Ram's Rules on Recession

By: Will Phillips I have already raised several red flags from my clients about the impending and potentially accelerating downturn in the economy. I am now going to share with you a summary of a recent article from Fortune Magazine “February 18, 2008 (written by Ram Charan).” He is the World’s management consultant par excellence. Although his office is in Dallas, in recent interview, he stated that he had not been to his office for several years since he consults 24/7 around the world. He simply has his office FedEx, the latest fresh clothes to him as he travels around the world consulting. MULTIPLE FACTORS MAKE A PERFECT STORMIt seems that a number of factors have converged to make a potential perfect storm in this downturn. The federally induced housing bubble with too much cheap money for too long combined with exotic financial instrument which collateralized debt obligations to disperse the risk among people who really did not understand what the risk was, and finally, all of these converged with a great deal of poor quality in highly rated debt. As a sailor, we always take to heart the guideline that, a storm that comes quickly leaves quickly and when bad weather takes a long time to build, it takes a long time to go. I think the same is true with economic conditions. It seems that over two years ago, there was a change in the housing market in San Diego and many feel that the bottom has not been hit yet. If you read a recent set of articles I sent to clients, they point out that the bond market which is tied into the housing market has not even yet gotten in on the radar screen with the negative impacts that will occur in that market as a result of the declining housing market. So slow to arrive; slow to leave. Potentially a long down turn. RAM’S RULES FOR RECESSIONTo the extent that you think your business depends upon the housing market, you are in for the worst of times. So here are several of Ram Charan’s “rules” to think about as you prepare your business to be successful and healthy in the long run in spite of changes in the current economic weather. 1. Keep investing. Continue to explore and invest new product and service development. Continue to look at innovation and continue to invest in building your brand. These are the three areas that will give you the greatest strength for coming back strong when the weather changes. Do not shortchange these now so that you come out of the current recession weakened. Because this is a paradoxical choice and many small business owners will choose to sacrifice these long-term investments to make the down turn easier. The more disciplined leader, who invests in the future now has a chance to really make huge gains on competitors. This is particularly true if any of your competition is publicly held businesses. The publicly held business will most likely receive the strongest pressure to cutback on everything during a slowdown. They will be under pressure during a downturn to cut all costs particularly those which do not seem necessary to produce this quarter’s or this year’s bottom-line. So this gives you an opportunity to move ahead while they loose focus. 2. Invest in your people. This is a time even if profits do get a little thin to continue to support your people and reward excellent behavior even though you are not getting the very best performance out of the organization. Reward their behavior through new challenges, public recognition, and money. This will build the strongest management team/staff with the most loyalty. A slow down is also just the right time to see who you can poach from your competitors. They may not be rewarding their best people or giving them opportunities to do new interesting and challenging things. Of course, in the worst of recessions, you will have layoff people, hopefully laying off your B’s and C’s before you layoff your A’s. Try over reducing your labor costs so that you have a little kitty left to invest and taking even better care of those you want to keep. Of course, if there are cuts to be had in salaries, it is also important that everyone knows that you and other top managers are taking a cut also.If you have to let anyone go who is a great performer, give then an unsigned check made out to them with a $1,000 or $3,000 payout.Tell them you will sign it as soon as you can afford to rehire them.This conveys a very positive message and prime’s the pump for re hiring. 3. Do not forget to communicate frequently, intensively, and honestly. Employees in particular appreciate candor during difficult times. Seek their input on how to address the diffcult times. 4. Bring your key thinkers together whether that is two of you or a dozen and start making plans on how you would react over the next 24 months if revenue drops, if new business declines, if current customers or members are not upgrading as much as usual. Sit and think together about what you will do if demand declines. The research shows over and over again when a strong group of people think through their reactions to a high-stressed situation, they are much more likely to survive it successfully. 5. Ram Charan comments that in good times, companies manage their P& L and in bad times, they manage their cash and receivables. So make sure to switch some of your attention to these latter two financial areas keeping on top of them and not letting them get you into trouble. 6. In the worst of times, some of us have a great predilection to deny reality. We know things are right not right; we know they are not going the way we want, and we just refuse to look carefully at what needs to be looked at so that we can deal with it. We even know in our minds that we should be looking there but somehow in us, there is a fear of opening that dark corner even though we can hear the cage rattling on a fairly regular basis. This is one of the best ways to get in trouble by not looking in that dark corner. When you do and turn the light on, you will always have better ideas on how to respond, then by not looking at all. 7. Seriously consider how you can take the pain of your customers if they are experiencing financial distress and may choose to reduce their involvement with your business. What kind of recession programs can you offer them that will help reduce financial pressure on their budgets? Even if this does not make a huge difference, the intention to help and the care that is expressed in such intentions can have a beneficial impact on customer loyalty when they are choosing what they may have to cut out of their budget. 8. Cut back and prune selectively. Do not use across the board budget cuts to balance your budget. Look at those things that your business is doing that have low benefits and high costs to you. Which products or programs or services are more expensive than others? Cut them back and take the saved money and time to invest in those parts of the organization that seem a bit stronger at this point. This kind of work is never fun but it is where the real winners may be determined. Simply reducing costs is about the worst way to respond to a business downturn because it does not set you ahead of your competitors in any way. Those business leaders who were wise invariably make choices during downturns which positioned them to come roaring out when the tide turns and leap ahead of their competitors. Are you wondering what the worst thing to do is in the recession? I mentioned it above, it is called denial.

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