Leadership lessons from the credit crunch

As we navigate this period of economic uncertainty we’re bombarded with advice, statistics and all manner of content about how best to cope, how to mitigate losses and so forth.

We’re told to preserve cash but not to cut back on training. Make savings but don’t turn off marketing. Raise cash but reduce debt.

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There’s a lot of contradictory advice out there. In this article we go through some of the most well-respected academic papers currently doing the rounds – so you don’t have to. Read on to discover some valuable lessons from past recessions and get insights into ways leaders can adapt to business challenges during economic downturn.

People

Key finding: Successful firms cut back on new recruitment, helping them build trust with employees and save cash.

The Boston Consulting Group (BCG) surveyed 883 executives about how they expected to tackle the current economic crisis, what their tactics were in the last recession and what impact their actions had on employees, both positive and negative. When asked which actions their company will take in the current crisis, the three most popular were cutting back on recruitment, cutting back on company events and cutting back on performance-related bonuses. When viewed in relation to how successful these measures were during the last crisis, cutting back on recruitment was not only deemed most effective but also made the most positive impact on employee commitment.

The report, published in 2009, identifies two main business scenarios for the future; those who will recover historical levels of revenue sooner rather than later, and those who will struggle to achieve previous levels of success and may never see their revenues return to normal. For the former, a flexible approach with a focus on driving down costs is recommended. For the latter, the BCG encourages businesses to explore restructuring the current workforce and looking at opportunities for reducing headcount.

“Adapt current performance management and incentive schemes so they’re aligned with long-term business goals.”

When it comes to workforce reduction, the BCG urges business leaders to consider alternative models for employee compensation such as deferring bonuses to help reduce the need to make more permanent cuts which are likely to impact negatively on employee commitment. They also encourage businesses to adapt current performance management and incentive schemes so they’re aligned with long-term business goals.

Other key takeaways include:

1. Build trust with employees to encourage commitment and loyalty and avoid the need to re-hire later.
2. Try to cut bonuses before employee headcount.
3. Focus on strategic workforce planning to identify opportunities for merging and improvement of employee skill bases.

Source: Creating People Advantage in Times of Crisis: Rainer Strack (BCG) Jean-Michel Caye (BCG), Rudolph Thurner (EAPM) and Pieter Haen (EAPM).  

Finance

Key finding: Introducing a decentralised approach can be highly beneficial during economic downturn.

A 2017 study published by SSRN, explored how organisational structure affects the ability to navigate downturns. They discovered that rather than opting for making tough, business-wide decisions that suit centralised businesses, decentralised businesses could benefit from adapting business strategies to incorporate local knowledge. Allowing each part of the business to operate in the most effective way possible for their locality including strategic investments, recruitment and marketing.

Other key takeaways include:

1. Consider reducing hours, furloughing staff or restructuring bonuses before making permanent cuts.
2. Try to reduce levels of debt before the economy is officially in recession. For companies that are concerned about reducing spend on important operational functions, reducing their asset portfolio may be a good option.

Source: Turbulence, Firm Decentralization and Growth in Bad Times: Raffaella Sadun (Harvard Business School), Philippe Aghion (Collège de France), Nicholas Bloom and Brian Lucking (Stanford), and John Van Reenen (MIT). 

Leadership

Key finding: Both leaders and frontline staff should receive appropriate training. 

The BCG report references companies such as Philips and Credit Suisse who have introduced specific training programs and resources for their leaders. The report highlights the need to equip leaders to deal with these new challenges and to focus on long-term approaches rather than fighting fires in the short term.

Other key takeaways include:

1. Frontline managers as well as leaders to receive leadership training.
2. Ensure effective communication throughout the business and externally.
3. Devise ways of uniting and motivating staff and demonstrate their commitment to this ethos.

Marketing

Key finding: Cutting budgets only protects short term profits. 

Cutting marketing budgets straight away only protects profits in the short term and can significantly weaken your brand presence and internal and external communications. If you’re able to continue your marketing activities you also stand a chance of taking market share from your competitors.

• You may like: What should your marketing dashboard look like?

Marketing during an economic downturn is challenging. Reaching out to customers and prospects during periods of uncertainty and finding the right message for doing so is tricky. But research suggests that marketing does improve business performance, during and after a downturn.

Other key takeaways include:

1. Focus on retaining your customers as well as recruiting new ones.
2. Consider apportioning marketing spend to reflect the needs of each location, rather than assigning the same budgets across the board.
3. Use segmentation to ensure you get the right message to the right audience at the right time.
4. Adapt the segmentation as audience needs and the market adapts to the crisis.
5. Adapt buying cycles and customer journeys according to current analytics.

Technology

Key finding: downturns increase investment in technology.

Increasing investment in technology might not seem a priority during an economic downturn but if companies are reducing operational spend they may be able to invest more in IT. This increased investment also affects the types of skills companies are looking for.

Other key findings include:

1. Resist cutting budget for analytics software which can provide valuable business intelligence.
2. Shop around before making any decisions.

Source: Do Recessions Accelerate Routine-Biased Technological Change? Evidence from Vacancy Posting: Brad Hershbein, Lisa B. Kahn. 

Conclusion

Recessions are destabilising and can have highly negative impacts on staff, revenue and operations. But they also offer opportunities for significant change in business strategy, company structure, ethos and approach.

“Focus on long-term strategies rather than immediate fixes.”

The research mentioned above highlights a range of measures businesses can take to tackle the impact of recession and economic downturn. One of the overarching themes is the need to focus on long-term strategies rather than immediate fixes.

Flexibility is another key theme. The more prepared we are to adapt to new challenges and attune ourselves to the needs of our customers, the more likely we are to be successful.

During challenging times, leaders must:

• Have the courage to make the necessary decisions and the conviction to stick with them.
• Consider the rewards in moving away from traditional recruitment and retention strategies and identify more sustainable workforce structures with clear roles and accountabilities.
• Ensure their own leadership skills are robust enough to tackle current challenges
• Develop other frontline leaders that can support them both in the short and long-term.

While we wait for brighter days, it’s important to keep talking to our customers and community – finding ways to help and support them and earning their loyalty and advocacy.

None of us knows how businesses or employees will fare in this crisis. We do know, however, that leaders who act ethically and with conviction, who listen and communicate effectively and who prioritise employee wellbeing as far as possible will be remembered well.

Images via Adobe Stock and Unsplash

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