When Harvard Business Review conducted a study of businesses that survived the 2007–2009 recession better than their peers, it found that it was not necessarily due to more popular evergreen products. These companies didn’t have a head start over their competitors because they started with higher profits or harder working employees. They survived and bounced back stronger because they managed corporate risk effectively.
Among the biggest corporate risks facing businesses today are those related to financial and economic issues, as well as issues related to culture and talent, particularly given the last two years and the focus on human capital management (HCM). Preparation for both types of risk requires a strong contingency plan and solid yet flexible strategies for protecting and managing both a company’s assets and its people.
One of the unfortunate facts of life is that economic downturns are inevitable. In fact, a good number of C-suite executives have spent the past few years anticipating and preparing for a recession. Generally, growing corporate debt, decreasing government yields and rising unemployment rates are a few of the signs that signal a looming economic downturn. Of course, the impacts of the COVID-19 pandemic, inflation numbers and the conflict in Ukraine are just a few factors leading to an inevitable recession. With that in mind, the question isn’t whether a company will face an economic downturn, but how it will handle the situation to mitigate risk and keep business resilient.
The question isn’t whether a company will face an economic downturn, but how it will handle the situation to mitigate risk and keep business resilient.
1. Be Prepared to Act Early
In Harvard Business Review’s study, the companies that bounced back strongest from the recession did so primarily because they took action immediately. Most likely, they already had strong contingency plans in place and thus were able to implement them sooner than their competitors. This also suggests that they had been keeping a close watch on economic trends and recognized the recession for what it was almost as soon as the numbers began to decline.
Following that lead, ideally, you’ll prepare for an economic downturn while your company (and the economy) is still thriving. This involves being hyperaware of economic trends and creating a carefully considered, data-driven contingency plan. In order to hit the ground running, companies want to clearly prioritize the steps in their plan and assign each one out to specific departments or team members so it’s clear who will take accountability for performing each action.
While early action won’t grant immunity from the recession, it will enable companies to come back sooner (and stronger) than their competitors. By cutting costs from the beginning, the companies in the study saved and held on to more money than their peers, and when the economy began to rise again, they were in a much better position to buy out the assets their competitors were being forced to sell.
2. Embrace Flexibility
Another high-level strategy is to be flexible. Companies that bounced back from the 2009 recession embraced greater flexibility in business operations and investment planning. In the post-pandemic world, many businesses have already discovered the benefits of being agile and adaptable to uncertain times, but as we wade through another recession, it may be time for more flexibility than ever.
A few ways to build flexibility into your operations and investments include:
Embracing greater flexibility may mean taking a long, hard look at current operations processes and considering whether there isn’t a more effective, more affordable way to achieve the same results. It may also involve adjusting current priorities to align better with the current moment and economic climate.
3. Consider How to Reduce Operating Costs
One of the actions companies in the study took immediately was reducing operating costs. With inflation now on the rise, it’s a factor many companies are focusing on once again, in an effort to maintain profit margins and keep from driving prices even higher. Some common strategies include:
According to The Wall Street Journal, Alkaline Water Co. Inc., a supplier of bottled water, plans to save $7 million in annual costs by moving its operations to northern California in order to lower freight costs and by removing cardboard from its packaging.
However, there is a caution here: In reducing operating costs, companies must not dig themselves deeper into a hole that will be difficult to climb out of once the recession ends. For example, while cutting back on travel and real estate likely won’t cause much long-term damage, drastically reducing employee compensation or investment in digital technology may put a company in a difficult situation once the recession ends and the economy accelerates again.
If possible, it’s best to steer clear of tampering with employee pay. In fact, many companies today are in a situation where they simply can’t cut back any more on compensation, particularly with so much attention around the CEO Pay Ratio and equal pay movements. In light of this, a better strategy may be turning to digital tools to reduce spending. Automated processes and customer self-service options can be an effective route toward reduced spending and increased productivity.
4. Reduce Debt Where Possible
Companies that made it through 2009 largely did so because they were able to reduce debt at a much higher rate than competitors. In the Harvard Business Review study, the most resilient companies had managed to reduce debt while their competitors ended up with added debt.
Naturally, it’s preferable to decrease corporate debt as much as possible before a recession hits, as less debt will leave a company with more cash and make it easier to stay lean and productive. During a recession, prioritize which debts to pay based on maturity dates and interest rates. Another option is to refinance, since interest rates often fall during or just before a recession.
Again, there is a caution here: If inflation is high, it may be best to hold on to debt, especially as a recourse to not incurring new debt. Interest rates often rise with inflation, so any new debt that is incurred will likely end up being more expensive than the old debt that is already owed.
5. Be Ready to Divest Assets
Many of the companies that paid off debt in 2009 did so by divesting assets more frequently than their competitors—at a rate of 25% rather than 18% (percentage of all deals that were divestitures). During a recession, divestitures can represent a significant strategy for gaining capital as demand for products or services falls. Underperforming assets or businesses can be sold to help pay off debts, minimize losses and generate working capital.
While it’s important to manage the financial risks mentioned above, today’s C-suites must not neglect the human element. Many businesses currently find themselves in the tight corner between a pandemic and a recession. While trying to mitigate financial risk and plan for an economic downturn, there’s also concern about creating a safe workplace and increasing employee retention. Here are a few of the culture- and talent-related risks facing employers today, followed by some suggested solutions.
1. The War for Talent
With many employees no longer tied to a specific workplace, companies must offer more incentive than ever to attract top talent; however, with labor costs on the rise, offering those incentives can quickly become very expensive. Additionally, with the workplace changing at an ever-accelerating rate, the struggle doesn’t end once an employee is hired—part of the battle that today’s corporate boards and C-suites face is retaining workers who possess the adaptability, management skills and technological literacy that are so in-demand in our current corporate environment.
2. The Great Resignation
Along with accelerating disruptions in the modern workforce comes an accelerated rate of burnout. Unfortunately, this has led to a phenomenon termed the “Great Resignation,” as employees leave the workforce in greater numbers than ever, resulting in high turnover and labor shortages. Bereft of essential team members and lacking the numbers necessary for optimum productivity, many companies are struggling to cope with this “new normal,” and facing the risk of failing to achieve their operational and financial targets.
3. Health, Safety and Well-Being
Ensuring the well-being of employees isn’t just a good moral move; it makes sense as a corporate strategy to strengthen the business and minimize risk. Ignoring employee health and safety can lead to significant corporate risks, including reputational damage, low morale and a dampening culture.
Beyond simply preventing illness and injury, guaranteeing the overall well-being and satisfaction of employees is one approach to retain talent at an organization. While the rise of remote work may have improved health and safety, it’s often had the opposite effect on employee morale: The physical disconnect poses a challenge to creating a shared sense of purpose and maintaining a positive culture.
Similarly, remote work poses challenges for integrating new employees, contributing to a sense of isolation that doesn’t help with employee retention. Meanwhile, mental health issues have spiked in the wake of the pandemic, often leading to lower productivity and employee well-being.
Ensuring the well-being of employees isn’t just a good moral move; it makes sense as a corporate strategy to strengthen the business and minimize risk.
Create a Learning Environment
Location, salary and culture have been traditional incentives for attracting and retaining employees, but with traditional methods failing, employers must place greater emphasis on the individual needs of their employees to retain them. Creating learning opportunities is one strategy many businesses have found valuable. While location and salary are somewhat arbitrary in today’s rapidly changing world, education and growth will always be in demand.
Leaders and managers can empower their team members through one-on-one meetings and coaching sessions, opportunities to develop and deploy new skills and changing assignments and responsibilities. Over time as employees develop new skills, granting them the trust and independence to take risks and play larger roles in an organization can help them feel connected, needed and satisfied in relation to their workplace.
In addition to preventing burnout and increasing employee retention, fostering a learning environment can mitigate the consequences of labor shortages. While it may not solve the problem entirely (one employee can’t do the work of 10), having employees with multiple skill sets may help fill holes in the interim. Similarly, employees who are adaptable and comfortable with calculated risk-taking will be able to guide a company more successfully through labor shortages and economic downturns.
Consider Individual Needs for Health and Safety
In jobs with a high potential for health and safety risks, there’s no overestimating the importance of regular risk assessments and safety training sessions. However, ensuring employee well-being doesn’t end there. In the aftermath of the pandemic, many are more concerned with health and safety than ever, and failure to provide a safe workspace may mean losing employees.
With so many disruptions in the workforce, companies may need to show their employees greater consideration, especially as it relates to promoting mental health and a sense of safety. Steps toward ensuring well-being may include adding benefits geared toward mental and emotional health, allowing employees to continue working from home, and, where possible, considering individual needs and circumstances in order to create a safe working environment for everyone. This may require a more people-focused mindset.
While following these strategies for risk management won’t guarantee companies a free pass in times of economic turmoil and talent shortages, it will equip businesses with the tools necessary to remain resilient and drive growth—before, during and after corporate crises occur.
Amit Batish is Editor-in-Chief of C-Suite and Director of Content at Equilar.