As the global economy heads back into crisis, business leaders are focusing on what they need to do to succeed in uncertain times. Most companies had the wrong overall approach to the previous crisis; these companies need to change their mind-set now to prepare for the emerging crisis.
The challenge is that the dynamics of a balance-sheet recession are different from those of a traditional inventory-cycle recession, making it difficult to know how to react. PA Consulting Group's Managing Uncertainty Survey provides lessons from the last crisis to help prepare for the uncertain future. The survey asked over 200 global business leaders how they had responded to the financial crisis and what actions had proven most effective. The analysis establishes which actions added value and which did not.
The survey shows that most companies then were too cost focused, too slow to react and too passive. The most common response was the conventional response to recession - battening down the hatches and waiting for business as usual to return -- which is a formula for failure.
By contrast, the highest performing companies (as measured by total shareholder value) responded faster than their competitors, cut out inefficiency while protecting competitive advantage, and planned to come out of the crisis with a sustainably higher market share then when they went in. Only a third of companies saw the 2008 financial crisis as an opportunity, but those that did had a higher total shareholder return (TSR) by 10%. The survey shows that decisions made quicker during a financial crisis are better. Companies that made quick decisions had a higher TSR by 13%.
PA Consulting's survey also shows that those companies which decided to make drastic cuts actually performed worse than those adopting a moderate approach to cost cutting; in fact, the survey demonstrates that companies who cut costs so extensively that they slashed staff had a 10% lower TSR than those that contained or avoided staff cuts.
According to the survey, losers in the last recession have been too cost focused, too slow to respond and too passive. So what should companies do in the next balance-sheet recession?
Four key lessons for business leaders:
-- avoid drastic, panic reaction cost cutting; cut costs in a focused and
-- prepare ahead of time: develop contingency plans and secure financing -
if possible, "offensive liquidity," but at least "defensive liquidity"
-- make sure that your business is not carrying baggage -- don't be forced
to make fire sales at the lowest point of the economic cycle
-- take the opportunities - acquisitive and organic - to gain share in key
Mark Thomas, business strategy expert at PA Consulting Group, noted: "Just as politicians are beginning to realize that their natural response to the financial crisis has been inadequate, many companies are discovering that the conventional response to recession guarantees that a business will lose. The reason for the failure of these conventional management strategies is that they are designed for conventional inventory-cycle recessions - and a balance-sheet recession is a completely different beast."
"The highest-performing companies took a different approach: they identified the crisis early and responded quickly," said Thomas. "They had a moderate approach to cost reduction, and they looked beyond this to focus on the opportunities to get ahead. A fundamentally different approach is what produces the highest performance, and this needs to be heeded by companies in this economic downturn."
According to the survey, most companies took 18 months to understand the global financial crisis and then act in response, and they performed worse than those who acted quickly; while the minority who saw the crisis as a time to gain market share performed very strongly. Analyzing the survey results and learning from the mistakes made in the past is the best way to avoid making them in the future.
About the survey
PA Consulting Group surveyed 205 c-level and director-level representatives of companies across the world. The analysis has been produced using the survey data and also by comparing responses against total shareholder return (TSR) for listed respondents (92 in total). As TSR looks at the value the market places on a company's stocks and shares over time, it is a good measure of medium and long-term performance. We have used data from the period 2007 to 2010 to cover the main timeline of the financial crisis. For more information about the survey, visit www.paconsulting.com/managinguncertainty.
About PA Consulting Group
PA Consulting Group is a leading management and IT consulting and technology firm. Independent and employee-owned, PA Consulting operates globally in more than 30 countries and transforms the performance of major organizations in both private and public sectors. From initial idea generation and strategy development through to detailed implementation, PA Consulting delivers significant and tangible results. PA Consulting has outstanding technology development capability; a unique breadth of skills from strategy to performance improvement, HR to IT; and strong expertise in communications, defense, energy, financial services, government and public services, healthcare and manufacturing. For more information about PA Consulting Group, please visit www.paconsulting.com.