I don't know who first said that economics is the painful elaboration of the obvious, but today's business climate certainly validates that sentiment. If you've been watching television, surfing the web, or even, dare I say it, reading a newspaper, you've probably reached the conclusion that the economy of the United States is in bad shape, and that many businesses are suffering. Hopefully, this was eye-opening news to you and your business, and you are actually having a robust year. But even if that is the case, to borrow from an exhausted cliché, the only businesses that are fully immune to economic slowdowns are funeral parlors, cemeteries, and tax collectors. Even hedge funds, financial vehicles designed specifically to counter the effects of poorly performing investments, suffer in down economies.
My point is that even if you are having a decent year, it would be unwise to assume that a prolonged downturn will not ultimately have a negative impact on your business. In other words, if you haven't felt the pain yet, odds are you will. The question with which to grapple is how to minimize the negative impact of this inevitability on your company. Or, putting a more optimistic spin on things, how to ride out a down economy and position yourself and your business to thrive when the economy ultimately rebounds.
A critical principle to bear in mind at all times is that cash is the blood of any business, and cash flow is the pulse. Jim Robinson, the former chief executive of American Express and currently a venture capitalist invested in smaller companies, was quoted recently in Fortune magazine saying, "In a downturn, decision making slows and budget targets are pushed back. Be sure to have the cash to see it through." For companies of all sizes, worshipping cash flow manifests itself in many ways, including delaying less-than-critical long term investments, wage freezes, intelligent downsizing, and paying more attention to sourcing and purchasing. The challenge, however, is to avoid the "cash is king" trap, where companies take action to sustain or improve cash flow and these actions have a negative impact on their customers or their relationships with those customers (i.e., airlines charging to check baggage, supermarkets reducing the number of checkout lines, and so forth).
Managing by metrics is never more important than during tough times, as it ensures vigilance in key performance areas. Every company has its own daily, weekly, monthly, and quarterly metrics which they use to oversee the sales, operational, efficiency, and profitability of the business. I would recommend developing two additional metrics: Quality of Revenues (QR) and Quality of Profits (QP).
These top and bottom line analyses are important barometers as to the long term health, viability, and prospects of a business. How you measure them is up to you, based on your knowledge of your business, product, market, and customers, but these metrics should indicate the health and diversification of your customer base, the rate of higher margin revenues, and the overall reliability of your financial performance. Common examples of QR and QP metrics are percentage of revenue or profit by customer, geographic market, or product line, and ratios of revenue and profits per employee, equipment, or working capital. In addition to providing the all-important benefits of assisting you as you navigate through troubled waters, positive QR and QP metrics can be critical to boosting the valuation of your company in the future, whether to secure financing or even to sell the business.
I'm sure you've heard the joke about the new CEO who, upon assuming his position, is presented with three numbered envelopes by the outgoing chief to assist him through troubled times. After six months of difficulty, the CEO opens the first envelope which urges him to "Blame your predecessor." This advice gets the CEO through that jam, but six months later he is forced to open the second envelope, which reads "Reorganize." The CEO embarks on a full scale, company-wide restructuring, which buys him a full year, until he once again is forced to turn to the third envelope, which pointedly advises him to "Prepare three envelopes."
My takeaway from that parable is to avoid chasing a strategy du jour. Too often, when businesses struggle, managers flail around in an effort to grab onto a magic solution. Rarely does this work. Instead, remain disciplined, and concentrate on developing your company's sustainable competitive advantage. Frequently, this critical focus can in and of itself illuminate the strategic path necessary not only for short term survival but for long term success as well.
As far as the more pragmatic, internal day-to-day management techniques, I have always been comfortable building an operation centered on performance stars in every area. I'm not talking about simply singling out the top performers in any area and acknowledging them. Develop the core of your company – each company has one, whether or not senior management chooses to recognize it. You might be able to utilize this core in the form of a cross functional business improvement team, one which could assist you in planning and managing just about every element of the business.
Star performers are never more valuable than in tough economic climates, which leads us to the subject of employee compensation. Sparky Anderson, the Hall of Fame baseball manager, once declared "Just give me 25 guys on the last year of their contracts; I'll win a pennant every year." Of course, in the business world, things don't work exactly that way, but Anderson's point about succeeding by properly motivating employees is both valid and valuable.
Developing an effective compensation and incentive structure is critical to a business, and never more so than during economic slowdowns, when worker consciousness can be overrun by fear, doubt, and insecurity. While every business must devise its own plan that fits its culture and situation, it is critical to ensure that the company's performance meet some benchmark prior to the awarding of individual performance based rewards. And always remember to keep perspective when developing incentive based compensation plans, especially with star performers. You might want to avoid the attitude made famous by another former major league baseball manager, Leo "The Lip" Durocher, who used to tell his players, "If you don't win, you're going to be fired. If you do win, you've only put off the day you're going to be fired."
The stress of managing in a difficult economy can make decision making particularly difficult. Panicked executives in companies large and small often resort to using CYA studies, statistics, and prognostications not only to justify but to actually steer their muddled thought processes. The point is, make decisions on the basis of reality, not projections or figures that are meaningless to the actual real life performance of your company. The best way I can illustrate this idea is to relate the story of the three econometricians who went hunting one day. They came across a large deer, and the first econometrician took aim and fired, missing the deer by three feet to the left. The second took aim and fired, but also missed, this time by three feet to the right. At which point the third econometrician threw down his rifle and triumphantly shouted, "We got it! We got it!"
Finally – and in my opinion, most important – is this: When the pressure is on, hit the streets! Sales don't just happen – you have to make them happen. The tendency for businesses experiencing performance declines is to gather data, analyze, and then develop a plan. Well, take it from me, the ultimate planner – get yourself and your people out of your offices, stop planning so damn much, and just get in front of as many prospects as you can. And for goodness sake, stop worrying about what your competitors are doing. Trust me: While you're sitting in a conference room with a consultant (like me!) developing a strategy to rev up your marketing or product line and land your next dozen clients, your competitor is sitting at lunch, across the table from that very prospect!
I'm reminded of the joke about the police officers who respond to a bank robbery and pull up to the curb outside the bank just as the getaway car roars down the street. One of the cops begins to calculate the optimal strategy for chasing down the robbers, listing all possible routes and methods of escape. His partner points out that while the sergeant is doing all this planning, the bandits are getting away. "Relax," says the sergeant. "They've got to figure it out too, don't they?"