With recession looming, dramatically accelerated by the Coronavirus Disease 2019 (COVID-19), companies across the board are looking at contingency plans to prepare and take measures to contain financial impact, stay afloat and evaluate different scenarios to combat recession impacts.
According to a Harvard study in 2010 that examined the three last large recessions, little research has been done regarding strategies that can help companies survive a recession, get ahead during a slow-growth recovery, and be ready to win when good times return.
“Recession is an opportunity in wolf’s clothing” – Robin Sharma
There are lessons to be learned from previous recessions and companies with a plan that are acting in an organized manner uncovering bottom line savings, but also identifying strategic investments for topline growth often come out strong after a recession.
Take Amazon for example which has grown by 28% in 2009, a tough year of deep dips in sales for most businesses. The company’s secret? Focus on the long term, innovate with products and forever anticipating the next change.
Or Intel, which kept tight control of spend and strategic investments during the 2009 recession knowing that companies would hold off purchases with a plan to be ready for the pinned up demand propelling them to a 10 year high in revenue last year. What is the recipe? Patience.
After all just like the seasons change recessions are temporary periods followed by rapid growth as laid out in this chart by the federal reserve bank of New York with our without COVID-19:
Organizations that plan strategically now with the big picture in mind can weather the storm and prepare for better times.
While 10 days ago there was uncertainty where we were headed – it is now clear, we are in a recession as per a recent CNN report retail sales plunged 20.5% during January and February compared to 2019, industrial output was down 13.5%, and fixed asset investment fell by nearly 25%, according to the National Bureau of Statistics.
But not so fast – the actions taken by government, businesses and consumers can soften the blow which brings me to the first step to be taken as part of your recession response plan if you don’t already have it in place.
Develop a Recession Response Plan:
Step 1: Form a dedicated crisis management team
Just like a critical incident response team (CIRT) in cybersecurity the crisis management team (CMT) needs to come up with a plan to contain the damage, isolate yourself from the market dynamics as much as you can and restore operations after reviewing scenarios and come out stronger than before. It is a continuous improvement cycle that technology teams apply to their services, dev ops and cybersecurity.
The same needs to take place for the pending recession which is further accelerated by COVID-19.
This is really a strategic planning and risk management exercise for the CMT to soften the impact on your organization and come out strong after.
This CMT team is comprised of individuals from various branches of your business including Finance, Supply Chain, HR, IT and other departments based on the industry you are in. This team will then develop different economic scenarios and determine how they might affect your business.
There will be an opportunity to identify recession-related risks and opportunities followed by prioritizing initiatives designed to mitigate the risks and capitalize on the opportunities.
This team should monitor progress and report back to the board on milestones and any changes needed.
Step 2: Analyze the data to forecast the severity of a potential recession
The CMT should determine if we are facing a
- Modest downturn
- A more severe recession
- A full blown depression
For each of these scenarios, for example, how would customer demand for your product and services be impacted by limited capacity with 10, 20 or 30% sales reduction, limited production, limited credit and price decline of 10 or 20%? Would declining stock markets make it more difficult to raise equity, and how would higher borrowing cost impact your cost of capital?
Here is an overview of the Economist and World Bank on economic impact of a flu pandemic:
Step 3: Evaluate exposure to your industry and lines of business
During the beginning of the epidemic, impacts were mainly related to supply chain disruptions and business slowdown in affected regions. If your industry is healthcare, waste management, education, government, mining and professional scientific services the interactive chart below hints that you are going to be just fine.
For other industries however, based on the current ripple effect across geographies and economies the world economic forum estimates $1 trillion in losses and worst case $2 trillion.
The economic times highlights industries that are most impacted:
Step 4: Cash is king
Staying afloat with adequate cash flow and access to capital is key. Establish a central cash management system to monitor, prioritize and postpone spend depends on the severity of the downturn and to what degree spending is discretionary.
- Manage customer credit risk – evaluate higher risk customers and assign customers a credit rating
- Reduce working capital – but be careful – firms that cut costs faster and deeper than rivals don’t necessarily flourish. According to a Harvard study they have the lowest probability—21%—of pulling ahead of the competition when times get better.
- Implement hour reductions, furlough workers to save jobs, and pay for performance.
The British government realized that proactively addressing layoffs by covering up to 80% wages to keep workers employed is as chancellor Rishi Sunak put it: “a great national effort to protect jobs. We want to look back on this time and remember how in the face of a generation-defining moment we undertook a collective national effort and we stood together. It’s on all of us.”
According to a recent Harvard Business Review article a study of public companies concluded that “companies that emerged from the crisis in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements”.
Step 5: Analyze the market, your competition and seize the moment
What is your competition doing and how can you set yourself apart?
- Pricing strategy – companies should consider offering low-priced versions of popular products— just like consumer products companies are doing. Is there a version of your products or services that is equal to the McDonald’s Dollar Menu by offering the same but limited service for less.
- Explore subscripton and pay as you go versions of your services including pricing models that would allow a customer to rent equipment, services by the hour rather than by the day.
- Pursue opportunistic mergers and acquisitions – some organizations exploit competitors’ vulnerabilities to redefine their industry through consolidation during a recession.
- Explore if divestiture of non-core businesses selling off peripheral and poorly performing operations is a viable option – divestitures rose modestly from 30% in 2007 to 36% in 2009 during recession.
- Anticipate change where the economics a business may change because of increased competition, changing input costs, government intervention, or new trade policies. This requires companies to re-evaluate their business model.
Step 6: Invest into the future
Companies that thrive after a recession understand that investment in product development, information and production technology will bear fruit only after a recession is past.
However, delaying investments can compromise the ability to capitalize on opportunities when the economy rebounds.
During this pending recession we can already see that companies are becoming more digital investing in collaboration, infrastructure and bring your own device (BYOD) to enable continued work from home as compannies and businesses are asked by government to close down stores, offices and self isolate.
With the historical recession bull and bear market cycles there is an opportunity to invest anti-cyclical and come out strong riding the wave of average nine years of growth following a recession:
In a way recession is an opportunity in wolf’s clothing since there is surplus capacity due to a lack of demand for services and product. That capacity can and should be strategically redirected for strategic investments into people, process and technology.
Investing into technology and people during recession might be the most critical success factor to come out roaring after a recession – Carsten Krause
Here is what to do:
- Budgetary allocations can be more easily redirected to fund IT initiatives without dampening sales and due to reduced production in the first place.
- Cost to invest in technology capability is significantly lower now, as talent and resources are more readily available and competition for resources is declining.
- Technology cababilities themselves enable cost savings by consolidating platforms, reducing time to market, and automating labor intensive processes.
- During rapid cycles of change technology can be an enabler to rapidly scale up and out and to run agile low cost proof of concepts for new business capabilities, products and services.
- A downturn is also a good time to invest in people to upgrade the quality of your management teams. Competition for top people is less fierce, availability higher, and the cost lower.
Take Apple Computer – when they headed into the 2001–2003 recession revenue fell 33% in 2001 over the previous year. However, Apple increased R&D investment by 13% in 2001—to roughly 8% of sales from less than 5% in 2000—and maintained that level in the following two years. As a result Apple was able to leapfrog the market by introducing the iTunes music store in 2003 followed by the iPod in 2004 setting a foundation for rapid growth and market dominance in the industry.
Step 7: Sit tight, monitor and plan for growth
The CMT should keep the focus on the big picture and inform its executives how individual initiatives are part of a comprehensive plan, track progress and direct their board where and when their participation is needed.
As with any transformation program there needs to be flexibility in a rapidly changing environments bolstered by the capability to suspend, accelerate or initiate new measures and seize the moment.
Let me leave you with this quote by Robert H. Schuller that I feel is relevant during these times of personal and economic distress:
Never cut a tree down in the wintertime. Never make a negative decision in the low time. Never make your most important decisions when you are in your worst moods. Wait. Be patient. The storm will pass. The spring will come.
Disclaimer: The opinions expressed in this post are my own personal views regarding IT strategy, trends and architecture.