Call it workplace whiplash. With lightning speed, we’ve gone from prosperity and peace to recession and war. Soaring earnings and fast-track hiring have given way to missed numbers and rolling layoffs. And leaders are wrestling with the same questions: Where does it make sense to cut? Where would it be insane to cut? And where would it be smart to invest? A roundtable of seasoned business leaders assembled in Dallas to come up with short-term tactics for surviving the downturn and long-term strategies for winning in the future.
Lightning Round 1: Mistakes That Losers Make
Alan Webber (founding editor, Fast Company): What’s the most common mistake that companies make in responding to a market downturn?
Roy M. Spence Jr. (founder and president, GSD&M): First, too many companies don’t understand their own business models and don’t trust their customers. In a knee-jerk reaction, they cut their marketing and violate the rule that Sam Walton used to tell me: Whenever you get confused, go to the store. The customer has all the answers — and all the money.
Fred Chang (president and CEO, SBC Technology Resources Inc.; SBC Communications Inc.): The big mistake that people make is cutting their R&D budgets. They don’t see R&D producing immediate benefits in the first 6 to 12 months, so they say, “Let’s cut that!” You have to fight the natural tendency to think in 6-to-12-month cycles. Instead, you need to remember that this is a long game. When the business cycle recovers — and it will — you need to be ready to get past your competitors.
Ian Downes (vice president and executive sponsor for cost reduction, Cap Gemini Ernst & Young): It’s almost a reflex: Reduce your head count across the board. But we’ve done a lot of research on this, and we’ve found that 50% of all companies that cut their head count across the board end up in a worse position as they come out of difficult times. Across-the-board head-count reduction doesn’t work.
Morris Miller (managing director and cochairman, Rackspace Managed Hosting): Too many companies find themselves trying to make up for lost time, and, as a consequence, they cut too deeply. You really have to look nine months out. You may have to lay some people off, but you should focus on keeping your core team together.
Steve Moffitt (CIO, global communications, Dynegy Inc.): The biggest mistake? Not seeing a downturn as a time to make investments. During a downturn, you can acquire assets and capabilities at the low end of the market and be positioned to take advantage of them during the upturn.
Tom Rohrs (senior vice president, global operations; member of the Silicon Business Sector Executive Committee; Applied Materials Inc.): I think that the most common mistake is a kind of corporate egalitarianism. Companies take 10% away from everybody, instead of separating out what’s core. They need to determine what’s critical and invest in that, even if it means taking 20% away from everything else. There’s too much democracy, because nobody wants to make anybody else unhappy.
Katrina Roche (senior vice president and chief marketing officer, i2 Technologies Inc.): I’d have to say just the opposite of what Morris just said: Companies are unwilling to cut deep enough the first time. They’re too optimistic that the market will come back. If you don’t cut deep enough that first time, you will damage the culture in the company.
Kevin Krone (vice president, interactive marketing, Southwest Airlines Co.): It’s a big mistake when people come in and do layoffs. But it’s easy to identify people as a high expense. At Southwest, we feel that people are a tremendous asset. Layoffs really cut the guts out of your company, because those who stay, while happy that they made the cut, are demoralized. So protecting people’s jobs is very important.
Sunny Vanderbeck (chairman, cofounder, and CEO, Data Return Corp.): People have the bad habit of believing their own press releases. The evidence of trouble ahead was in place by last March. But too many companies didn’t want to face reality. There’s no excuse for not recognizing what was going on and for not responding. Too many companies did too little too late.
Lightning Round 2: The Best and the Brightest
Alan Webber: When it comes to making a smart move toward adapting to a much tougher economic climate — whether it’s a cost cut or an investment — what’s a best practice?
Sunny Vanderbeck: Our company’s approach has been to keep our customers in mind when the economy gets tough, because we know that those customers will determine whether or not we survive when the cycle ends. If you do things that keep your customers happy, and perhaps even make your customers happier, you’ll be successful. They will stand by you through the mistakes.
Kevin Krone: Southwest has always managed in good times as if it were operating in bad times — because eventually, those bad times come. And when they come, it’s too late to start asking yourself, Now what do I do? When things started slowing down for us, we asked what we could live without to save money and jobs. We deferred anything that was not critical. That decision bred fierce loyalty from our employees, who, through a program called “A Pledge to Luv,” are actually giving back money to the company to help out during this tough time.
Katrina Roche: I see this climate as an opportunity. We just had 200 of our customers here in Dallas a couple of weeks ago. The best performers in that group were those who had looked at their core competencies, figured out what would make them competitive as far out as two years, reinvested in those areas, and cut other unnecessary stuff.
Tom Rohrs: Applied Materials is part of a very cyclical industry, so we’re fairly seasoned at this. We have a game plan that we execute. It starts with a very firm belief in the business that we’re in. One of the best ways to get through a downturn is to have a firm understanding and belief that there’s going to be an upturn. Another way is to have a very strong cultural fixation on remaining profitable. We try not to let our operating results slip into the negative numbers — because negative numbers become an excuse for almost anything. A third thing we do is invest in R&D through thick and thin. We try to gain market share in the downturn through that R&D. Finally, we explain what we’re doing to our constituents: Our shareholders, our customers, and our employees all know the game plan. It’s built into their expectations when they buy the stock, when they buy the product, or when they join the company.
Steve Moffitt: I think that one best practice is to maintain a disciplined fiscal focus. At Dynegy, we employ smart fiscal responsibility when we make investments. We really study the financial side of things. It can be good for a company to go through a downtime. It takes discipline to figure out what the core business is and what to invest in.
Ian Downes: The best companies use down cycles as opportunities to change the game. They figure out where they want to be when they come out of a turbulent time, and then they lay the groundwork necessary to move toward that goal. If you know where you want to be when the economy comes back, you can make the smart moves to get there.
Fred Chang: The smart thing to do is embrace disruptive technologies. Technologists today are continuing to work hard on ideas that will improve productivity. It’s more important than ever to use technology to change the game and to save money.
Roy M. Spence Jr.: Companies need to understand what business they’re in. I’m not talking about their operational business. I’m talking about the culture of their company — the spiritual business that they’re in. What a company stands for is just as important as what it sells, because everybody is selling the same stuff. Best-practice companies understand their business beyond their profits and losses. They will endure; those are the beacon brands that consumers will gravitate toward.
Essay Question 1: The Art of Making Sense
Alan Webber: In today’s environment, where business is changing rapidly and customer behavior is more than a little bit unpredictable, the first problem isn’t what to do, it’s how to make sense. So the question is this: How do we make sense of this current economic climate?
Ian Downes: This is my way of looking at the world: First, companies need to gain stability. After that, the best companies look at their income statements and their noncore processes and mine them for ways to generate positive cash flow. They can reinvest in what is going to be strategically important for them.
Katrina Roche: We can all learn from looking at how companies such as Dell used a downturn like this to change the rules in the PC industry. Dell stopped and asked, What business are we in? It couldn’t compete with Packard Bell, which was doing a great job of handling finance when it was all about cash flow. Instead, Dell focused on being competitive through speed. Today, a lot of companies are asking, How can I stop building up these inventories myself? How can I increase the velocity of my business? How can I start working better with partners?
Tom Rohrs: It’s all about leveraging relationships. In this period of change, the companies that can find a way to collaborate with their customers, employees, and suppliers to come up with a new way of doing business together are the ones that can change the game.
Roy M. Spence Jr.: There’s an old country song called “Looking for Love in All the Wrong Places.” We spend way too much time inside our own organizations. What’s going on outside our companies, where all the customers are? The American people are waiting for businesses to take the leadership position. I’m not talking about patriotic flag waving. I’m talking about a leadership position that says, We’re moving on. Our message to our clients is simple: Go out there and be more productive than you’ve ever been, and your business will come.
Morris Miller: The biggest bummer that we had as a startup was when we weren’t able to go public. So we had to figure out what we were going to do. Instead of doing layoffs, we told our employees, “There’s a hiring freeze. Everybody who’s here is going to stay here.” A year later, we have not added one person — but business has doubled. We communicated to our people the idea that the downturn may have kept us from going public, but we’re all going to be around to see a brighter day.
Kevin Krone: The business environment since September 11 has become complex for our industry and our company. The first thing you have to do is enlist your employees’ support. You tell them the truth: We are facing a huge challenge — one that we have never seen before. This is the time to rise to the occasion, perform, and win our customers back. Your customers want to carry on — and you can’t betray them.
Essay Question 2: What’s the Smart Bet for the Future?
Alan Webber: If this is a time to take advantage of opportunities, where do you double down?
Fred Chang: If you look at the places where multiple roads intersect — with customers, with partners, with suppliers — a little bit of change and chaos is always happening in the middle. That’s where your resources should go. You can begin to push an advantage that’s not only a strategic advantage but that’s also a daily operational advantage.
Ian Downes: I’ve been through three downturns in my career, and this one is different. There’s a lot more collaboration and a lot more outsourcing. Companies are concentrating on what they’re best at and jettisoning some components that have traditionally been part of their business. It takes a lot of courage for leaders to say, “I’m going to place a bet — not just exclusively within my walls, but also with friends and colleagues.”
Tom Rohrs: At Applied Materials, we’re using this downturn to go outside our traditional business model. We’re a capital-equipment company that has 40 or 50 big customers out in the world. But for the first time, in the midst of this downturn, we’re putting together a mass-media ad campaign. We have the financial wherewithal to make this bet, and we didn’t think that any of our competitors could do it.
Steve Moffitt: At Dynegy, we are using our skill in energy commodities to do broadband trading. The trading business is very different from the energy-exploration-and-production business. It’s much faster paced, for one thing. The technology changes on a 12-to-18-month cycle, not a 5-to-10-year cycle.
Kevin Krone: Look for a process that irritates your customers and automate it or offer a more convenient way to do it. Look internally at a process that requires 12 employees, automate it, and then redeploy those people to something that will make a positive contribution for customers.
Lightning Round 3: Monday-Morning Action Items
Alan Webber: We’ve gotten some great advice about what to do to get faster and be more nimble and how to put our money in the right place during a downturn. But I can only do one thing on Monday morning. What’s the one piece of advice that you would want to give me?
Sunny Vanderbeck: Most of the time in an environment like this, you already know the answers. You just don’t want to hear them from yourself. So I would advise you to take the day off, go find those answers, and come back with a resolve to do whatever it is that you need to do in your business.
Kevin Krone: Come in on Monday with a focus on your customers, both those who write checks to you and those to whom you write checks — your employees.
Katrina Roche: Start a pilot program to implement some type of collaborative technology in the area that enables you to work better with your customers and your suppliers.
Tom Rohrs: I would advise you to call up the last customer whose deal you lost and ask him what happened, why he chose somebody else, and what you could have done better.
Steve Moffitt: I would suggest killing two birds with one stone: Invest in technology that reduces your operational cost and that at the same time increases your touch with your customer.
Morris Miller: The first thing that you need to do on Monday morning is a gut check. Make sure you’ve picked a category where you can lead, and if you haven’t, then pick a new category. As the leader of that company, you have to spread that message throughout your organization.
Ian Downes: Look for the most complex tasks and try to find ways to simplify them. Usually, with complexity comes cost.
Fred Chang: If I were the technology adviser, I’d say, Now comes the hard part. Get really smart about picking the right technology. There are plenty of them out there. I’d also say, There are some very bad things out there on the Internet, and the consequences of not being secure are devastating.
Roy M. Spence Jr.: Number one, you have to focus on revenue. You can’t cut your way into prosperity. And customers are the ones who have the money. Number two, hug your employees. If you can’t give them raises or bonuses, give them time off. They’ll come back renewed and with a spirit of appreciation and commitment.
Ian Downes: I would urge people to have the courage to say, During this downturn, I have an ideal opportunity. I know that my competitors are not going to be as aggressive as I am. Use this time when companies are hibernating to gain competitive advantage. This is a wonderful time to move.
Sidebar: Fast Talk 20
In short form, here are 20 key points from Fast Talk Dallas on how to make smarter moves during tougher times.
1. Remember what Sam Walton said: Trust your customers. Go talk to them.
2. Don’t cut your culture. It won’t recover easily.
3. Ask yourself what you want to look like when the recovery comes. Then manage toward that outcome.
4. Run your company in good times the way you would in bad times. You’ll always be ready.
5. Believe in your own business. There will be an upturn.
6. Do what it takes to remain profitable. Negative numbers become an excuse for almost anything.
7. Invest in your R&D. You’ll need it.
8. Talk with your customers, employees, suppliers, and shareholders. Keep them in the loop.
9. Cut what’s noncore. Invest in what is.
10. Understand what business you’re in — emotionally. Be a beacon to your customers.
11. Look for technology-based efficiency. Use the Web to cut costs and boost productivity. (No, the Web isn’t dead.)
12. Leverage relationships.
13. Make an economic downturn a good time to reexamine your business fundamentals.
14. Demonstrate leadership to your customers. They’re looking for it from business — and too often, they don’t see it.
15. Enlist your employees’ support.
16. Look outside your own walls for good partners. Doing so can save money or make money.
17. Take a calculated shot at something that could change the game: a new marketing push or a timely acquisition.
18. Do what you already know is right — only this time, really do it.
19. Simplify something — it’s bound to help cut costs. Complexity equals expense.
20. Use this downturn as an opportunity. Make it make a difference.