead of time can give those who may be impacted time to consider their futures, to review their financial position and explore options. ‘Yes, but..’, I hear, ‘... won’t that mean they will be unsettled and will leave ahead of time? Or won’t our better people take that as a signal that they need to leave?’ I believe we underestimate the capacity of our people to process the signs of slower activity and to conclude for themselves their view on future security. I would be much more inclined to focus on how to ensure the retention of great performers than ‘spin’ a story that will eventually unravel. No substitute for honesty in the conversation, with the lasting impact that everyone will place greater trust in future operating bulletins.
My third thought is a further exploration of the time factor. Anticipating a need for cost reduction gives the time that is necessary to analyse all aspects of the business and to ensure that critical investment projects are recognised and, in some way, protected. Too often there are investments made but classified as operating expenditure and therefore subject to the ‘across the board’ cuts (I can hear it now: ‘it wouldn’t be fair to prefer your department’). Time gives the opportunity to consider those costs that will add to future effectiveness. If necessary, defer but not cut.
We had a recent example of organisational madness with a well-established project team who were subjected to an across the board cut. No doubt there was a need for cost reduction in the business as a whole, but the impact of the application of the ‘one size fits all’ approach has been to compromise the intended outputs from that team. All for the sake of classifying them as an investment rather than an operating expense. A bit more time and it may have been possible to understand the future value and explore other financial options to continue the investment. Consider: third party targeted finance? Joint venture with a third party? Buy-out by the team itself? Any of these options could have resulted in continuing investment activity while retaining the overriding need to reduce operating expenditure.
Returning to mindset. A period of stressful trading can release an energy that might have remained undiscovered. The reality of the next recession is that it is likely to be far reaching with whole supply chains under pressure. So, maybe this is the time to explore the effectiveness of our products and service levels for our customers. Can we reach them in new ways and focus on the value provided, and removing cost where it does not impact the value proposition? I list this sort of activity as mindset as it will be too easy to sit back and treat as inevitable that our customer base will be looking to us to reduce cost. But like most things in a crisis, actions will be more effective if planned in good time. Have we got time this time round? Maybe, if we start now.
We at Telos are strong advocates for investment in culture: getting behaviours defined and embedded in the organisation in support of its purpose and (authentic) values. I would argue that if your behaviours don’t work in a period of adversity, then you have the wrong behaviours. Ensuring that these behaviours are harnessed to deal with difficult situations will not only improve the execution of solutions but will also strengthen the culture for the better times to come. Too often we see the culture and other ‘soft’ areas being de-emphasised when in crisis. The reverse should be the aim. We have observed that a focus on the authentic purpose and values can support the successful navigation through a crisis.
With a healthy culture and a positive (growth) mindset, a recession can become a platform for improved performance and creativity. If we choose to take it, there is an opportunity to improve our businesses and ready ourselves for the post-recession recovery. The recession will come, and we need to be ready. Not a time to become a victim of circumstance, time for a positive mindset, focused on growing out of distressed times.
Our goal should be to optimise our model for recovery, rather than dwell on cost reduction
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