Leading & Managing Through a Recession

Published January 2009

Although there is no official definition, a recession is commonly defined as two successive quarters of shrinking Gross Domestic Product (GDP). Since GDP is a trailing indicator, i.e., data is not available until after the quarter ends, one never knows for certain whether a recession is in place until well after it has started. Indeed, after much study and debate, the National Bureau of Economic Research officially declared on December 1, 2008 that the country has been in recession since December of 2007.

I was surprised to learn that, at 12-13 months old, the length of this recession has already exceeded the average length of its post-World War II predecessors (10.5 months). In fact, the longest recession in the past 50 years lasted 16 months. Iíve got a hunch that record is in jeopardy.

Recessions certainly provide unique challenges to running your business. But recessions also provide opportunities. This month Iíd like to offer some advice on leading and managing through a recession.

Letís start with a couple of definitions:

Management is the skill to ensure that maximum results are obtained from the existing process or situation. It entails effectively setting expectations, establishing timely and accurate feedback systems, and having the discipline, tactfulness, and courage to respond quickly and appropriately to out-of-control situations. Management is all about working within the process or current situation.

Leadership is the ability to communicate and inspire others towards a vision for an improved future state. Leadership involves working on the process or status quo in an effort to improve it. It requires personal passion, courage, patience, and commitment.

Above all else, managing during a recessionary environment means keeping an eye on cash flow. Strategies worth exploring include:

  • Challenging expenses to identify where waste has crept into the system during good times. Are we paying for luxuries? Have suppliers grandfathered surcharges from the latest boom period into their regular pricing? Could we reduce expenses typically thought of as fixed (i.e., electricity) with some attention?
  • Investigating and optimizing accounts payable. Your suppliers are likely trying to manage cash flow as well. They may be willing to offer price incentives for early payments.
  • Investigating and optimizing accounts receivable. Should we reward our early payers and/or penalize our late payers?
  • Fine tuning inventory to ensure cash is not needlessly tied up. Do our inventory levels still reflect peak demand? Are alternate suppliers with shorter lead times available?

Regardless of the strategies chosen, strong management skills are needed to implement them and ensure that maximum benefits are realized. For example, if it is decided to closely monitor expenses, budgets should be set and closely watched. This is the essence of management.

From a leadership standpoint, a recession provides a unique opportunity to produce cultural change within the organization to make it stronger. Perhaps complacency has seeped into the organization during good times. Results have been OK, maybe even good, but they could be much better. Just the fact that it takes a recession to cause the organization to tighten its belt is a good indication that money was left on the table during good times.

As hard as it is to change peopleís habits, itís almost impossible when they perceive things are going well. ďIf it ainít broke, donít fix itĒ will be the response. A recession, with its almost certain negative impact on business results, provides the leader with an environment for communicating a compelling case for change. Employees now may have doubts, perhaps even fears, regarding the future.

Opportunistic leaders take advantage of the downturn to communicate their vision for better days ahead. They use the shortcomings of the current situation as evidence against the status quo. By demonstrating confidence in the teamís ability to not only weather the storm, but emerge stronger, they begin to develop a core following that will help turn the vision into reality.

Next month weíll go into more detail on the process for leading change within an organization.

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