Worries over an imminent economic downturn are on the rise. Growth in China is stalling; Germany, the bellwether of the EU economy, is on the brink of recession; stock markets are volatile; and the bonds in the US are showing "inverted yield curves," an anomaly that some consider a historical precursor to troubles ahead. As a result, not only has consumer confidence dropped, investors and executives, too, are cautious and preparing for bumpier times ahead.
Some Fortune 500 companies have already begun to tighten their belts. Typically, spending cuts first affect "softer" functions with fuzzier success metrics, namely marketing and HR, as well as long-term R&D and innovation efforts. This is understandable because these may appear less critical to the immediate survival of the business than, say, product and sales. But cutting investments in marketing and innovation can hurt a company's long-term prospect rates, especially when they come at the expense of what some researchers call "vitality."
The concept of vitality was first introduced in a joint study by the BCG Henderson Institute (full disclosure: BCG is a partner of a conference I produce) and Fortune. The authors point out that traditional performance metrics (e.g. revenue growth, profitability, and financial returns) are all inherently backward-looking but don't say much about a company's later success and its future readiness. The study defines vitality as a set of forward-looking capabilities such as "a sufficient pipeline of 'future bets' with high growth potential" or "a culture that promotes cognitive diversity and a competition of ideas."
A company exhibits a high degree of vitality if it has a vibrant culture that is able to attract and retain talent even in times of crisis; and if it has the ability to imagine its own future and take action toward realizing it, in other words, if it has the passion and capacity for innovation.
Both culture and innovation are jeopardized when the belt-tightening kicks in. Yet the worst thing you can do as leader is to surrender to the apparent urgency for quick cuts of long-term efforts.
Rather than cutting the wrong things, here are some ways to navigate an economic downturn creatively:
1. Double down on customer service
Now more than ever it is paramount that you stay close to your customers and anticipate their needs. Reach out to them, express gratitude for their loyalty, and offer them something special, even just a symbolic token of goodwill like a small gift or a handwritten card. They may remember you, fondly, when they are confronted with tough decisions on where to save money, regardless of the sector you're in. Remember the saying: B2B is business with people who have the luxury to buy things they desire and have their organizations pay for it. Emotions and relationships matter.
2. Enhance your innovation efforts
Instead of marginalizing your marketing and innovation leaders, strengthen them. Instead of cutting the budget for that extracurricular exploration, raise it! Launch new product initiatives, and don't rule out those that are kind of out there. When the platform is burning, shoot for the moon. Companies which continue to invest in R&D and innovation during a recession have the best chance to successfully grow in the long run. Take Google, which continued to invest in R&D during the dot com crash and emerged ever stronger from it, going public in August 2004 right after the crisis.
3. Keep the perks
After laying off 400 people from its marketing department recently, Uber also cut the budget for balloons they had given to their employees on their birthdays (having allegedly spent $200,000 on this custom each year, which pales in comparison to the $53 billion the company lost this past quarter). While this may make sense in the case of Uber's economic performance, and certainly makes sense in terms of the environmental impact of balloons, make sure that you don't cut all the seemingly small, non-essential things in times of crisis--they are critical and often make the difference between a lively and friendly workplace and a cold, more corporate feel. They are your culture. Keep the quirky weekly email full of workplace folklore. Keep the daily afternoon coffee gathering. Keep the Monday night softball game. Take your team out for a casual dinner. Launch a book club. Keep the holiday party. For all of these, it's ok--and encouraged--to adjust them in a way that is budget-conscious. You can still have a party that everyone enjoys for less than you spent in previous years. Or you can be creative about it and shift the perk to instead support a cause that employees and customers care about.
4. Sorry, no business class
However, there are some benefits you may have to sacrifice. Nope, business class on international trips is no longer an option, even for your senior execs (for Cisco's managers, by the way, this has been the norm for years). Eliminating travel perks hurts, but keep in mind that cuts are always symbolic, and role modeling sacrifices will go a long way. In fact, just telling people about the new policy might make them reconsider whether they even need to take the trip in the first place, thereby cutting costs (and carbon footprint) even more.
5. Cut the fat, but not the muscle
The truth is there's always a lot of "stuff" in the system. The trick is to find out which of it is muscle and which fat. Instead of marketing, innovation, and culture, cut some of the more outcome-oriented processes, even if that may seem counter-intuitive: for example, shorten time-sucking operational meetings and schedule less of them in order to focus on customer service or innovation, while also creating more spaces for informal meta-conversations about how you run your business.
6. Tell the truth, but don't overshare
Don't lie about the numbers, as ugly as they may look when the economic climate becomes more challenging. But don't confuse honesty with radical transparency. You don't do always do your employees a favor if you share everything with them proactively. Be selective as to what truly matters. Stay positive. Stay clear. And when you don't know the answer to a question, admit it.
7. Kill the committees
Most importantly, empower your team to make more decisions independently rather than being bogged by rounds and rounds of committee reviews. Now is the time to be entrepreneurial. Instead of hunkering down, disrupt yourself!
As economist Paul Romer once said, "A crisis is a terrible thing to waste." You can indeed use the looming downturn to build a sustainable advantage. Businesses which prepare early on for harsher macroeconomic conditions with the right measures have proven to gain market share and enhance their competitive edge. A recent Bain analysis of 3,900 companies worldwide indicated that during the last recession companies that responded with not only cost restructuring and financial discipline but also aggressive commercial plays and proactive M&A activities increased their profit and market-cap gap during the subsequent growth cycle.
Make no mistake: an economic downturn is no fun, and you'll have some tough decisions to make. But each crisis is an opportunity. In 2007, my then-boss asked me just before the financial crisis hit: "What are you going to stop doing?" And then: "What are you going to start doing?"