Navigating Through The Recession

Taking The Right Track

With the optimism of easing the COVID-19 health crisis, we plan to get back to normal, phasing out the lockdown and going back to schools, work, and our usual businesses. It seems that very shortly, the hottest topics for both companies and individuals will be the recession and the increasing unemployment.

Unemployment increased during the lockdown. The first wave came after shutting down all the non-essential businesses. People working in places such as street shops, cafes and restaurants found themselves on furlough or, even worse, unemployed. While the government support eased the pain during the lockdown, getting back to work now presents new challenges as some of the businesses will not remain as profitable.

UK inflation is at its lowest since 2016. The Office for National Statistics (ONS) announced the 12-month inflation rate, 0.9% in April 2020, down from 1.5% in March 2020. According to the Bank of England’s ‘Monetary Policy Report and Interim Financial Stability Report’, UK consumer spending decreased by more than 10% during the Covid-19 crisis. The interest rates are expected to be negative coming to the end of the year.

The decrease in demand will have an impact on all businesses. When the economy takes such a downturn, businesses take drastic measures to adjust to the new reality. Companies defer planned investments and cut their costs to mitigate revenue losses and remain liquid.

The capital expenditures and research and development investments (R&D) are postponed to save on critical resources.

Cost-cutting is a measure with immediate impact but is only successful when unnecessary costs under given conditions are correctly spotted and reduced. Cutting operating expenses the wrong way will harm the businesses in the long run. I had a few such experiences during my career. At first, the expenses such as company events and entertainment activities, travel and training are axed. Then it comes to costs that are more fundamental to business: marketing and advertisement, insurance and employee costs.

Employee expenses are the target of cost reductions most of the time, especially in service industries, because it is the most significant chunk of total expenses.

In 2015, Caroline Flammer (Boston University) and Ioannis Ioannou (London Business School) published a research paper on firm-level decision-making during the 2007 -2009 Great Recession and assessed the results of these decisions. In their study, ‘To Save or to Invest? Strategic Management during the Financial Crisis', they examined the measures taken in response to the recession and found that ‘the companies that sustained their investments in R&D and CSR had performed better in the years following the economic meltdown’. But sadly, this was not the case for the companies that maintained their workforce and CAPEX during the crisis. They conclude that ‘firms that pursue the two-pronged approach of simultaneously maintaining their R&D and CSR while reducing their workforce and CAPEX achieve an even higher performance in the post-crisis years’.

It is important to mention, though, that the crisis of 2007 – 2009 had different dynamics. It started with a shock from the financial system. A long-improving structural defect in the world economies was the cause of the crisis. The covid-19 crisis was not triggered by structural issues; it came out of the blue with the lockdown, and getting out of it may be as fast as we got into it.

Keeping in mind that a short recovery period is possible, workforce reductions will not be the right approach while planning the way out of the crisis. Besides immediate saving on the costs, there may be consequences harmful to the businesses:

Loss in employee confidence and engagement

Loss in productivity and quality

Loss in customer satisfaction and revenues

It is better to finetune the employee costs that would be fit for normal operation of the businesses in the coming years rather than reacting to the immediate conditions. This will prevent unnecessary damage to the company and its brand image during the time of crisis.

And hope for a sharp recovery from the recession.