A primer on the 'R' word, especially for the youngsters

'Management needs people who can remember the last recession'
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The Independent Online

How do you manage a company through a recession when none of your staff can remember one?

How do you manage a company through a recession when none of your staff can remember one?

Pause for a moment. No, of course, a recession is not necessarily round the corner. Those of us who were worried about this year have been proved wrong, and there is enough momentum in the economy to carry it well into 2001.

But the mood is shifting: the "R" word is now appearing in the investment banking circulars and it wasn't three months ago. In the high-technology sectors, a period of much slower growth has already begun. So it would be silly to ignore the change in the climate. What should companies do to prepare for the worst - even though it may not happen?

All companies are different and all segments of the market are different. But there are some common principles. The first one is to assemble the appropriate experience. You need people who know what it feels like to go through a recession. That means people who remember the early 1990s, which many new companies may not have on board. It does not make any sense to be adding to costs at this time, but it should be possible to find the experience through the non-executive director or consultant route.

How do you afford to buy recession expertise? There are two answers to this. One is to say that not buying the expertise is false economy. I think it was Red Adair, the Texan oil firefighter who, when a client queried his charges, replied: "If you think a professional is expensive, try hiring an amateur."

The other answer is that expertise often brings money with it, rather than the other way around. This helps the second "must do" bit of preparation.

That is to make the company bullet-proof by ensuring that there is sufficient financial firepower to gun through the recession. Recessions do not last for ever. In a worst case, we are talking about two difficult years, more likely nine months. But you have to be able to look through the valley to the sunny hills beyond and that takes money.

Companies need financial firepower not just to keep from going under - for most, that is not very likely - but equally to protectlong-term growth prospects and take advantage of the opportunities that always arise in recessions. Getting expert advice helps convince potential investors that the group has anticipated tougher times. Secondly, people with experience of recession also know where to go for money. Getting finances on to a sound basis ahead of recession is crucial.

Again, the action will vary from company to company, but the most likely option for small- and medium-sized companies may well be some kind of strategic alliance. Raising risk capital from the markets is extremely difficult at the moment, as the dot.coms are finding. Banks tend to be less than helpful to cash-poor companies ahead of a potential recession for obvious reasons. But large companies are anxious to get toe-holds in new areas of business and wise ones will see the coming months as an opportunity to do just that.

But suppose the next recession, if and when it comes, proves different from previous ones? Though in aggregate most recessions look much the same, they strike different parts of the economy in different ways: for example the next recession will be the first to strike the "new economy"; it may also be the first since the 1930s to be accompanied by falling prices. From a practical point of view, perhaps the greatest difficulty will come as a result of the lack of pricing power in many lines of business. Demand in volume terms may not fall as much as in the recessions of the 1970s, 1980s and 1990s, but it may be more marked in pricing terms. From many companies' viewpoints, instead of facing a collapse in demand, they will find a collapse in prices. That should, in theory at least, suggest a different strategy. In previous recessions the primary response of companies was to cut output; this time they should perhaps focus on cutting costs.

There is a guide of a sort for managers here: in Japan's experience through the 1990s, companies found that volume did not decline much, but that prices fell relentlessly. The parallel is not exact, for there were, and to some extent still are, special reasons why Japan has found it so difficult to return to secure growth - the principal ones being the weakness of the banking system and the need for the structural reforms that happened here and in the US during the 1980s and early 1990s and which are now happening on the Continent.

But the extreme sensitivity to prices is a new experience for British managers and is one of the reasons why UK retailers are finding life so tough at present.

So management must achieve balance. It needs people who can remember the last recession but it also needs people who are aware of the changes that have taken place since then and can therefore apply the new technologies to cope with the pressure, particularly on prices. Most of all it needs people who can ask: "What if?"

And that, perhaps, will be the central message to any management facing a slow-down in demand. In the past, success has gone to companies that plan well and execute well. Now it is likely to go to companies that plan sketchily and execute quickly. So the right way of facing a slowdown is not to agonise about it beforehand but to have a management structure in place that can react swiftly if and when a slow-down happens.

The new mantra for business should be: "Plan to be nimble". The great advantage of that strategy is that it will serve companies well even if recession does not come.

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