DURING RECESSION, MANAGE DEFENSIVELY
Why didn’t I, as CEO, anticipate the recession in order to take the proper defensive steps? Wasn’t I warned in advance that bad times were coming? Yes and no. Until the recession became obvious, the economists’ predictions had been divided. Wasn’t that a valid excuse?
No. (Most CEOs are hard on themselves.) Once the recession struck, I learned which prognosticators were correct and noted the accuracy of their predictions over the following years. Eventually, as it became clear that one in particular was correct more often, I bet on him. When the next recession—a mild one—snuck up on us, we were ready.
A further answer to the question “Why the mess?” lies in the answer to “What’s the remedy.” Though we had been drawing P&L statements every month, they revealed little that was meaningful except for the bottom line. Only after we had points of reference—the figures of a comparable month with which to compare each expense item as a percent of sales—could we evaluate whether something was truly good or bad.
Until that crisis, I had always assumed the burden of rescuing us single-handedly. But this time I felt overwhelmed. Suddenly, it made sense that only those responsible (the VPs, managers, and supervisors) for losses (and, of course, profits) should know what they were, determine their origin, and participate as a team in devising remedial procedures. This was especially true for specific profit centers in which a manager and his lieutenants were directly involved.
However, we quickly realized that the monthly P&L statement (and more so the quarterly and the annual) often reported situations too remote for timely and effective corrective action. It would be useful if we knew how much money we had made (or lost) each day. And how much better if we could precisely identify which orders were the losers. The solution: add up the various costs that went into completing a particular order and compare them with what we charged the customer.
By compiling separate profit and loss figures for orders produced during the preceding twenty-four hours, we could review by 10 a.m. each day the P&L for the prior day. In fact, as the cumulative daily figures mounted, we knew exactly which day of the month we broke even. As a result, the bottom line on the monthly P&L statement, which arrived several days after month’s end, was never a surprise. And by the time our quarterly statement arrived, the news was already ancient history. As for our annual P&L statement, this was done principally for the benefit of the bank and the IRS.
Just as our lack of information was the cause of not being able to anticipate the recession, it also caused our blindness in coping with it. Though at first we may have blamed declining sales for our predicament, we soon learned that we should have blamed our failure to pinpoint troubles and their first causes on a micro level. Either we hadn’t reacted correctly to the crisis or, when we had reacted, we were too late.
We had established a policy of cutting costs as sales declined. That was consistent with the premise that every dollar saved goes directly to the bottom line versus only part of a sales dollar. With timely detailed information available, we had a handle on the source of our losses and insight into which orders were unprofitable. The department managers and I reviewed the daily P&L together. We discussed each loss until we were satisfied that we knew why it occurred, then decided on a course of action to prevent its recurrence.
The cause of a loss may have been a one-shot event—a temporary power failure, for instance, that added extra time during processing. Under such circumstances there was no need to take further action. Or the loss may have been due to complications inherent in the job. We’d watch the results when it came up again. If the loss proved repeatable, we would either find an easier and less costly way to accomplish the job, or we would raise our price and advise the customer well in advance of his next order. If, due to competitive pressures, we couldn’t raise the price, we might choose to abandon that business. Now at least we had the option to stanch or knowingly suffer a future loss.
As the recession worsened, we were faced with a shocking development. Because our selling prices were falling due to stiffening competition, we were losing money on virtually every job we ran. In desperation we sought to increase productivity. This led to installing a team incentive system that rewarded superior worker performance. It worked: in only two months, both production and quality improved and our losses eased.
If a recession had no other constructive purpose, at least it forced us to identify our company’s vulnerabilities and seize an opportunity to change old ways for the better.