The global health crisis continues to place unprecedented burdens on executives and leaders. With the global economy contracting in 2020 and broad-based recovery unlikely until late 2021, the question becomes – who pays for the recession?
Pays in the sense of feeling the pain in adjusting to uncertain revenues, rising costs and overall uncertainty. David Cote, former CEO of Honeywell and author of Winning Now, Winning Later described his experience responding to the 2007 – 2009 recession. He boiled it down into a powerfully simple idea. The response to a recession is cutting something. Those cuts predominantly impact one of three audiences: customers, employees, investors or suppliers.
Someone has to pay
Leaders face the decision regarding which of these audiences pays, or bears the brunt of recession strategies.
- Customers can pay for the recession in terms of reductions in the quality of support and service as these internal functions are reduced. Reducing inventory levels to save cash but stretch order fulfillment cycle time or reducing customer service support in the form or narrower hours or smaller staff. Pulling back on product investments so expected new features and functions customers rely on do not make it to market.
- Employees pay for a recession directly through layoffs, reorganizations, reduction of work hours, deferred benefits or salaries, etc. This is the more traditional cost cutting plays as wages make up the majority of a company’s cost structure. Work from home accommodations are already leading employees to ‘pay’ in the form of reported longer work hours and apparent increases in productivity.
- Investors pay for a recession in the form of company operating losses that reduce balance sheet equity and stock/market price valuations. Making investors pay extends beyond the capital markets to issues of company reputation, relative performance and their future cost of customer and capital acquisition.
- Suppliers pay for a recession when they have to cut their prices, accept lower purchase volumes or usage levels, renegotiation of contracts etc. Delaying future purchases, starting projects and similar tactics are other ways in which suppliers pay for a recession. These actions pass on the recessionary pain as much as allowed via long term supplier contracts etc. It often frequently comes back on you as suppliers cut their service levels, responsiveness etc. as they react to reduced revenue.
Who are you making pay for the recession? Customers, employees, investors or suppliers? It is an interesting perspective and creative way of thinking about your response to the ongoing economic impact of the virus.
More to come on this idea including:
- Using ‘who pays’ to go beyond mindless management
- The Payback you can expect from making others pay