Six Proven Rules to Beat the Recession

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Type in the word “recession” into Google and at the last count, it returned over 62 million hits. Everyone is talking about the recession and many companies have already started to do something about it too. Often this means cutting swathes of staff without much thought to their long-term success: British Telecom announced it is cutting 10,000 jobs, Citibank that it is cutting 52,000 jobs and the City of London is forecast to lose over 370,000 jobs during the recession!

No Company Ever Shrunk to Greatness

Whilst job cuts are to be expected, they are by no means inevitable. Research by McKinsey showed that companies that beat the last recession in 2001/2 actually increased spending in key areas. The research tracked almost 1,000 US companies over 18 years, including during those all important recession years. The companies that emerged in the top quartile after the recession actually increased spending on sales, innovation and marketing. Although this reduced their cash reserves, the companies traded short-term profitability for long-term gain. And it worked; their book-to-market ratio was more than 25% greater than their less successful peers.

Understanding the Value Equation

The companies that beat the last recession understood the “value equation”. When times are hard, cash is in short supply and customers are in even shorter supply, you need to carry out a ‘strategic due diligence’ to understand how your company creates value. That means understanding what drives sales and margin growth, how core shareholders view the company’s prospects and how the company can return value back to them. That is the company-side of the value equation. But by itself it isn’t enough. You also need to understand the customer-side of the value equation too That means understanding who your company’s core customers are, what they buy, which channels they use, how much they are willing to pay, and what jobs and outcomes they are looking to achieve at different points in the customer experience.

Only by understanding both sides of the value equation can you beat the recession. And the value equation changes a lot during a recession; just think how people are now buying own labels rather than branded products at your local supermarket. It is critical that you spend enough time during the due diligence studying how your company delivers value to customers and how that creates value for shareholders. The recession is probably going to be with us until 2010, so it makes sense to do a proper due diligence before setting out to beat the recession. And it is no use just relying upon analyses from just before the start of the recession either. The world has changed in the last few months and it might never be the same again.

Six Proven Rules for Recessionaries

Although different companies should respond to the recession in different ways, there are a few general rules that they should follow. I call these the “Rules for Recessionaries”.

Rule 1: Protect Your Best Customers, Products & Channels

As George Orwell, might have said, “All customers are created equal, but some customer are created more equal than others”. You need to understand who your best customers are and to protect the revenues they provide. As pressure mounts to make cuts, it is essential that the cuts fall on the customers who don’t provide much revenue or who lose you money. You also need to protect the products the best customers buy, and the channels they buy them through from cuts too. Paradoxically, this may be the time to consider making strategic investments in your best customers. You can achieve much more ‘bang for your buck’ when your competitors are reducing their spending.

Rule 2: Refocus the Customer Experience Around the Value Equation

Knowing who your best customers are, what and how they buy, and what jobs and outcomes they are looking for, allows you to refocus the business and provide a superior customer experience that also delivers superior results for your company. This may require refocusing resources away from your worst customers towards your best ones. The deep understanding you developed during the due diligence will identify the core touchpoints in the customer experience and the activities which support them. And the focus on customer jobs and outcomes will ensure that you don’t forget about the product in use. This is usually the part of the customer experience where most value is delivered to customers.

Rule 3: Sweat Your Customer Management Assets

Now that you know who your best customers are and have refocused around value creation, you should look to gain the maximum from the customer management assets you have. This means squeezing a bit more value from each of the core touchpoints in the customer experience. Doing this requires that all the supporting people, process, technologies and other assets that deliver the customer experience are better aligned. And that they are used a bit more intensively to create value, whether this involves better sales calls, more targeted marketing, or products that are better at helping customers get the jobs and outcomes they want. As has been said elsewhere, a recession means doing BETTER, not just doing less!

Rule 4: Cut Non-value-adding Costs while Protecting Value

In parallel with using your customer management assets to the full, you should also look to remove all non-value-adding costs using the lean thinking approach pioneered by Toyota. By following a customer order through the entire delivery process, most companies are able to identify 20-40% of the activities that don’t add any value, i.e. that neither the customer, nor the business is willing to pay for. These are all candidates for cuts. This not only saves significant costs, it also speeds-up the business, reduces errors and increases the satisfaction of your best customers.

And don’t listen to the ignorant naysayers who clain that lean thinking only works in manufacturing. Just look at companies as varied as Vodafone, Ducati and Tesco, and of course, Toyota, who have all applied lean thinking with great success to improve their service operations.

Rule 5: Support & Incentivise Staff to Deliver Value

Tough times call for strong leadership. And not only from senior management. You should carefully assess your staff and select the ones who can help lead you through the recession. And then agree tough performance targets for delivery. That may mean upsetting the old order and hierarchy as young managers are promoted above longer-serving ones. It may also mean trouble with unions more interested in maintaining the job status quo than in your company beating the recession. You should be prepared to support, coach and mentor managers responsible for running key parts of the customer experience. It will be worth it. Not only will they feel empowered to deliver against their targets during the recession, they will also be much better managers once the recession is over.

Rule 6: Focus on the Long-term while Supporting the Short-term

Many companies make the mistake of just focussing on the short-term, particularly at the start of a recession. And you will certainly face pressure to be seen to be ‘doing something’ about the recession. The whole point of the due diligence and the previous steps is to enable you to understand what creates value for customers and shareholders over the long-term, and then to develop a plan to beat the recession. This will no doubt require some tough trade-offs. And sometimes you will be forced to make the wrong ones to placate senior management. That doesn’t mean that you should ignore the short-term, particularly revenue generation. But it will allow you to strike the right balance so that you can plan to beat the recession.

Are You Planning to Beat the Recession?

Try and answer the five questions below. If you can answer “Yes” to most of the questions, you are on the right track. But you still have a little work to do? But if you can only answer “No” to most of the questions, you had better look again at your approach to beating the recession. Your best competitors already have!

Question 1: Do you understand the total value equation?
Do you know how value is created for your company? Do you understand how value is created for customers? Can you keep abreast of changes in both as things change?

Question 2: Can you protect the value created by your best customers?
Do you know who your best customers are? Do you know what they buy, at what price, through what channels? Do you know what your competitors are doing to attract them?

Question 3: Are you using all your resources to create value?
Are you sweating your customer management resources? Are you cutting out non-value-adding costs? Are the resources aligned and integrated to let value flow seamlessly to customers?

Question 4: Are you supporting your staff and partners?
Are the right people in charge of customer management? Do they get senior management support when they need it? Are they incentivised to deliver value? Are you supporting & incentivising your partners?

Question 5: Are you focussed on the long-term?
Are you preparing plans to beat the recession over the next 1-2 years? Are you pro-actively managing customers for short-term value creation? Are you measuring the health of your business on a regular basis?

If you follow the six simple Rules for Recessionaries, you will be in a good position to put together a coherent plan to beat the recession. But if you are just intending to rely on aggressive cost cuts, or untargeted investments in the status quo to save you, then “Good Luck”. You will need it.

Post a response, reblog, blog elsewhere or tweet about this post to get the conversation going.

Graham Hill
Customer-driven Innovator
Follow me on Twitter

Interested in Customer Driven Innovation? Join the Customer Driven Innovation groups on LinkedIn or Facebook to learn more.

Further Reading:

McKinsey, articles in the McKinsey Quarterly

Boston Consulting Group, a series of very detailed articles from BCG’s Collateral Damage practice

Harvard Business Review, articles in the Harvard Business Review

The Economist, articles in The Economist

Financial Times, a series of articles in the Business Life section of the Financial Times

6 COMMENTS

  1. Graham, great post! While I think much of what you wrote about is also good advice in healthy economies, it does seem that recessions are a great opportunity for leaders to get even farther ahead as followers struggle to survive.

    But I’m wondering whether the McKinsey research you referenced showed what percentage of companies moved from a follower position (out of top quartile) into the top quartile by increasing spending on sales, innovation and marketing?

    It’s easy for me to envision how already strong companies can use the recession to their advantage. But it’s less clear how the rest can seize this opportunity. Thanks for any additional info you can share.

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

  2. Graham, I concur with Bob – great post!

    I see some similarities in our thinking based on the article I wrote for Direct Marketing News, which was published off-line and on-line in March 2009.

    In my article, I identify three key CRM principles to remember so as to stay true on one’s CRM journey, maximize ROI from existing customers, and help mitigate risk against the negative economic forces in the current economy:

    http://dmn.ca/stories/03.09/crm_phil_oliveri_03.09.htm

    Cheers!

    Phil

  3. Hi Graham Enjoyed your post. I loved your focus on “customer management resources.” My question is who is the “you” that we want to create and manage these very worthwhile processes. I believe customer management perhaps needs to find a new “home” where the necessary skills and knowledge can gather to create the value that we know lies in competent customer management.

  4. A great post full of sound advice.

    The one area that you only touched on lightly that I believe is very important to future success is innovation. Now, when everyone else is hiding, is the time to innovate. As companies perform the due diligence suggested by each of the 6 rules they should be looking for ways they can create new products, processes and systems that create value for their best customers.

    None of us knows what the future will look like but it won’t be the same as the past. Innovative companies can shape their own future and force their competitors to play catch up.

  5. Thank you for this timely article–agree with your main premise, that companies that have confidence in themselves and are willing to invest in their own future can really set themselves apart in these “down times.”

    Have been doing some work with Pitney Bowes and many of their customers are looking at Customer Communication Management, which seems to touch a bit on your rules 1, 2 and 3.

  6. Thanks to you all for commenting. It is much appreciated.

    Bob

    The McKinsey research didn’t show which quartiles the companies were in before vs. after the recession, just that those that ended up on the top quartile after the recession spend more on marketing, sales and above all innovation, and significantly outperformed their lesser bethren. This is no guarantee that they will stay in theat position over the longer term. In fact, longitudinal research on business returns suggests that all companies trend towards a position where ROIC equals WACC over time; the best get worse and the worst get better.

    Phil

    Great article.

    Ray

    Good question. To be honest, I am pretty ambivalent about who the ‘You=the Customer Manager’ should be. There are pros and cons for marketing, customer service and even operations being the rightful custodians of the customer. While none have an overwhelming advantage over the others, it is important that they work together so that the customer at least doesn’t see any operational gaps in the customer experience. If they don’t, we will likely see customers taking charge of their own destiny.

    James

    I agree with you 100%. The McKinsey research supports your view too. Understanding what customers want, where there are shortfalls and how they can be overcome is the foundation of customer-centric innovation. Recessionary times often provide an opportunity for disruptive innovators who offer 80% of the functionality of best in class products, that meet 100% of customers’ needs, at only 70% of the cost. It should come as no surprise that Skype (the disruptive VOIP service) has been one of the big success stories of this recession, with 20%+ year on year growth.

    Ed

    Tell us about your work at Pitney Bowes.

    Graham Hill
    Customer-centric Innovator
    Follow me on Twitter

    Interested in Customer Driven Innovation? Join the Customer Driven Innovation groups on LinkedIn or Facebook to learn more.

    Further Reading:

    Michael Mauboussin, Death, Taxes, and Reversion to the Mean

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