Surviving Recessions & Coming Out on Top
31st March of 2020

COVID-19 has made a recession a reality rather than a possibility; with many businesses preparing for tough times ahead. This got us thinking – how will companies weather the storm and come out on top?

A recent HBR article by Walter Frick offers some useful insights into how some companies not only survived previous recessions, but thrived in the years that followed.

Preparation was the key difference between companies that flourished post-recession and those that didn’t – the survivors had put in place contingency plans and had thought through alternative scenarios.

The article focused on 4 additional ways that companies weathered recessions:

1. Deleverage Before a Downturn

Companies with high levels of debt are more susceptible to recessions, with declining revenues making debt repayments unaffordable. This leads to aggressive cost-cutting measures – often through layoffs – leading to a fall in productivity and the inability to fund new investments.

While most companies have some level of debt, businesses should look at reducing their leverage leading up to a downturn. A study on the great recession revealed that companies that deleveraged before the recession emerged in better shape than those that didn’t. Issuing equity to avoid debt obligations and shedding assets to reduce debt are all options available to companies in the lead up to a possible recession.

2. Focus on Decision Making

Decentralised structures provide an added advantage during recessions. Decentralised companies can react to market changes more aggressively and with agility, as decision making happens further down the hierarchy.

Having a decentralised structure also allows companies to benefit from the value of local information, in turn matching decisions with expertise. Even if companies don’t want to decentralise, it is important that they gather input from employees at all levels prior to making decisions at time when things are so uncertain.

3. Look Beyond Layoffs

While many companies resort to layoffs, the companies that emerged strong from previous recessions relied less on layoffs and more on operational improvements. Layoffs tend to have a detrimental impact on companies, especially because it hurts employee morale and productivity at a time when these are needed most. Laying off employees can make rehiring post-recession difficult, and training and development is a costly affair.

As an alternative, companies can also consider furloughs and hour reductions instead sending their employees home. These are especially effective when there is government support in the form of partial unemployment payments. Another benefit with furloughs and hour reductions is that companies can decide which workers will be affected. Company-wide pay cuts, on the other hand, can affect morale and demotivate some of the most productive employees as they impact everyone equally. Performance pay is another alternative, and allows companies to align employee incentives with changing conditions.

4. Invest in Technology

While conventional thinking may lean towards playing it safe, research suggests that successful companies tend to invest more in technology during recessions. This is because the opportunity cost of diverting resources and investing in technology during a recession is less than if a company was operating at full capacity and needs all available resources. By this logic, investments in technology are less costly during a recession.

Technology can also provide an array of practical benefits, helping companies become more transparent, flexible and efficient. It can also help companies significantly cut costs through automation and enable data-driven decision making – allowing them to stay nimble during times of great uncertainty.

While a difficult period is on the horizon, preparing for what is to come will play a pivotal role in how businesses fare both during and after a potential recession.

The full HBR article can be accessed here.