As companies tackle the rigours of global recession, veterans of previous slumps reveal vital lessons they learned and ask whether their survival strategies would work as well today
When looking for advice on how to survive this recession, who better to turn to than some of the old warhorses who steered their organisations through previous downturns? There are plenty of them around—even though they may be largely retired, semi-retired, or working in a non-executive, interim or consultancy capacity. And they have great battle tales to tell. But while they may be content to pass on to others the benefit of their own experience at the front line, they are united in a firm belief that this recession is different, and that there is no guarantee that the tried-and-trusted strategies that worked in past slowdowns will have any effect against the unprecedented combination of forces ranged against companies this time round.
"The nature of this recession is so unclear that we don't even have a name for it yet," argues Lowell Bryan, a director in McKinsey's New York office. "All we know is that it is an economic shock of huge proportions. It has hit everything simultaneously, and there is no real visible source of strength to pull us out of it. We are telling people to prepare for multi-year economic slowdown rather than assume a recovery is round the corner. We don't know yet what shape it is going to be, but we do know that it is likely to be long and drawn out."
Lord James of Blackheath, better known as David James, the renowned company doctor, predicts it will be bloody. "It's the eighth major recession I have experienced in my 55-year career and I've never seen anything like it," he says. One of the biggest differences between this recession and previous ones, argues James, is that the banks have been paralysed by shock.
"Until they start lending again there is no prospect of recovery, and there are no signs that either they or the government have any idea how to get through this," he says. "The banks are in a dangerous frame of mind: they feel isolated, the whole system of mutual support and syndication has broken down, and they are not doing what the government is telling them to do."
In such a climate, James warns, suggestions that companies should spend their way out of difficulties are dangerous and irresponsible. "Anyone who tries to expand through bank borrowing is likely to find their funding withdrawn completely. There is little opportunity to steal a march on the competition. Survival is all, however big your business or whatever sector it operates in."
Jon Moulton, founder and managing partner of the private equity firm, Alchemy, agrees. "Managers have two choices. They can cut capital expenditure, cut people, take no risks, do nothing novel, batten down the hatches—or they can go bankrupt," he says. "They need to change the direction at the top of the business, and do things such as making key performance indicators cash-based rather than sales- and margin-based. A lot of that, such as paying late and pulling debtors in, will mean overturning social policy. But when there are seven of you and only five seats in the lifeboat, what else can you do?"
Sir John Egan, another veteran of turnarounds, including Jaguar Cars in the 1980s and BAA in the 1990s, and now chairman of Severn Trent, takes a similarly tough line. "For all except the grandest companies, cash will be more important than profit," he says. "And it is safer to go for cost reduction rather than expansion or sales because at least you will get something back. At Jaguar we needed to improve productivity by 70-80 per cent to meet [then British Leyland chairman] Sir Michael Edwardes's cash targets, and we did it by making about 40 per cent of the staff redundant and increasing sales through improving productivity and quality. That's survival mode. Most companies just can't afford to spend their way out of problems."
But it's not easy for executives with more than a decade and a half of company expansion behind them to switch into survival mode as John Mumford, a 40-year BP executive and now a director of several companies, admits.
"I've worked in both large and small organisations, and the level of myopia, introversion and lack of sympathy for and sensitivity to what goes on in the outside world is enormous," he says. "There is a high level of dysfunction in terms of talking to outsiders and seeing problems coming. In a large company your personal future is tied up with internal politics, which drive your daily behaviour. There is a large degree of 'group think' and if you don't share the same view you are out. So you get locked into trying to bend reality to what you think it should be." It's an explanation for how companies got into this mess, and a predictor of their ability to dig themselves out of it. But help, from both inside and outside the company, is available to those that recognise the challenge."
Mumford is a member of an organisation called Expert Alumni, which has around 800 retired or semi-retired senior executives on its books—all, says chief executive Jon Glesinger, "interested, willing, available and capable" of helping companies with recession strategies and, whenever the upturn comes, recovery strategies, too. As Glesinger explains, the much-discussed "war for talent" has turned, almost overnight, into a "battle for experience" as troubled businesses try to counter the corporate amnesia caused by the swathes of redundancies and early retirements that were features of previous crises.
In Mumford's experience, the biggest barrier to change within a business is "those in their forties, who are locked on a treadmill because of family, career and pension worries. The young and the old are more courageous. You often get the most productive discussions by bringing those two groups together to think about problems."
Get that right, and recession can be "a burning platform" for positive change, explains Mumford. "Survival is the wrong way to view it." he says. "Companies need to figure out how the world is changing and use that knowledge to beat the competition. You can create competitive advantage during a recession. There will be winners at the end and they won't necessarily be the biggest companies."
Bryan agrees: "Lots of companies have felt very constrained for some time. They've been caught up with social issues, hampered by silos and baronetcies, dogged by politics and interpersonal issues. There's just no time for all that now, so if people don't knuckle down, fire them."
Recessions give you the time and the licence to "cut out fat, get fit and build muscle," he adds. "That involves generating internal cash, using resources better, building resilience and innovating. You can't just batten down the hatches as people did in previous recessions: you've got to take risks or you will be swept away in the flood."
He advocates "thinking expansively about the possibilities", and suggests that companies prepare a range of scenarios to give them tactical and strategic options that they can use defensively or offensively as conditions change. This might even be as extreme as seeking a "positive" merger in a market that is likely to consolidate.
The differing advice about the best way to deal with the recession is in itself testimony to its uncertain prognosis. Perhaps the safest approach is to steer the kind of middle course between mere survival and creating the foundations of future growth advocated by Anthony Holmes, turnaround specialist and author of Managing Through Turbulent Times. The trick, suggests Holmes, is to aim to emerge from recession as "a healthy survivor", with credibility and a base for future growth, rather than a "disabled survivor". To improve your chances of falling into the former camp, you have to throw received wisdom out of the window and act counter-intuitively, he says.
"You might, for example, decide to deliberately shrink your business, reducing revenue and cutting costs to make it leaner and easier to manage," Holmes says. "That might involve reducing your geographical reach or product range, or it might be telling certain customers—from whom you make only a marginal profit, perhaps—that you don't want to trade with them any more. It's about focusing on the quality of the business you do, rather than the quantity. Sometimes retreat is strategically sensible, if it allows you to come back stronger later."
Take a series of small decisions rather than one big one, he advises, pointing out that even the most senior economists failed to predict what was just beyond the end of their noses. "Companies are in uncharted territory, so they have to move ahead in small steps, testing the ground as they go. The one thing we do know is that you can't retreat to familiar territory, tempting though it might be, because that familiar territory has disappeared."
When Philip Wright was brought in to steel company Sheffield Forgemasters as managing director in 1985, it was losing £21.5m on a turnover of £92m. "The banks told us the company was terminal and that they wanted to shut us down. The chairman said we could break even in two years, and we did it more quickly than that," he recalls.
Jointly owned by Firth Brown and British Steel, Sheffield Forgemasters was organised much like a nationalised industry, says Wright. "It was stuffed full of bureaucracy and people in offices. There were two sets of shop stewards, neither of which would talk to each other, and there were similar divisions among management."
The first thing Wright did was fire people, and he engineered a strike to help. "It lasted for three months. The DTI phoned us every day to see if we were talking to the strikers and I said there was no point until they were ready to go back to work, which would be when they felt hungry.
"Rolls-Royce was in a panic, too, because we were the only ones who made certain components for them. But I refused to make any compromises because we needed to integrate the company and we couldn't simply let the unions call the shots."
At the same time he started to break up the bureaucracy. "No one had taken responsibility, it was all very opaque and people could hide. The weekly meetings used to generate two-inch-thick minutes, so I abandoned all meetings and said I would make the decisions. There was
a bunch of deadbeats and weeds, but you quickly find out where the flowers are. You give them more responsibility and they respond to it."
Wright split the company, which had around 4,000 people, into 11 different semi-autonomous businesses, each with its own board, responsibilities and set of accountabilities, and organised them into three separate divisions, each with its own managing director.
He scrapped flexitime. "It doesn't work because people cheat. We exported to 40 countries and our customers were ringing up and there was no one there. So we changed the hours to 8.30am to 5pm, which in itself improved communications with overseas customers."
Wright also overhauled the payment structure to reflect individual and/or small-group performance. "We got rid of all grades, which had led to messy and very inflationary pay," he explains.
"We started to pay on merit and results, which motivated people to do a good job as well as giving them a stake in the future of the business."
At the same time he was monitoring and controlling cash closely. "We had a daily cashflow statement for each subsidiary by 9.30 every morning, so we knew exactly the cashflow position of each company at any one time. We also changed the management and financial reporting system, imposing tight monthly budgets and management reporting requirements on each subsidiary."
Wright then tackled the product quality. "Our main competitors were in Japan, Italy, France and Germany, and our quality fell short."
Within two years, Sheffield Forgemasters had turned a £2m profit. In year three it made profits of £9m and in each of the following three years the figure was £16m. "That allowed us to pay off our initial £28m bank borrowings, and soon afterwards we were able to pay back our venture capital investors. The key thing then, as it is today, is control of the cash," concludes Wright.
