The Recession Playbook
May 8, 2020
Much of the economy is currently in Phase D, Recession – when can we expect the transition to Phase A, Recovery? Catch our latest episode of TrendsTalk with ITR Economist and Speaker Connor Lokar.
Transcript by Rev
Hello, everyone. This is Connor Lokar checking back in for another edition of TrendsTalk with ITR Economics. Today, we're going to be talking about and essentially dusting off an old playbook, the recession playbook, specifically on the management objective side of things. Now, that's a familiar term to long time ITR followers. You know that we codify the business cycle into four distinct phases that are demarked by both the direction and amplitude of the 12/12 rate of change, whether we're looking at a business, a particular sector, or an entire economy. All four phases of the business cycle, whether it's quickening growth, slowing growth, recession where we find ourselves now, or recovery or we're going to find ourselves later, they'll have their own challenges and opportunities and psychological challenges and opportunities as well and I see how recommend management objectives for each of these.
Now, today again, it is the recession phase of the business cycle. Currently, the macro economy at large and probably many of your businesses are sliding into phase B, recession. This is when the economies' and your businesses' rates of change are moving farther and farther below zero. The macro economies and your revenues deterioration is intensifying, not abating. For some of you, and I think that's why today's so important is for some of you, this will be the first sustained revenue decline that you've had to navigate since 2008 and 2009. Now, many of mine and our collective consulting clients at ITR have what's I guess I'll call the advantage, to put a positive spin on it, the advantage of having dealt with a period of sustained revenue decline more recently, and that was during the oil and gas downturn of 2015 and 16. Now, this affected many of you and many of our industrial inclined clients negatively to varying degrees.
And as I said, it kind of gives them the advantage of having to flex their recession muscles a bit more recently and having to execute peel down plans and other strategies more recently, but many of you just don't fall in that bucket. I mean, it's been a decade since you've had to flex these muscles. So, let's go ahead and talk about ways that we can mitigate the current downturn. And first, I think the first one is my use of the word mitigate there is worth pausing on, as it was intentional.
Some of you may be looking for a silver bullet for the current situation of cure, if you will, just as we're trying to find a cure globally for COVID-19 and unfortunately, as far as the economy is concerned and your current situation, it does not exist. Severity of decline under way and upcoming, a cure and a disappearing negativity from the conversation, it's going to be really difficult to achieve, but again, we can mitigate it.
So, one of the first things we needed to do, again, it's rather obvious, but the time is now to implement cost cutting measures. Keeping an eye, with that said, to the rebound coming in 2021. You make sure you are not cutting in areas that will come back to bite you in 12 months. But these are those times that the difficult decisions need to be made and in some cases, that does encompass payroll reductions and letting folks go, which can be the hardest ones of all. Now, you also need to look at your cashflow model and you need to make sure that it's both reliable but also not just focused on the very near term. We've talked with some clients that I think falsely assume that if they can survive the next six weeks, they're in the clear. Unfortunately, the economic aftershocks in Malaysia is going to extend much longer than the next month or two.
We feel that downside is probable, likely particularly in the industrial side of the economy, emanating all the way on a 1212 basis into early 2021. So, make sure that the conversation in your cashflow modeling includes a look beyond the current quarter and also examines the third and fourth quarters of 2020 and at least in some contingency planning includes the possibility of extended downside pressure on your business, so you can prepare some peel down plans and then put your benchmarks in place, your tripwires of sorts for you to execute those plans.
Now, we typically advise moving on to the next one, advise against waiting into the pricing fight and giving up margin. This can be a bit myopic as that margin, it's hard to call back when things get better. So, we would say hold your ground on price and margin as best you can, emphasizing your value adds, your competitive advantages. Again, you'll make your case but try to stick. And perhaps a different strategy is can you offer alternative product or service offerings with a lower cost basis? Do the unique circumstances of this current economic disruption offer your business a chance to serve your clients at a lower cost tier and maintain that relationship? Offer them something that fits their budget. Instead of giving them the Cadillac level product or service at discount pricing, offer them a discounted price product at a slightly lower level. And then next years, their business improves and their own business conditions and cashflow improves, they can then upgrade back into that Cadillac level of service at the Cadillac pricing and you don't have to fight them to callback that discount that you gave them this year.
Also, this is a great time to lock in cost. Again, we talked about cost minimization but later on this year as we get towards the bottom of the business cycle, we want to lock in our cost. This could be labor, this could be renegotiating leases, bulk buys of raw materials, where applicable and if you have the cash and space to buy and store it, but whatever inputs of yours that you can lock in at recession-low price and you're going to be thanking yourself for in 2021 and 2022 depending on how long that is. Again, obviously, labor contract's a big part of that. But again, on the topic of labor, as I said, payroll reduction may be part of your cost cutting strategy. But again, this is an opportunity.
A term I picked up from clients several years ago is improving your roster depth. Can you move some C players that were in the organization that you desperately needed in the breakneck pace growth of 2017, 18 and much of 19? Can you move them off the bus as necessary in 2020 and replace them with A or B players that now find themselves available in labor market flack that we haven't seen in several years? And one last one is, we typically suggest tightening your credit policies as insolvency risk amongst your customers goes up considerably during recessions, and you're internalizing that risk by offering that flexibility. But it's really going to depend on your own personal cast situation. You're going to definitely going to want to partner with your best and highest margin customers with whatever creative payment plan or solution you can land on. And you want to be triaging your customers by industry.,See which ones carry the greatest risk in the cycle, which appear to be more resilient than sheltered, where you can be flexible with less risk there.
If you're not subscriber of our Trends Report, it offers a sector by sector look where most of the pain and opportunity is going to reside in this cycle over the next couple of years. So, it might be a way for you to answer that question if you check out that trends report. But a big, in closing, one is leading with optimism. Phase D is painful, but it's always temporary. It's not going to last forever. Leverage a combination of these and other strategies to build that bridge to growth on the other side. Again, it may show up in your orders late this year, maybe early next year, but it's coming. And if you're confident you're going to survive, share that optimism within the company. Make sure they know the plan, your employees know their role in that plan and that you're confident that it's going to work.
The toxicity of pessimism can be devastating to your company in times like these, so it's your job to snuff it out. So, that's just a few things that we can look at to, again, open up that recession playbook and make sure that, again, not necessarily take decline off the table, but mitigate it where we can, make a difference on the margins and make sure that we are in as healthy of a position when the growth does come back because it is coming back. So, we'll keep you updated with the latest leading indicators on when it is coming back. And until then, I'll see you on the next TrendsTalk.