INDUSTRY INSIGHTS | SUMMER 2010 EFFECTCritical Decisions Are Made Long Before a Crisis
by Rob Tracy and Chris ShimekThe last several years have been challenging for most business leaders, and many have made difficult decisions to maintain the health of their organizations. In some cases, those decisions were made proactively. The decisions were evaluated and carefully considered while the company was not under the economic stress of a recession, which allowed those leaders the flexibility to explore many well-reasoned and cohesive options.
Other organizations did not plan or respond until the company neared a crisis point. These leaders found themselves with limited options and draconian solutions that often sacrificed the long-term strategy of the company in the name of survival.
One reason some organizations are able to respond quickly to a changing business climate is that they are prepared for multiple scenarios. They accept that predicting the future is an educated guess, so they develop business plans based on a range of possible situations. A typical plan would outline how a company responds to three situations:
- Sales volumes are as expected
- Sales volumes are below expectations by 25 percent
- Sales volumes exceed goals by 25 percent
Leaders map out each scenario and include the specific actions that need to be taken. The end result of a planning process is a financial model for each situation, but the majority of the plan describes the operating decisions that turn it into reality. Each scenario examines four key areas of the business and articulates how they are impacted at each sales volume level.
Structural elements
Structural elements of a business include buildings, equipment, information systems, and land. These elements often define the capacity of a company and tend to drive many of the costs in an organization, which makes them a critical part of a planning activity.
Although they are often called fixed costs, they are not necessarily permanent—though they are difficult to change. To adjust them is painful, risky, and expensive, which leads to a natural resistance to address these areas. Because these structural elements are so closely related to costs and capacity, it’s crucial they are carefully evaluated in each scenario.
People
A people plan describes more than headcount and the associated costs; it describes the skills and competencies that will be needed. Developing growth scenarios typically involves adding key talent to the organization and is an energizing exercise. Unfortunately, creating the plan for a drop in volume is a difficult and emotionally draining process.
Again, the best time to consider a strategy for a loss in sales volume is before it is needed. A proactive plan can include many options: shorter hours, pay reductions, in-sourcing, forced vacations, voluntary layoffs, furloughs, and early retirements can all reduce the impact of slow sales volumes on the employees and their families, while still meeting the needs of the business. These tools may not be available to a company forced to operate in crisis mode.
Operating expenses
Operating expenses include a wide range of activities, including travel, training, service contracts, and supplies. When creating a plan for a sales volume shortfall, classic “belt-tightening” measures are necessary. It is typical to cut discretionary spending in order to avoid more drastic actions such as a reduction in the workforce.
A plan for unexpected growth in volume is necessary to help mitigate the tendency to overspend during good times. As the last two years have shown, the good times don’t last forever, and it’s a healthy practice to maintain strong spending discipline even when sales are strong.
Project funding and investments
As part of the annual business planning process, most companies target certain projects for investment. Those might include new product development, facility expansion or improvement, or a new process or technology. A comprehensive scenario describes how the project funding would change if events do not unfold according to the plan.
These investments are often expected to become the long-term value drivers for the company, but they also tend to consume internal resources and cash rapidly. Given the critical nature of these projects, scenarios should articulate when an investment should be accelerated, decelerated, or stopped altogether.
The difference between a business that can effectively and successfully flex, adapt, and respond in times of uncertainty and one that cannot is often the leadership. Leaders who have planned well can fall back on a pragmatic and data driven approach to managing the highly emotional issues that arise when a company is under stress. They rely on the leading indicators (daily sales, current work backlog, and/or leading economic trend data) to drive action. And they rely on a plan that was carefully considered long before it was needed.