Warren Buffet famously remarked that it’s only when the tide goes out that we see who’s swimming with no trunks on. But how can businesses ensure they’re not caught with their pants down when the recession hits? Senior Editor Ben Thompson reports on how some of America’s biggest companies are dealing with the downturn.
John Donahoe’s recession playbook At the recent World Economic Forum in Davos, the eBay Chief Executive outlined his four-part plan for dealing with the downturn. Stay externally focused. At times like this, it is so easy for an organization to turn inward. You read the newspaper and you watch the stock price and you become obsessed with your own situation. We’ve got to stay customer-focused because we now have to scratch and claw for each customer’s dollar. You’ve got to be really realistic about your costs and get them in line early so you don’t have to be reactive and surprised down the road. You can’t stop investing, but you’ve got to invest selectively. You’ve got to be very targeted in what you invest in, the things that will make a difference – which often turn out to be opportunistic investments. I would view our Bill Me Later acquisition as an opportunistic investment in our future at a counterintuitive and tough time. Work on teamwork and execution. During a downturn it’s natural for organizations to get distracted and have one part of the business start accusing another of getting more time and attention: “How come we’re being cut back more than they are?” Tensions build inside and people get sidetracked. So good execution and teamwork during turbulent times can provide a company with a degree of competitive advantage.
Inside business Mike Monahan, CFO at mailstream technology company Pitney Bowes, offers his thoughts on how to manage through a recession.
How are you approaching the current downturn? We take a very balanced approach to this type of market. First and foremost, we need to understand the risks inherent in the marketplace, and we have a fairly comprehensive enterprise risk management program in place. We have taken the opportunity to create greater efficiency around our organization in the downturn, but have also focused on investment. In fact, as we went into this economic downturn in 2008, we actually increased our investment in R&D by 11 percent. What we’ve seen in the past is companies that invest through these types of economic downturns generally accelerate faster out of them, so we realigned some of our resources into investment in both our traditional mailing business as well as our newer software businesses.
Have you seen much impact in terms of your own operations? We do have a high degree of recurring revenue, which provides a certain degree of stability, but economic downturns affect all businesses. We have focused on maintaining a strong capital structure, very strong credit ratings and good access to the commercial paper markets – as well as the long-term debt markets, because we do financing as well. More and more of our customers are looking for ways to finance their business operations, and we’re able to provide that. And like many other companies, we’ve also looked at ways of streamlining our organization, increasing the span and control of our management team and reducing the resources necessary to manage the business.
To what extent do you think it is important to have a really good risk management policy in place? We think it’s critical. We’ve had a program in place now for a few years and it’s well understood across the organization. We have 16 key risk categories that we’ve identified, and we’ve assigned ownership across the organization for developing mitigation plans against those risks. We also have a regular meeting process that allows us to look at current business environment issues and factor those into our planning process, and it’s a process that rolls right up to our board of directors.
Do you think this has been a problem area for companies in the last year or so? I think you see it every day in the way that companies are challenged in terms of access to the capital markets. In many cases, some of the very serious steps that companies have had to take may be related to the fact that they hadn’t anticipated certain risks or exposures to their businesses. I don’t think any company could claim to have full visibility into what’s occurring today, but the key is to have the mechanisms in place to respond to it. What is the most important thing for executives to keep in mind when managing through a recession? Well, I think first and foremost is to keep the customer front and center. That’s where our revenue is generated, and so making sure that you continue to invest in relationships with customers, giving them the right kinds of products and services, is key. Good customer service is going to be critical. And the other side of the equation is how you interact with your vendors. Make sure that 1) you have a viable set of vendors, and 2) that you’re managing relationships with them for the long-term.
What value do you put on open communication? I think there’s two sides to communication – external and internal. From an external standpoint, transparency is very important for customers and investors to understand the value proposition of the company, what you’re doing to be successful and how the business is performing. On the internal side, we have a strong philosophy around communicating with our employee base, engaging them in the actions that need to be taken, and in this downturn we’ve seen a very strong reaction from our employees to that.
How is this recession different to ones we’ve witnessed previously? I think the speed at which it came on and the breadth of the industries and geographies that it’s impacted have marked it as different. It’s truly global, and thanks to technology we’re all interconnected much more closely than in previous recessions – but this isn’t necessarily a bad thing. Modern technologies really allow you to communicate more broadly and more consistently. In fact, we’ve introduced something we call IdeaNet, which allows our entire employee community to be involved in generating innovative ideas. I think it’s very empowering to employees. It gives them an outlet to put their ideas forward and to communicate with others across the organization. It’s a very important piece of technology, but also very important in terms of engaging employees in the business every day.
How do you ensure you’ve got the right talent in place to take the company forward? We have a pretty robust people development process that allows us to identify the skills we need for the future, and identify talent that can be developed to take on senior roles. Our succession planning program requires us to identify at least two candidates that would be appropriate for a position within 12 months and then additional candidates that could be ready for the position out from there. It allows us to create a development program for each person that helps them move towards their career goals; and for the organization, it provides us clear visibility to the people who are going to be the future leaders of the business. In an environment like today, the ability to engage those people in problem solving is a great way to help them develop quicker, and it gives us a lot of insight into how we can manage going forward.