"A fundamentally different approach is what produces the highest performance and this needs to be heeded by companies in this economic downturn."
MARK THOMAS, STRATEGY CONSULTING, PA CONSULTING GROUP5 December 2011
PA Consulting Group’s ‘Managing Uncertainty’ survey shows how an organisation’s approach to the financial crisis drove their total shareholder return (TSR).
Companies are discovering that the conventional response to recession – battening down the hatches and waiting for business as usual to return – is a formula for failure. Most companies were too cost focused, too slow and too passive, according to a PA Consulting Group survey of over 200 business leaders. Those companies that cut costs drastically performed worse than those that adopted a moderate approach to cost cutting; many companies took 18 months to respond and they performed worse than those who acted quickly; while the minority who saw the crisis as a time to gain market share performed very strongly.
Companies that made drastic cuts to their costs did not have a higher TSR than those that took a more moderate approach – in fact the survey demonstrates that those who cut costs so extensively that they slashed staff had a 10 per cent lower TSR than those that contained or avoided staff cuts.
Most companies had the wrong overall approach to the crisis; these companies need to change their mind set now to prepare for the emerging crisis. Only a third of companies saw the 2008 financial crisis as an opportunity, but those that did had a higher TSR by 10 per cent. The survey also shows that decisions made quicker are better. Companies that made quick decisions had a TSR 13 per cent higher.
Mark Thomas, business strategy expert at PA Consulting Group, says: “Just as politicians are beginning to realise that their natural response to the financial crisis has been inadequate, many companies are discovering that the conventional response to recession guarantees that a business will lose. The reason for the failure of these conventional management strategies is that they are designed for conventional inventory-cycle recessions – and a balance-sheet recession is a completely different beast.
“The highest-performing companies took a different approach: they identified the crisis early and responded quickly. They had a moderate approach to cost reduction, and they looked beyond this to focus on the opportunities to get ahead. A fundamentally different approach is what produces the highest performance and this needs to be heeded by companies in this economic downturn.”
Losers in the last recession have been too cost focused, too slow to respond and too passive. So what should companies do in a balance-sheet recession? Four key lessons:
• avoid drastic, panic reaction cost cutting; cut costs in a focussed and measured way
• prepare ahead of time: develop contingency plans and secure financing – if possible, ‘offensive liquidity’, but at least ‘defensive liquidity’
• make sure that your business is not carrying baggage – don’t be forced to make fire sales at the lowest point of the economic cycle
• take the opportunities – acquisitive and organic – to gain share in key markets.
Notes to the editor
About the survey
PA surveyed 205 c-level and director-level representatives of companies over a range of geographies. The analysis has been produced using the survey data and also by comparing responses against total shareholder return (TSR) for listed respondents (92 in total). As TSR looks at the value the market places on a company’s stocks and shares over time, it is a good measure of medium and long-term performance. We have used data from the period 2007 to 2010 to cover the main timeline of the financial crisis.
About PA Consulting Group
PA Consulting Group is a leading management and IT consulting and technology firm. Independent and employee owned, we operate globally in more than 30 countries and transform the performance of major organisations in both the private and public sectors.
From initial idea generation and strategy development through to detailed implementation, we deliver significant and tangible results. We have outstanding technology development capability; a unique breadth of skills from strategy to performance improvement, from HR to IT; and strong expertise in communications, media and entertainment, defence, energy, financial services, government and public services, healthcare, manufacturing, transportation and logistics.