What Goes Up Must Go Down

Hey, CEO's: Do you remember how to run a company in tough economic conditions?

I predict with 100% certainty that the economy will make a correction, the stock market will tank, and business will become harder. As to when things will move south, your guess is a good as your planning. Do you remember how to operate in a tighter economy after a decade of good times? A strong economy forgives a lot of issues and inefficiencies in your company and culture. A tightening economy shines a klieg light on them.

The Law of “What Goes Up Must Come Down,” says there is an unknown economic downturn in our future and it will impact your business and your routine.  If you do nothing about the impending headwinds and drive your company full speed ahead, you may get lucky and just be in a minor, short-lived dip. You'll end up ahead of your more risk averse competitors who pulled back in anticipation of a longer, steeper decline. Or you could batten down the hatches and go into hunker-down mode; no hiring, bonuses, or new investments; business becomes about preserving your capital for better times. If the bad times are long lasting, you will be at an advantage against competitors who didn’t ration their capital to last long enough.

Or do you do something in between? I don’t know. That’s why you make the big bucks; to make the big decisions.

A happy CEO presides over a stable, well-run organization with clear intent and strategic objectives that are distributed to the staff in cumulative goals adding up to the company's success. This situation has been known to exist in the real business world for upwards of 4 minutes before disappearing into the night with a mocking laugh. A typical CEO smells of smoke from putting out fires and wears out tap shoes keeping the company moving in the right direction no matter how many outside factors intrude.   

If you are out of practice operating in a situation of uncertainty and contraction, here are a few things to consider based on my experience profitably navigating the last several downturns:

Personal Business Objectives

• Make better short-term decisions by remembering your personal, long-term objectives for your company. Not strategy or tactics, but what this company has to accomplish for you to meet your goals. Knowing long-term objectives will allow you to make better decisions in the short-term.
• Are you trying to be the next superstar CEO with a multi-billion dollar business? Growing it to critical mass and selling? Creating a legacy to hand down to the next generation? Or enjoying a lifestyle company allowing you a combination of income and free time that makes life pleasant?

Know the Rules!

• Be crystal clear on important business restrictions including banking and business covenants. You have to keep lenders happy even if revenue drops. Make a plan early to be in compliance with everything that could be a business killer, like having your line of credit pulled for bad ratios. Stay in communication with your bankers. They don’t like bad news but they hate surprises. Keep your key vendors informed.

Look Into the Future as Far as Possible

Data

• The data in your systems (whether you use Salesforce or spreadsheets) is your insight to future performance. Make your systems give you relevant information about future activity and revenue. Know your trends and changes in those trends.

Meet and Listen

• Talk to your people on the ground who are close to your buyers, suppliers, manufacturing….
• Get a broad view of what experts and trusted advisors guess is coming. Join a CEO peer group that will challenge you, and learn what’s happening in industries in different stages of the economic cycle. Listen to experts. Gather diverse and constant input. Find economists you can tolerate and follow economic news to get a sense of how the whole forest is doing, in addition to your few trees.

KPIs - Get them, set them, communicate them, track them and repeat

• What are the standard key performance indicators (KPI) in your industry? Plus a few that you know are a tight indicator of business health in your company?
• Leading and trailing indicators - look at your KPI data as both a point in time (how many new orders did we get for the month of May?) as well as a trend (is this better or worse from our typical month of May?) I used 12-month-moving-average trailing and leading indicator templates from a past Vistage presentation, which proved insightful. This data view smooths out blips and seasonality to give you a look into real impending change - up and down.

Contingency Planning

• Spreadsheet a variety of scenarios that keep you staying in the black even as revenue drops because you have identified enough expense reduction (or a new source of revenue if you’re able). If you foresee business staying down long enough, you will have to make difficult and impactful cuts in your most expensive resource, people. Planning ahead before emotions have the best of you and your team will help you make better, more timely, decisions.
• Layoffs are demoralizing, expensive, cost you institutional knowledge and expertise and yet, have to be an option if business is just not there. Your trend data will point to where your new normal in revenue is heading.

Change Management and Communication

• Humans have a knack of imagining the worst possible scenario in the absence of information. If there is a well-known external change (a recession on the front page) you can bet that your employees are wondering how it will affect the company and them personally. Don’t make them guess, keep them informed and on-board early and often so they stay focused on success rather than worry.
• Heed Jim Collins’ “Stockdale Paradox”: You must retain and communicate faith that you will prevail in the end, regardless of the difficulties. You must confront the brutal facts of your current reality, whatever they might be.

Creativity and Action

• Improve your workforce: your competitors will also be struggling in a downturn. If you are better prepared you may be able to acquire their top talent and improve your workforce expertise.
• Does your culture allow for shared pay cuts rather than layoffs? Can you reprice or repackage your services? All competitors will be squeezing expenses and trying to stay close to clients as economic times darken. Your unique and creative ideas are a differentiator that will help you come out of tough times with momentum and progress.
• Doing nothing in a declining economy is a bad strategy. Get the whole company working together to carry the load and eventually share in the success.  Are there creative angles you can take due to your specific culture? In a past layoff that I expected (incorrectly) to be a short “V” dip, I looked for an alternative to layoffs. I choose an across the board 10% salary cut. This was surprisingly (well, I was surprised) met with broad appreciation for not doing layoffs, and one year later I still had my full team, their expertise, relationships and knowledge, and we were able to take advantage of a rebound to double revenue.

Stay Personally Motivated

• You carry a real responsibility on your shoulders as CEO and owner. Downturns are all consuming. Pay attention to your physical and emotional health. Talk to your mentors, your network, your peers and friends to gain perspective and ideas. Watch alcohol intake.
• Hard work over an extended period of time will be our way out. Drive momentum, celebrate every step forward and have some patience. You can direct and influence but not control.  

What to Do When You Don’t Know What to Do

Let’s say it is the imagined future and the economy has had a downward turn. You are concerned if not yet frightened. You’re not sure how to replace that lost revenue that you were counting on. You’ve looked for painless but sufficient cuts and they are limited. No move is not an option, but the wrong move could cause a lot of long term trouble.

• There are usually no perfect answers when running a business. When you don’t know the best way forward, gather information, get advice, ask hard questions, declare your assumptions and take action.
• Never get paralyzed by the size of the decision. If you do not know the next 10 steps you should take, just find the next, best thing to do. Do it, reassess and take the next, best step again. Rinse, lather and repeat.

With solid preparation, a little luck and a lot of hard work you will come out the other side stronger, more resilient and able to take advantage when the economy inevitably cycles back in your favor.

-Steve Laine, Consultant