Whilst the OECD has fallen short of predicting a global recession for 2023, there is no doubt that market slowdowns will have significant impacts on the future revenue and profits for many organisations.
Given this level of future uncertainty, how should organisations prepare themselves through more effective planning processes?
Firstly, we need to understand that strategy, by its very nature of trying to predict the future is a ‘science of uncertainty’! We seek to understand the future opportunity in our chosen marketplace and then align a plan to deliver a business result that maximises organisational value and delivers returns to our shareholders.
However, a recent piece of McKinsey research suggested that the ‘CEO’s excellence’ can control less than 50% of the factors that ultimately contribute to the value created by any organisation.
Add to this the impact of potential recessionary pressures and one might conclude that strategic planning is a fruitless exercise.
Nonetheless, we must attempt to deliver positive value creation, no matter what the marketplace throws at us, and there are some tangible steps that we can take to ‘recession-proof’ our businesses, so that we are better able to pursue our strategic direction whilst insulating ourselves from the unexpected ‘bumps in the road.’
STEP 1 – Start by knowing your costs
As revenue becomes less predictable, we must be able to control and flex our cost base. To do this, we first need to really understand how cost is distributed in our business model. This means:
a) understanding the proportion of each cost type as a percentage of our total cost base
b) understanding the actual cost of key activities within our value chain
Having a clear understanding of the above points will enable us to understand where we can have most impact if a future downturn requires us to either cut our total cost base in absolute terms or review our business operating model to uncover cheaper ways to execute our business activities.
Clearly every industry will have a different answer from this cost analysis. For item a) above, an IT services company will find that people costs will likely account for a huge proportion of overall cost. For a utilities business, equipment and fuel will be two overriding contributors to the cost base. For item b) above, a construction company may find that new client acquisition is a significant contributor to overall project profitability, whereas a different industry may be more exposed to high distribution cost activities.
So, what can we now do with this enhanced insight to recession proof our business?
STEP 2- Make costs variable
If you have a high proportion of ‘fixed costs’ to total costs, then it is very difficult to eliminate significant cost when revenues slump. Variable costs, however, can be turned on and off to reflect changing business volumes. As an example, an IT services company that staffs up with a high fixed salary base of full-time employees will struggle to maintain profitability if there is a market downturn. It may be faced with an expensive redundancy program with associated adverse reputational impact. If the same company staffs up for, say, 70% of expected demand and then leverages the ‘gig economy’ to fill the balance on an as-needed basis, then it can be far more resilient to volatile market demand.
Pushing the cost of inventory holding onto suppliers may be another strategy for those industries where stock costs is a significant component of overall cost.
So, to recession proof your business, first start by moving as much fixed cost to variable as possible.
STEP 3 – Change the business model
By understanding the costs of key activities within the business, it may be desirable to change either the strategy or the business model execution to reduce the cost base and improve ‘recession-proofing.’
Amazon’s new bricks and mortar ‘Amazon Go’ grocery stores remove staff checkout costs by leveraging technology to automatically identify items placed in a shopping basket and charge to the shopper on exit without any manual intervention through traditional checkouts.
This type of process change to the business model is typical of many examples where organisations utilise technology to effectively transfer tasks which were previously performed by the organisation to the customer, who willingly performs these activities because of other convenience benefits that accrue to the customer. In the Amazon Go example, the customer is not faced with endless queueing at checkouts. Other examples of this technology leverage to reduce core process cost can be found in areas such as online banking, where we gladly perform tasks previously undertaken by bank cashiers so that we may benefit from the convenience of anytime banking and no trips to the bank.
Examine your business model not just at the customer interface, but in all high-cost process areas and see where a different business model might release costs and again enable activity level costs which are incurred on a transaction-by-transaction basis rather than requiring a large, fixed cost overhead. I find the Osterwalder business model canvas to be a useful tool here in establishing key aspects of the business operating model and identifying where you may be undertaking the highest cost process activities.
STEP 4 – Disentangle shared facilities
Many larger organisations with multiple business units have traditionally looked to shared facilities and services as a way of optimising cost delivery for common operating requirements. We see this in centralised head office service functions such as IT, or where a single production site is shared by different operating business entities and managed through a separate site management business unit. Whilst the initial logic for such solutions was cost efficiency, the reality is that they create a lack of flexibility in decision making, if, for example, one business unit is to be closed or relocated. Disentangling one of the entities may change the whole cost efficiency calculation that underpinned the rationale for the original shared facility decision. The remaining businesses may be required to absorb higher costs which have no logic from their own business operating point of view.
Consequently, if cost reduction decisions are necessary to meet recessionary pressures in part of such a diversified business, then these may be more difficult where a shared service/facility arrangement is in place.
If this model is in place within your business, then consider how you may progressively disentangle these facilities so that each operating business can stand independently. This will make it easier for you to make tough calls to recession proof the total business where one or more entities may need to be downscaled or exited.
Founder & MD – NSP Strategy Facilitation Ltd
In summary
Recession proofing a business is never easy. However, by following some of the steps above, the overall goal is achieving a higher level of cost flexibility, where costs can be more closely aligned to volume of activity rather than being fixed based on assumptions of activity which may not be realised in a demanding and recessionary environment.
