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In a crisis, who pays now, how do they pay back in the future

by Mark P. McDonald  |  August 3, 2020  |  Comments Off on In a crisis, who pays now, how do they pay back in the future

Cost cutting and other recession actions compromise someone.  Either customers, employees, suppliers or investors ‘pay’ for these actions.  Pay in the sense of accepting lower levels of service, losing wages, losing contract or lower market value etc.  Executives applying the idea of who pays to their recession decisions avoid mindless management cost cutting that makes everyone pay.

What is the payback?

Somebody pays, the question is who will pay?  Consider the impact of that group’s payback as you set your next round of recession responses.   The table below summarized thoughts on each of these players and their potential payback actions.

A table that shows how different players pay for and pack back a company in a recession

Leaders think through today and tomorrow

Leaders face difficult decisions in a recession.  Business activity is down and therefore costs must follow to maintain operational and financial health.  Determining who pays based in part on the potential paybacks gives leaders a current and future view.   Mindless management is the alternative with across the board cuts that create temporary results at the expense of the future Using the ‘who pays’ idea the following general rules emerge:

Employees pay first and fastest.

Wages and benefits are a significant component of cost.  They are most readily controllable easiest to implement. Simple workforce actions are a mistake. They seem to be the most cost-effective way to cut costs, but they are not.  Consider the ‘total cost of employee actions’ (TCOEA) in these decisions.  Those costs include severance, business disruption, skill losses, the cost of rehiring people in a recovery, etc.  Simple actions encourage employee payback.

Consider furloughs, reduced hours, and other more targeted approaches.  Inform employees about the situation, tell them what is going on, ask for their contributions in reducing costs  Share what the leadership team is doing, the sacrifices they are making, etc.

Customers should pay last, if at all

Customers are the present and future of the company.  Management decisions cutting internal costs related to sales, quality of service, support, availability etc. make customers pay.  Customers notice these changes and respond accordingly.  Their power and payback increase in tough times as they have choice, particularly in the long term.

Consider simplifying customer facing processes, removing layers and delays that drive cost but also poor service.  Know your customers and what they value, eliminate the non value added parts of the interaction.  Recognize that customers face tough times too, they are looking for ways to reduce costs while maintaining services. Sharing and supporting how to do that builds

Suppliers can be hard to make pay, so renegotiate the non-discretionary

Suppliers pay when you reduce your business with them.  They lose revenue and you lose supply.  Making suppliers pay is not as easy as it sounds.  Non-discretionary suppliers have purchasing contracts that lock in prices and volumes.  Discretionary spend is a different matter.  Either way think about the need to change the price, volume, time equation with key suppliers.

Investors indirectly pay, but pay more for poor performance

Stock prices for the normal company stagnate or fall during a recession.  Current stock markets are driven by a few firms that are the exception rather than the rule.  Investors continue to hold the stock so long as they have confidence in future earnings.  Those earnings drive stock price appreciation.

Leaders manage their performance to demonstrate that they are outperforming their peer averages.  In other words, they are the best in a down market and can be expected to be even better when the market returns.  Being above average, even when the average is low has never been more important to investors.

Who Pays broadens the recession response discussion.

Recessions require hard choices.  On the surface, cost cutting feels like a financial decision with simple rules.  Start with cutting your biggest costs.  Give managers cost reduction targets.  If that fails, then make across the board cuts.  Cost, cost, cost everywhere.  Thinking through who pays for those choices puts a face on cost cutting.  How those paying now will pay back puts the future into play.   That balance between now and next gives leaders a way to think through the apparent financial decision to make intentional and informed decisions.

Related posts

Customers, Investors, Employees, or Suppliers who is paying for the COVID-19 recession?

Using ‘who pays’ to go beyond mindless management

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Category: covid-19  leadership  management  tough-questions  

Mark McDonald
VP Analyst
12 years at Gartner
33 years IT Industry

Mark McDonald, Ph.D., is a Vice President and Fellow Emeritus in Gartner for General Managers Program. Read Full Bio

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