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This article originally appeared in Chief Executive Magazine
If you were having flashbacks to the early days of Covid-19 as the tariff war exploded these last couple of weeks, there was good reason. Simon Freakley, executive chairman of AlixPartners consultancy, certainly had that sense of numbing déjà vu.
The global scope, the deep uncertainty about the future, the sudden, history-making market swings, and ultimately the unsettled feeling that we’re in someplace uncharted have had Freakley—and a lot of those he talks to—experiencing not-so-subtle reminders of those dark days, he says.
“I do think that the early days of the pandemic were a dry run for this, they were a dry run for the conditions that we’re dealing with,” he told me in a conversation Tuesday night, before Wednesday’s jolting turn of the tariff drama. “The pandemic wasn’t avoidable. This could have been avoidable, but it’s the circumstance that we’re dealing with.”
So what’s he advising the big-company CEOs he talks with to do right now? The basics, he says: Control what you can control, communicate communicate communicate and above all else, protect your balance sheet. Then watch for opportunities.
“What do the best leadership teams do? They remain nimble,” he says. “They ensure that they’re never a hostage of a strategy that a previous moment in time might have been appropriate, but now isn’t appropriate. They remain agile to pivot.” What follows was edited for length and clarity.
You talk to a lot of CEOs. What’s the vibe out there right now? What are CEOs feeling? What are they asking you about?
At the moment, what CEOs are saying is that we don’t know where this is going. We do know that it’s going to lead to pressure on margins. We do know it’s going to lead to pressure on prices, and therefore we need to take steps to mitigate to the extent possible the detrimental effect on our business.
Pausing discretionary spend to the extent possible, converting fixed cost into variable cost to the extent possible, mitigating any spend of capital until we know where this is going. Maximizing our access to cash, either through cash reserves, through the disposal of non-core assets, or through borrowing facilities so we have options. Because out of cash and out of credit is out of options. Also, potentially, if special opportunities arise in the market, if assets are being sold that we can capitalize on, we have the resources to do it.
It’s very much the counsel that you were giving folks at the beginning of Covid, that when you don’t know what happens next, you focus on controlling the things that are in your control.
Exactly. In moments of uncertainty like this, control the controllable because you can only focus on your circle of control, which is mitigating costs, maximizing the preservation of cash and maximizing, therefore, your agility to pivot and maneuver as things become more clear.
What are you saying about how to deal with the tariffs themselves? What do you advise with that?
We have tariff war rooms or tariff command centers set up to understand how clients can maximize tariff arbitrage. You know, if one jurisdiction has lower tariffs than another, how can you reconfigure your supply chain to mitigate to the extent possible, the net tariff cost to you?
We have people looking at how they can deconstruct their products so that they may be import products with only direct costs so far incorporated into them, so you don’t end up paying an enhanced tariff on indirect costs. Importing semi-manufactured goods rather than finished goods; how you reconfigure your own domestic manufacturing operations to maybe manufacture those components that are most expensive to import, and then import the less expensive products from the differentiated territories.
For instance, in an environment where China controls 60 percent of the rare earth elements in the world, and probably 90 percent of manufacturing with rare earth elements, if China’s going to be a very high tariff country to import from, how can you mitigate that by taking the rare earth elements into different jurisdictions to have them then manufactured so that you don’t end up with a higher tariff.
The one bit of good news in this is we’re using AI-enabled engines to understand how to disaggregate all of this production, to reconfigure it in the lowest tariff configuration you can. These AI tools can digest thousands of contracts a day to understand where the points of differentiation and difference are in this environment, which would take weeks, sometimes months to do it manually. They are allowing decisions to be taken more quickly than they were before.
What about talking to stakeholders? Give us some thoughts about communicating right now.
One of the things you’ve heard me say before, and it’s as true today as it was in those early moments of Covid, is that the best CEOs are their own chief communication officers. They get right onto the front foot of communication.
One of the masterclasses we were all given on this point was by one of your CEO of the Year award recipients, Marriott CEO Arne Sorenson, who, at the early stages of Covid, got right on the front foot, even though he was under intense treatment for cancer at the time. All his hair had fallen out. He’d lost quite a lot of weight. He went on to video himself to speak to all 444,000 employees about what Marriott was doing in Covid to honor its values and protect his business. (View the video on YouTube.)
Ultimately, of course, Marriott had to furlough many of its employees as it worked through Covid. But he got so much credit and goodwill from his employees from just doing it himself, being on the front foot, speaking truth, during a time of profound uncertainty.
Exactly that is true today. CEOs should, even though they don’t have the answers, just talk about what they’re doing in the face of uncertainty to protect customers, to protect the extent possible employees, and also make the best decisions for investors, understanding that a new set of facts tomorrow may require them to pivot again in a slightly different direction.
Because nobody knows ultimately what they’re going to do, all they can do is narrate the principles they’re using, the basis upon which they’re determining the best decisions for the business. People are getting high marks for doing that.
If you look at the history of business, in any crisis like this, some companies emerge stronger than other companies. Some make the big move that is the making of them within their industry. Any tips on finding the opportunity in the volatility and making sure that you are doing the things that your rivals aren’t? You don’t need to beat everybody in the market. You just need to beat your rivals.
What do the best leaders do? What do the best leadership teams do? They remain nimble. They ensure that they’re never a hostage of a strategy that a previous moment in time might have been appropriate, but now isn’t appropriate. They remain agile to pivot.
The winners are those who are able to pivot, which means that they have the cash resources, they are not up against the wall in terms of their borrowing, and they’ve got the flexibility in their balance sheet to either be prepared to let things go that are non-core, or to buy things when special opportunities arise that normal market conditions wouldn’t make available.
The ones that get left behind, the ones that don’t have the balance sheet strength, they’re in a bind and can’t move. Their costs have been much too fixed. They’re not variable. People who haven’t actually narrated what they’re doing can’t carry their constituents with them. All of those things turn out to be features of the winners in moments like this.
Honestly, I do think that the early days that the pandemic were a dry run for this, they were a dry run for the conditions that we’re dealing with. The pandemic wasn’t avoidable. This could have been avoidable, but it’s the circumstance that we’re dealing with. But what is similar about this and the pandemic is it is now a global phenomenon. The winners—and there will be winners coming out of this—the winners will be the people who can pivot quickly and are able to move to action quickly because they have the strength of balance sheet to do it.
