As we rush to slow the pace of viral contagion, the tinders of economic contagion are igniting. Just like our healthcare workers are racing to prevent a health catastrophe, our business community must likewise rally to stem the impending economic ramifications.
The health crisis caused by COVID-19, itself devastating and overwhelming, is creating a demand shock of untold proportions. Social distancing — while good for our health — has slammed the brakes on revenues, the fuel for all businesses (and ultimately all institutions, including governments).
Few businesses are prepared to forego 70% or more of their revenues for a month — much less into summer. While the impacts will vary by sector and company, many businesses will be ravaged. Good, well-run, vital businesses. Even the strongest balance sheets cannot withstand a shock like this.
Despite governments’ jumping in to pass stimulus packages, businesses can’t wait. Companies need to configure their businesses to survive the “pause” caused by shelter-in-place restrictions, while also streamlining to face a recessionary market on the other side.
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Here are eight tangible steps every company should take to position itself for what lies ahead:
First, act quickly — and invest the right resources.
While companies have rushed to address the coronavirus threat itself, far fewer have taken the next step: understanding and addressing the impending demand shock, as revenues fall and recession takes hold. Start now. Start yesterday. Separate the necessary public health precautions you’ve already taken from actions to preserve the business itself. Both are vital, but don’t confuse the two. There is no more important action for your business than having a business preservation plan.
Importantly, this is not another task for an overburdened COVID-19 response team. It is someone’s (multiple someones’) full-time job. Pick a great leader. Create an action team. Set up a “war room.” Work closely with the senior team. If you don’t have seasoned resources that know how to address financial distress, hire them. The best money you can spend is developing a crisis plan. It is the business equivalent of buying n95 masks.
Second, make cash king.
First and foremost preserve cash. Cut non-essential spending. Delay capital investment. Shut down businesses or initiatives that aren’t mission critical. Deploy teams to drive rapid cost cutting where you need it. This is a force majeure moment: Review your contracts and renegotiate terms with suppliers. Finally, forget about making a plan: Plan is a “thrive metric.” You need a “survive” metric: economic breakeven.
Third, drive revenue resilience.
Many companies will see a huge drop in revenues in the near term. What can you do to shore up your revenue structure? If you are one of the lucky few to have a crisis-driven demand spike, capture it quickly — you will need every dollar you earn now to cushion you as recession sets in, and consumer spending drops. Some key steps: Ensure continuity of existing business where possible. Reallocate resources so that your best talent is focused on the highest priorities. Pivot offerings to make these more relevant. Rethink your go-to-market approaches, by refocusing routes to market, redirecting your sales pipeline, and honing marketing messages.
Fourth, share the pain.
The better you maintain your ecosystem of business partners, the faster you will rebound on the other side. Approach negotiations with vendors, customers, creditors, and employees in the spirit of collaboration. Work with vendors to slow payables. Ask lenders to forego interest payments. To minimize layoffs, ask employees to work for a period at lower salary or part-time. Work with government agencies to delay taxes or forego tariffs. Compromise will be key to everyone’s survival.
Fifth, embrace uncertainty.
The tools you normally rely on to gauge performance don’t work in this environment. No one knows what the next six months hold. Don’t resist uncertainty; instead, lean in. Identify key exposures. Scan your business for risks. Use tools like scenario planning to understand potential eventualities. What are second and third order effects? And don’t make this a drawn-out affair: A few hours will give you insights that will be game changing. Pause, think, organize: It will dramatically improve your decision making.
Sixth, identify action levers.
Understand key near-term levers in your business. Prioritize them:
- Reversible levers: What actions can you take now that are easily reversed? For example, delay Capex or postpone non-essential employee training. Pull as many of these as you reasonably can.
- Hard-to-pull levers that don’t threaten the future of the business: What are “nice to haves,” not “need to haves”? Now is the time to make hard calls you have put off: Eliminate programs that aren’t adding value, streamline processes, shut down lagging businesses. Innovate your operating model to be lighter, more agile, and more responsive. Preserve key strategic initiatives as best you can – you need to keep an eye on where you want to be when this is all done.
- Levers of last resort: What are the “Hail Mary’s” that could save the company in an extreme scenario? This may include selling assets or making deep layoffs. Identify these early. Define the circumstances that would force a decision. Plan how you would execute. Be prepared. The more thoughtful you are now, the more you will minimize collateral damage later.
The hardest decision any leader faces is laying off employees. If layoffs become necessary, do it. Do it with grace and compassion, but do it. Too many businesses wait too long and cause the broader enterprise to capsize — making the pain deeper than it needs to be and the job losses bigger than they should have been.
Seventh, think beyond the current crisis, now.
Financial crises are like forest fires: They ravage an economy, creating destruction in their wake. But, once the flames subside, there is resurgence — green shoots poking through the ashes.
One reason to act now, to preserve cash, and to become agile is to capture the green shoots when they sprout. Or even to plant them as the fires rage. (As Apple did launching the iPod in the 2001 downturn. Or as Adobe did, testing its SaaS platform in the midst of the 2008 financial crisis.)
Inevitably, assets will come up for sale at good prices, and new business models will emerge. There will be opportunities to take market share and to innovate to meet emerging needs. Test new product offerings. Great talent will be looking for new homes, and capital equipment and manufacturing capacity will be offered at fire-sale prices. Some of these opportunities may become available soon. If you have the agility to be an acquirer or an innovator, what’s your wishlist? The future will indeed be different, and many of the implied assumptions under which your company operates may need overhaul or revision. Develop a point of view on this so that you can be proactive when the moment is right. For companies with resilience and clear strategies, there will be many game-changing opportunities.
Eighth, be kind.
The economic impact of this downturn will be massive. Bills won’t get paid. Loans will default. Companies will go bankrupt. People will lose their jobs. After 12 years of economic recovery, this will be a hard shock. And there will be very real human impacts.
Heartbreaking impacts. Be empathetic, be responsive. But also know that as a company the single best thing you can do is survive. To jumpstart an economic recovery, we need as many businesses left standing as possible. The economy needs you. Society needs you. We need you to be there to do what you do best—provide goods, services, and most of all, jobs.
About the Authors
Patrick Viguerie is the Managing Partner of Innosight. He previously was a Senior Partner at McKinsey & Company.
Elizabeth Stephenson most recently served as the President of The FIJI Water Group and POM Wonderful. She previously was a partner at McKinsey & Company.
Patrick and Elizabeth worked together for more than a decade to build McKinsey’s macro- economic and trends capability, and helped develop the McKinsey response to the 2008 Financial Crisis.
Innosight is a strategy and innovation consulting firm that helps organizations navigate disruptive change and manage strategic transformation. Now a member of the Huron Consulting Group, we work with leaders to create new growth strategies, accelerate critical innovation initiatives, and build innovation capabilities. Discover how we can help your organization navigate disruption at www.innosight.com.