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Jason McDannold
Partner & Managing Director, Americas Co-Lead, Private Equity
Chicago
How long do you think the recession or downturn will last? How deep will it be? We surveyed 3,000 executives around the world for the AlixPartners Disruption Index survey; 13% said they thought a downturn would last less than a year; 39% said it would last between one and two years; 35% see three to five years of slow business; and 8% see a recession lasting five years or more. Though economists have forecasts, the fact is that no one really knows. Disruptive events—surging Covid in China, for example—could render the best forecasts meaningless. As The New York Times put it in a headline: “Trust the Models? In This Economy?”
In these circumstances, you need more than a plan: You need options—an already-prepared set of actions to take depending on the business climate. What levers would you pull in a relatively mild, short recession? A moderate one? A long, deep one? To answer these questions, you need to ask a couple of others, too: Where will a recession hit you hardest? Customer demand is the most obvious, of course—but for which customers and which lines of business? Or there could be more complex effects, such as distress among key suppliers or the impact of rising interest rates or changes in industry structure.
You want to prepare a set of scenarios—circumstances you might face—and actions—responses to those circumstances. You want three, depending on whether the downturn is mild, moderate, or merciless. You also should decide in advance what circumstances will cause you to pull each lever.
The first is a set of actions to that are easy to reverse, and whose harm to the business is negligible or transitory. The easiest of these are usually related to non-labor spending, starting with discretionary non-essential costs. Cuts in T&E, postponement of in-company events, eliminating some advertising and donations—these are easy to find and execute. (They also conserve cash).
Hiring freezes and postponed training are also possibilities. This is also the moment to convene workshops to eliminate “tail spend”—the 20% of small-ticket spending that’s sprinkled among many divisions and providers and lurks under budget lines like “other” and “miscellaneous IT and comms.” Because it’s small and scattered, tail spend is usually unmanaged. Like dust in an attic, it grows—and it can add up to hundreds of thousands of dollars, especially if you have had any M&A in the recent past. Don’t overlook no-longer-necessary costs you incurred during and after pandemic lockdowns, such as redundant Zoom, Teams, and other accounts.
The second scenario comprises actions that are harder to reverse, carry more risk for the business, or might generate more internal resistance. These are steps to take for a recession that’s long or deep but doesn’t endanger the business fundamentally. Rationalizing spending with strategic vendors is a good initiative for this scenario, whether that’s for IT services, shipping, licenses for business intelligence software, or other categories. You’ll also want to consider postponing capital spending except for maintenance, cutting back expansion plans, and delaying new product launches. This is also an opportunity to examine your real-estate footprint. You almost certainly need less office space than you did before the pandemic, and this is a great time to strike deals with landlords at very favorable prices.
Then there’s the worst-case scenario—the one where a recession seriously threatens the future of the business. In that case, you need to ask fundamental, clean-sheet-of-paper questions about both the structure of your business and the markets you serve. Looking inward in this scenario, you will need to think about rightsizing the labor force, reexamining spans and layers, analyzing the mix of offshore and onshore activities, rethinking high-cost vs. low-cost locations, and so on.
Necessity might also force you to restructure the market-facing parts of the company to eliminate product lines, close some operations, or sell parts of the business. Such decisions are difficult at any time—but much harder if you are unprepared and under the gun. That’s why you should develop these scenarios now, so that you have time to base them on detailed information about resources, revenues, and profitability at every level, all the way from SBU to SKU. Granular knowledge can guide restructuring so that it is more precise, perhaps less extensive, and—most important—more likely to result in a rebuilt business, not a battered one. The knowledge you gain will be valuable even if you never need to restructure, because what you have learned about costs and profitability can guide future investments when the economy turns back up.
Lay out these scenarios taking a market-back view—that is, figure out their likely impact not just on your operations but on your customers, suppliers, competitors, and even on industry structure.
As you consider what defensive actions to take, give equal attention to the chance to go on the offense. You’ll want to prepare and set in motion a series of no-regrets, tactical initiatives that can increase revenue and margins quickly even in the teeth of an economic storm—as our colleagues Jason McDannold and Yale Kwon wrote in a Harvard Business Review article, “How to Grow Your Top Line in a Down Market,” -- by improving sales force effectiveness, marketing ROI, and customer experience.
Lay out strategic options, too. The biggest shifts in competitive position and industry dynamics happen during recessions. Winning companies are ready with resources, and ideas to take advantage of the weakness of others, move into weakly defended territory, or buy assets or businesses from people who have not amassed cash, tightened operations, or done the scenario planning as you have.
This is part three of our four-part series about recession-readiness best practices. Read parts one and two and watch for part four next week: Twelve Questions to Improve Your Position in an Uncertain Economy.
