Thriving in Turbulence
What if there is no recession and we improve our business for no good reason?
If you’ve been listening to earnings calls of late, you’ve no doubt noticed disparate posturing around the state of the global economy. “We believe that…” is a common utterance, followed by some quantitative analysis and conclusion about what the company will do about it. It all sounds convincing until you realize that similar companies looking at the same data are coming to different conclusions: a recession is coming, we’re already in a recession, or the fundamentals of the economy indicate that recession fears are unwarranted.
Somebody is wrong.
What do we know for certain? Nothing, of course. But it’s fair to say that the near-term economic future is more uncertain than at any time in the last decade. “Risk” is the quantifiable portion of uncertainty, defined as “the product of the probability of an event occurring and the severity of the consequences should it occur.” The less we’re certain of, the higher the risk that our strategic decisions fail to realize our desired outcomes.
If we frame our thinking in the context of probability and consequence — and seek to understand these components of risk — what can we discern about the current state of the economy? And how does that compel us to act?
Probability
Former treasury secretary Larry Summers observed that whenever inflation has risen above 4% and unemployment has dipped below 4%, the United States has suffered a recession within two years. These two thresholds, when breached, indicate economic overheating. We are well across both right now.
History books may one day be written about how the state of the global economy in 2022 bucked every historical trend. Or the current recession debate could become self-fulfilling as a loss of confidence in the economy drives consumers to stop buying and companies to stop spending. After all, as John Maynard Keynes says, the markets are moved more by “animal spirits” than by reason.
For those of us living through this uncertainty, it’s best to err on the side of caution by recognizing a recession as a near-term probability and preparing for it.
Consequence
How grave are the consequences for a company ill-prepared for a recession? According to an analysis published by the Harvard Business Review shortly after the 2008 recession, 17% of public companies went bankrupt, became private, or were acquired. The analysis also shares that many survivors of that economic downturn were slow to recover — 80% hadn’t hit their prerecession revenue growth and profit after three years.
Risk is high, in part, due to the probability of an economic downturn, and the consequences can be as grave as ceasing to exist. So, what do we do about it?
Humans are interesting creatures. Omission bias causes us to view actions as worse than inaction, even when both action and inaction have adverse consequences. As Rush sang in “Freewill:” “If you choose not to decide, you still have made a choice.”
But — as we learned in the findings from the Harvard Business Review piece above — not all actions are created equal. Companies that cut more costs than their peers through a reduction in COGS, not headcount, and who made greater-than-peer investments in growth-related through CAPEX and SG&A were more likely to end up in a better post-recession market position than companies that executed a different combination of cost saving and growth investment actions. It’s the Goldilocks version of corporate action in the face of economic turbulence.
While we can look to past recessions to provide insight into if and how we might act, we now have new tools that didn’t exist 12 years ago during the Great Recession. For example:
- Advances in intelligent automation, including process mining and Robotic Process Automation (RPA), make the reduction in non- or low-value-added activities easier, more cost-effective, and more impactful than ever.
- Lessons learned during COVID-19 and the subsequent “Great Resignation” taught companies to adapt quickly and find success in new modes of working.
Some old truths still hold — companies with access to capital are exceedingly well-positioned to make strategic bets on acquisitions, product development, and market expansion while taking advantage of weirdness in supply chain and real estate markets.
Using the lessons of the past and the superior tools of the present, now is the time to act. At Slalom, we want our clients to say that we were there for them during this turbulent time, helped their people through the storm, and empowered them to not just survive, but thrive in the uncertainty.
And if there is no recession, so what? The time is always right to find efficiencies in your business, retain your best talent, and make strategic investments in growth.
Three lefts still make a right.
Slalom is a global consulting firm that helps people and organizations dream bigger, move faster, and build better tomorrows for all. Learn more and reach out today.
