PLANNING IN A RECESSION

Companies need to future-proof their business as they transition from pandemic-related supply chain issues to a potential recession—and the radically different economy that may lie beyond.

BY RENE HO

ast year was a grueling year for the global economy. China’s zero-COVID strategy only eased toward the end of the year and put global supply chains under severe strain even as they struggled to recover from the damage caused by the pandemic. Russia’s invasion of Ukraine further disrupted these supply chains, an event that sent geopolitical uncertainty skyrocketing and signaled our entry into a new and potentially more threatening world.

The resulting energy crisis in Europe has presented a huge challenge to policy makers there. And while the United States has been relatively insulated from the worst effects of soaring oil and gas prices, it hasn’t avoided the worldwide bout of inflation that has moved key central banks into hawkish policy stances that are likely to continue long into 2023.

Yet despite the forbidding macroeconomic backdrop, the fundamental choices facing businesses haven’t changed: Maintain a strong balance sheet and anticipate, model, and prepare for future scenarios.

One key lesson of the last few turbulent years is that the breadth and nature of scenarios that need to be modeled have changed. A number of recent events were largely not taken into consideration by business leaders, from China’s persistent lockdowns to the war in Ukraine to a radical uptick in inflation—with COVID-19, of course, representing the “big one.” take to ride out tough times. First and foremost is prioritizing the preservation of capital on the balance sheet. There are a wide variety of strategies to achieve this.

But each one of these events has yielded lessons in how to prepare for black swan events—or indeed “gray swan” events that are predictable and unlikely, but very great in their impact.

These include some shifts to bedrock assumptions that may or may not be permanent but must be factored into any decision-making process for at least the medium term. For example, the balance of power has shifted from buyers to suppliers as long as current conditions persist. Depending on the nature of your industry, confidence in the viability of Just-in-Time inventory management has likely taken a hit as time lags between ordering and consumption lengthen. Taking a longer view, it’s clear that the global energy market is taking a different shape.

What other gray swans can we anticipate? Among the list, there could be another pandemic, one potentially of a disease even more dangerous than COVID-19. It’s also feasible that climate change could result in food shortages or rapid shifts in global population distribution.

Challenges lie ahead, however, while many businesses focus solely on the next 12 months. As we move further into a year where there is consensus among analysts that we will face a global recession, companies can adhere to five key best practices to manage tough times: Follow the recession playbook, embrace technology, prioritize sustainability, embed long-term planning into your management structure, and optimize working capital.

A key is conservatism in deploying resources: budget freezes or cuts, hiring freezes, and ensuring recent investments start to earn a return before investing in new initiatives and the streamlining of your product offering.

As you prepare for a potential reduction in demand and/ or increases in costs, it’s sensible to forecast and model scenarios for different proportions of change—20%, 40%, or even more—and build contingency plans for each one. There are leading indicators that can give some indications of what you can expect, such as numbers of leads generated, visits to your website, or number of meetings booked. It’s also wise to come up with plans for what to do in the event one of your key suppliers ceases operations. You need to model scenarios that were unthinkable in the past.

Avoid sentimentality. If individual business units are significantly underperforming as the recession proceeds, you should restructure them before any contagion can spread. And, depending on your industry, there are typically segments of any market that hold firmer in a recession than others—be aggressive in targeting them while potentially stimulating demand with discounts.

At the same time, there are financial actions you can take that should smooth your ride through any downturn. These include carefully managing cash flows, including accounts receivable and accounts payable, to the fullest extent possible while preserving key relationships. It’s wise to lock in any pending debt or equity transactions.

After a significant period of inflation, pricing is in question as we move toward a recession. Many businesses will have increased prices in response to rising supply costs, but you may find that your customers have reached their limit and higher prices could begin to dent demand. This becomes an even bigger challenge should inflation continue as the recession hits, creating an unforgiving environment of “stagflation.”

One response to this would be to adjust prices in a flexible, nondogmatic way. Instead of increasing prices across the board, use strategically targeted increases to preserve your margins while offering other incentives to your customers, for example, volume guarantees, bundled projects, or service levels on a sliding scale.

Another approach to managing your passage through a recession is to actively seek to reinforce your customers’ relationships with you, regardless of your industry. They’ll be reviewing their spending and considering alternatives: Strong customer engagement will help you impede that decision. Money you save from, for example, automating processes can be redeployed to build the kind of business intelligence that can help you identify customer segments and delineate them by vulnerability to the downturn and openness to competitors. You’ll then be able to both target them in your marketing and adjust your product offer to meet their evolving demands.

Follow the Recession Playbook

The word “recession” can intimidate, but there is a tried-and-tested set of actions that business leaders can

Finally, are there any areas of your business that are outperforming as the downturn progresses? Explore investing in them further to reinforce success. This is also the time to be open-minded. For example, are there merger or acquisi-