Markets are suffering, the world is in a state of high anxiety, supply chains are being disrupted and many companies are already being driven into deep losses. In short, we are in a period of extreme market turbulence. So, how do we lead our organisations through the crisis?
Fortunately, the world does have plenty of experience and studies to draw on, that point us to the best strategies and tactics. So, this article will reference the best of the available research and provide very practical advice from the front-line of restructuring.
Let’s start with the research. Following the GFC three respected academics (Gulati, Nohria and Wohlgezogen, 2010) conducted invaluable studies on the best coping strategies during economic turbulence. Further analysis and research have validated the findings, which turn out to be very practical.
It seems that strategies which only focus on cost cutting, as opposed to productivity improvement, experience sub-optimal outcomes as the world normalises. Furthermore, those that fail to invest in growth risk being left behind in the recovery. The best response is one that combines a productivity focus (done with a sense of urgency) with targeted growth investments, all whilst keeping an eye on changing customer needs. We will call this superior approach the “Balanced Response”.
So, why not just cut costs immediately and deeply?
Well, this implies taking out people without taking out the work (as would be the case in a productivity project). This can lead to poorer customer experiences as service standards drop or mistakes happen. Furthermore, reducing staff, without understanding what they do, can increase risks. This is a problem in a world where risk management has become so much more important, and in which regulators are making sure we understand that fact.
It is also true that companies can have lower levels of morale in times of massive redundancies. If people are more concerned about keeping their jobs than responding creatively to the crisis, then you can be worse off than your (more prudent) competitors. If you want loyalty from staff in the good times, it helps to show them that you are not going to drop them in the bad times.
However, the research also found that organisations which only chased growth investments fared little better. While they may have slowed the decay of the revenue line, their higher cost-to-income ratios eventually put them at a disadvantage to those who pursued a Balanced Response. Furthermore, whilst they benefited from buying assets at reduced prices to support growth, many of them did not deeply examine the changes in customer needs (e.g. customers in leaner times might be more interested in “value” than in product “bells and whistles”). In effect they became overly focused on the growth story at the expense of the customer story.
So, if a Balanced Response is the right way to go, how do we go about executing on the challenge?
Well there are really four components to this strategy
- Rapid tactical cost reduction of redundant activity or obvious waste
- Moving on productivity opportunities with a sense of urgency
- Finding growth opportunities in existing and new markets
- Prioritising growth and productivity opportunities in ways that don’t lose sight of the changing customer needs
Rapid cost reduction is the first step for many companies, and it is often necessary. It can incorporate big moves, for example, cutting loss-making products, geographies or even businesses. However, it can also consist of a range of smaller actions (that add up) such as bonus freezes, non-paid leave, discretionary spend reductions, delayed asset replacements, and so on. All of this is fine, but what you really need is productivity.
Productivity shifts the dial on the sustainable cost-to-income ratio
It includes actions that reduce waste and improve asset utilisation. It is often associated with disciplines such as lean and process reengineering. The major trap here is that many leaders buy-in to the hypothesis that we need large capital spends to improve productivity. Certainly, capex can help, but there is usually a lot that can be done without capex. When we examine processes, we often find that 50% of the waste (which can be around 20% of the people costs) can be addressed without major technology or structural change.
Finding and executing on growth opportunities is also an important part of the response. This requires taking the time to think. Great companies responded to the GFC by stepping back and seriously examining their strategy and business model (or the way you are organised to make money). Target in the US did this brilliantly – while improving productivity it also focused on online sales and lifted its investment in “chic value” products. Consequently they came out of the downturn stronger than when they went in.
Delivering on all this potential change
Delivering on all this potential change requires three disciplines: communicating strategic intent throughout the organisation (so everyone stays on track); using distributed management to deploy cost and revenue changes quickly; and listening to the customer’s response. Of these three points, it is “distributed management” that is the most contentious because we tend to think that a crisis demands central command and control. However, recent research has made it clear that Agile teams solving specific cost problems can give you a much better result (Rigby, Henderson, D’Avino, 2018). CEO’s need to resist the temptation to control everything – or risk becoming the “bottleneck” that stops adaptation.
So, a Balanced Response is likely the optimal and logical way forward. This means drawing on the best of what management science has recently taught us on how to lift productivity, find growth opportunities and prioritise well – all whilst keeping and eye on the customer. The prize for the Balanced Response is much more than mere survival, for executing well means you will out-compete your rivals as markets improve.
- Gulati, Nohria and Wohlgezogen, 2010, “Roaring Out of Recession”, Harvard Business Review
- Rigby, Henderson and D’Avino, 2018, “How Agile Teams Can Help in a Turnaround”, Harvard Business Review