Are managers about to have their first experience in nearly a decade of managing in a recession? Opinion is still divided on whether a downturn is imminent and how deep it will be. The state of the world's stock markets is not necessarily a reliable guide. "The stock market has predicted eight out of the last five recessions," observes Jon Moynihan, chairman of PA Consulting, the largest UK-owned management consultancy.
Nevertheless, a prolonged recession would test management skills that have not been used since the early 1990s, when Europe's economy suffered in the wake of the Gulf war. The US experienced a downturn during the same period, but it was relatively mild. American managers have not had to deal with a serious recession since the early 1980s, so that many, particularly in the newer, high-technology industries, have no experience of managing through a time of prolonged economic hardship.
How would managers cope with a recession? How many people do they have left in their companies who remember the lessons of last time?
"All institutions are at risk of having short-term memories," says Mr Moynihan, whose own firm nearly went under in the early 1990s. He believes that companies where managers tend to be particularly young, such as in investment banking, might suffer from having a lack of staff with experience of a recession. "I would have thought in Investment banking we would see some accentuated turmoil," he says.
Many companies on both sides of the Atlantic reacted to shrinking profits during the early 1990s by getting rid of large numbers of staff. Middle managers were a particular target for redundancy as companies reduced the number of management layers in an attempt to sharpen corporate effectiveness. But many companies have since come to regret the loss of experienced managers with their memories of what had worked in the past and what had not.
So will companies attempt to avoid large-scale redundancies if recession bites again? Almost certainly not. If profits fall, companies will rush to cut costs and there is little likelihood staff will be spared. Employees who imagine that their organisations are now so leanly staffed that no cuts will be possible are likely to be cruelly disappointed.
William Lewis, director of the McKinsey Global Institute in Washington DC, part of the McKinsey management consulting organisation, says: "McKinsey has never met a company which couldn't reduce costs by 10 to 15 per cent."
Mr Moynihan says, however, that he hopes companies will reduce their staff numbers in a more intelligent fashion than they did last time recession struck. "The stupid way was to have-an across-the-board cut. You say to the organisation, 'Get rid of 10 percent of the people'." The staff who leave under those circumstances are often those the company can least afford to lose - the most talented employees who can most easily find jobs elsewhere.
Mr Moynihan says that companies that have instituted rigorous performance appraisal systems since the last recession will have a better idea of which employees they can afford to lose and which they need to try to keep.
Much will depend, too, on the quality of companies' data and the extent to which they understand when they are in trouble and need to take action. "Some companies take two years to realise they're in a recession."
Nor does a recession affect all companies equally. "Different companies have different kinds of recessions," Mr Moynihan says. Businesses selling commodity products and services suffer both falling volumes and vicious price competition. Companies selling luxury goods can see demand collapse. Organisations selling specialist products which other companies cannot do without often suffer the least.
But while some worry about companies' ability to cope with a downturn, McKinsey's Mr Lewis argues that modern managers have less to fear from a recession than their predecessors did. Just as no two companies suffer a recession in precisely the same way, so many have had very different experiences of the recent years of plenty. First, managers have become far more adept at dealing with change, from deregulation to globalisation to the impact of the internet. And while many companies have prospered over the past decade, others have not. Many managers have experience of hardship. "Firms go out of business all the time, even at times of buoyancy," Mr Lewis says.
Internet companies have seen their share prices plunge. Some have been forced out of business. Even large companies have suffered. Compaq, the US computer manufacturer, found its retailing strategy was inadequate to meet the demands of the internet age. DaimlerChrysler, the product of a German takeover of a US car marker, found that cross border management was far more difficult than it expected.
Managers are used to adversity and change now. This is very different from the recession of the early 1980s which caught many US managers unprepared, Mr Lewis says. "Two things happened then, especially in manufacturing. We had a very significant recession. And at about the same time, Japanese competition showed up on our doorstep fully equipped to out-compete many US manufacturers. Because of high interest rates, the dollar went very high too.
"Many US manufacturers had to face a fundamental restructuring, improving productivity or going out of business. In many industries, people went bankrupt. In the early 1980s, Germany and Japan had caught up with the US in productivity, and in some industries, such as automotive and consumer electronics, they had surpassed the US."
Mr Lewis argues many companies are now far better prepared to deal with a downturn than they were then. They should survive in better shape, even if a substantial number of their staff have to pay the price.
Copyright © Financial Times Ltd. All rights reserved.
