Recession 911

by Kenneth Sweet

Oh my gosh, we are in a recession!

What exactly does that mean? Simply stated, a recession is two or more successive quarters of declining economic growth. It is measured by economists as a decline in gross domestic product (GDP)–the value of final goods and services produced.

Is a recession a good thing?

No, not for most people—but it’s not something to be afraid of either. The uncertainty of not knowing what will happen next strikes fear in our hearts and fosters angst, worry, stress and frustration. Once you know what will happen, regardless of whether it is good or bad, you can make the necessary plans to deal with it and whatever it might be.

Here are a few facts about recessions that should help demystify them, put them in perspective and relieve the pent-up uncertainty:

1. At the beginning of every recession, there are few business owners, economists, stock market pundits, news commentators or investors who believe one has begun.
2. Every recession has a particularly dangerous focal point. For example, the current 2007–? subprime mortgage crisis, the 2001–2003 dot-com bubble, the 9/11 attacks and accounting scandals, the 1990–1991 industrial production and manufacturing-trade sales debacle, the 1980–1982 energy crisis and the 1973–1975 oil crisis–stagflation.
3. Late in the recession, corporate profits and stock prices decline, consumer confidence is low, consumer spending ebbs, unemployment rises and all economists, stock market pundits, news commentators and investors finally acknowledge the recession.
4. Late in the recession, market pundits and commentators begin to discuss and believe the recession may be deeper and last longer than any in history.
5. During the last three months of a recession, the Federal Reserve accelerates the easing of interest rates and the stock market rallies.
6. At the end of every recession, few believe it is over.

What does a recession represent?

It represents a business opportunity. Why? Most businesses take a ‘deer in the headlights’ approach to bad economic times with a "let’s wait and see what happens before we decide to do anything" response.

The more competitors that embrace the ‘wait-and-see approach,’ the less competition aggressive, take-action companies have in both sustaining their customer base and expanding their market share. Companies that recognize these circumstances for the opportunity they represent are on their way to being the next market leaders in their industries and sales territories. This is the opportunity to run lean, mean and fast! Keep your eye on the ball, head down and push forward.

Survive the recession in style.

The secret to surviving the recession in style and positioning your company for explosive growth in the coming recovery is to concentrate your energies, execute your survival plan flawlessly and just in case, have a Plan B.

Concentrate your energies.

AREA #1: Cut costs – cautiously
Most business owners’ first inclination is wholesale cost cutting — STOP! Don’t cut any cost that will harm your business later. Eliminating the crucial resources your employees need to do their jobs carries both short-term and long-term consequences. Cutting your costs is not the answer, yet controlling those costs is the key. While each industry (and each facility) has its own unique cost control areas, some examples of constructive cost control that can be applied broadly are:

• Set target inventory levels and regularly measure their effectiveness. Adjust as necessary.
• Repair, don’t replace, large dollar-cost equipment (and strictly adhere to equipment maintenance programs).
• Scrutinize accounts receivable closely and regularly. Tighten credit policies on problematic and potentially problematic accounts (especially slow paying customers).
• Employ labor and time-saving technology, where possible, on a low cost basis (to reduce workload and increase productivity).
• Eliminate unprofitable customers, as 80 percent of your profits come from 20 percent of your customers—allocate work time appropriately.

AREA #2: Hire – more than you fire
Most business owners’ first inclination is to cut labor costs — STOP! Personnel changes should be made with an eye to position the company to the next level during the coming expansion. Don’t buy into the temptation to cut the high-income earners on a wholesale basis simply due to the greatest short-term financial return by eliminating fewer bodies. Experience and skill are part of every business’ value proposition. Be cautious not to be penny wise and pound foolish. The priority must remain to identify and groom top performers capable of taking the company to the next level. Some examples of hiring and firing that can be applied across most industries are:

• Target replacement of poor producers (typically the bottom 10 percent to 20 percent of the workforce).
• Clearly articulate expectations, performance standards and standards of measurement (evaluate performance accordingly).
• Invest in new hire training during slower growth periods.
• Invest in training existing sales representatives to be more frequent and effective closers.
• Recruit top performers from your competitors.
• Hire talented, aggressive and experienced people who have been laid off from other companies.

Obviously, Citigroup CEO Vikram Pandit doesn’t subscribe to the "Hire more than you fire" philosophy. It is astounding to read that Pandit announced he planned to cut the company’s cost base by as much as 20 percent. His statement sent shudders through the financial services industry as they contemplated that tens of thousands of further job losses that will hit Wall Street and the City of London.

"It is clearly feasible for us to take 10, 15 (or) 20 percent off our cost base, especially in information technology and operations," said Pandit.

If he truly can do this successfully, my question as a shareholder or member of the Board of Directors would be "why haven’t you done it before now?" How long has Pandit allowed the company’s profitability to be minimized and the return to shareholders diminished by his failure to act? It would seem to me that his salary, bonus and continued employment should be called into question. It is hard to see how this can end positively for Pandit.

AREA #3 Sales & marketing – not a zero sum game . . . traction is required
Of the three areas, sales and marketing is undoubtedly the most important. Remember, marketing is a marathon, not a sprint. Stopping and starting again on a whim is not an option. Business owners should spend 80 percent of their time focused on marketing and delivering their product or service. Some examples of sales and marketing techniques that can be applied across most industries are:

• Advertise, advertise, advertise – Hard economic times have a way of whittling down the competition. While one’s first instinct may be to reduce advertising expenditures, that approach may make matters much worse. During the last recession, McDonald’s almost tripled their advertising campaign at a time when Burger King was cutting back. As a result, they substantially increased their market share. A recession is the time to increase your marketing.
• Communicate with your customers – This includes the competition’s customers. While the tendency is to shut down and adopt a wait-and-see attitude, the spoils go to those who reach out and communicate when none of their competitors are.
• Develop and institute new strategies – This action will secure more customers.
• Track marketing techniques that produce the most business – Reduce or eliminate the approaches that aren’t paying off, or fix them. Surgically direct market to new targeted areas where results can be calculated, minimizing marketing expenditures in areas where potential results are unknown.
• Diversify and launch – Develop new products or services currently not offered in your market.
• Develop value added sales campaigns – Highlight key product or service features that differentiate you from your competition and tie in reputation to value proposition.
• Create a sales contest – Focus your sales force by incentivizing new products and high profit margin product sales. This approach is one of the fastest and most effective ways to reposition the sales mix and, at the same time, stimulate overall sales.

Execute your survival plan flawlessly.
A survival plan must contain at least some aspects of each of these three areas. To execute successfully, create a defined and prioritized plan, then demonstrate leadership skills. Leaders know how next month’s sales pipeline will be filled. Great leaders closely and continuously monitor and manage the company’s cash flow. They also know how much money they want to make and have a plan to get there. Effective leadership communicates the mission to all involved, rallies the troops and charges forward with a take-no-prisoners attitude.

Plan B

If all else fails, the last resort must be to retreat and fight another day. Therefore, it is important for a leader to develop two 12-month cash flows. One of these cash flows depicts how the company can survive and operate if there is a 10 percent drop in company revenues, the other depicts how the company can survive and operate if there is a 20 percent drop in revenues. Plan B must only be put into play in the direct and unlikely event management is unsuccessful in executing the company’s survival plan as outlined previously.

Where do We stand?

So where do we stand right now in relation to the six observations about recessions?

1. At this point in time, most business owners, economists, stock market pundits, news commentators and investors believe a recession has begun.
2. The dangerous focal point has been identified—subprime lending.
3. We are late in the recession. Numerous corporate profit reports reflect declining profits and stock prices reflect substantial losses compared to closing prices on December 31, 2007. Consumer confidence is at a 16-year low, consumer spending is ebbing, unemployment has risen and almost all economists, stock market pundits, news commentators and investors finally acknowledge we are in a recession. All criteria are met.
4. In the April 2008 issue of CFO Magazine, Jerry York is quoted saying, "It’s going to be a very bad recession, perhaps the worst I’ve seen in the 46 years I’ve been working." The article goes on to say, "A majority of finance chiefs are similarly gloomy . . . 72 percent of CFOs are more pessimistic about the economy than they were last quarter and only 8 percent are more optimistic. Pessimists outnumber optimists nine to one. Nearly 90 percent say the economy will not return to normal growth conditions until late 2009. Should a recession last until the second half of next year, it would be the longest such downturn since the later 1970s. This is dramatically longer than the dips in the early 1990s and in 2001, each of which lasted just eight months. 60 percent of CFOs have postponed expansion plans." Wall Street analysts project a one percent rate of economic growth for 2008, down from four percent in 2007—the worst growth rate since the 2001 recession. Observation number four has been satisfied.
5. Over the past weeks, the Federal Reserve has substantially eased interest rates and during the most recent week (ending April 19), half of the 11 Dow Jones Industrial Average (DJIA) components reported results greater than expected by Wall Street analysts, and the DJIA, S&P 500, and NASDAQ market averages rose 4.3 percent, 4.3 percent and 4.9 percent, respectively. Initial jobless claims were reported as being higher than at any time since Hurricane Katrina, yet the stock market rose on the news. It was announced that foreclosures were up 57 percent in March, and 1,000,000 mortgages were expected to default in 2008, yet the stock market rose on the news. Citigroup reported first quarter losses of $5.1 billion and announced plans to lay off an additional 9,000 employees, bringing total layoffs to 13,200, yet the stock market rose on the news. Why? Because the Federal Reserve has signaled its willingness to continue to slash interest rates and put money into the economy. Observation number five has been satis- fied.

The only question remaining to be answered is when will the recession, in 20/20 hindsight, officially be declared over? The answer is the announcement will more than likely come sometime in 2009, with the recession being over sometime between June and September of 2008.

The business-cycle dating committee of the National Bureau of Economic Research (NBER) publishes the beginning date of a recession (the peak in the economic cycle) and the ending date (the trough in the economic cycle). Economist Robert J. Gordon, a member of the committee, was quoted in The New York Times (March 8, 2008) saying any announcement about the beginning date of the start of a new recession was unlikely before the last few months of 2008, at the earliest. On this basis, I suppose we should view them as ‘economic historians’ rather than economists.

Since 1854, the United States has had 32 expansion and contraction cycles. The average contraction cycle was 17 months, and the average expansion was 38 months. The contraction cycles have been shorter in recent years, with the longest expansion being 120 months (March 1991 to March 2001). The 2001 recession (which officially began in March 2001) was announced by the NBER in November 2001. Interestingly enough, November 2001 turned out o be the month in which that recession was subsequently announced to have ended.

Unfortunately, the real estate market is not much help in establishing the timeline. It usually weakens before a recession and can continue its decline past the point in time when a recession ends. However, those who wait to invest in the stock market until the announcement is made that the recession is over typically miss approximately half of the available gain.

Here’s a little tidbit few investors are probably aware of (and if you are the kind of individual that plays the odds, you will find it statistically significant). Since 1952, during the last seven months of an election year, there was only one time the S&P 500 stock index was down (-7.1 percent), with all other years being up (minimum of 3.3 percent, maximum of 22.0 percent, overall average of 7.2 percent).

What is the bottom line? Timidity is not a strategy. The toughest part of this recession is over. Now is the time to act. It is the time to set aside any fears and trepidation and take the steps necessary to reap the benefit of the next economic expansion. As the old adage goes, "those who forget history are doomed to repeat it."

Isn’t it ironic? In fear of a recession, many business owners and senior management stop doing the things that were responsible for creating their company’s growth. At that point, the company just stops growing.