Confront Reality

During an unprecedented deep and prolonged financial crisis, business leaders must have the courage to act swiftly to deal with fiscal realities.

By Ram Charan Feb 1, 2009
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February 2009 Cover The nation’s business leaders are confronting a confusing and stark reality. Few have ever faced such calamitous circumstances. A daunting task lies before them: making sure their corporations survive and positioning their businesses for the opportunities that lie ahead after this storm subsides. Every action and decision matters. Urgency, speed and flexibility become imperatives.

Leaders are being tested for their values, authenticity and realism. They need to be tough-minded. They will have to exercise intellectual rigor and be intellectually honest about the challenges they face and whatever painful steps must be taken to keep their businesses on the right paths.

This is a time for leaders to lead. They must face immense and ambiguous problems head-on and demonstrate to others a way forward, despite the fog. They must get down to serious work. Forget about wishful thinking and cheerleading. They have to dig into the details of their businesses and the external environment. They must seek contributions from other people, but they cannot pass the buck when it comes to making hard decisions. Leaders must own these decisions, being sensitive and compassionate toward the human beings affected by them. The best decisions will reflect the need to survive in the short term while coming out better in the long term. Times of upheaval provide tremendous opportunities for companies with smart leaders to act faster and better and to gain ground against their competition.

Cash Is King

What exactly is this "new new reality"? Only a few months ago, leaders were managing their businesses for revenue growth and fatter profits. Then, the global financial system spun out of control and credit dried up. Virtually no corporation, no matter how strong, has been left untouched. All have been hugely affected by the lack of liquidity or flow of cash as the credit spigot got shut off. Even an AAA-rated company such as AIG had to be taken over by the U.S. government.

Cash is to corporations what blood supply is to bodies. Hence, during the credit crunch, cash is king. Corporate leaders have to manage their businesses with cash as their top priority. All managers, HR professionals included, must understand how managing for cash instead of revenue growth or profits affects business.

Leaders should know how much cash their companies can generate, how much can realistically be garnered from other sources and how much the companies have to pay out. And leaders in every functional area should know how their actions affect cash flow. Simple, everyday activities accumulate expenses and seriously affect companies’ chances of survival. Just about every business activity—from hiring contractors to stocking up on raw materials and office supplies—affects cash in some way.

Develop a Sharper Focus

Conserving cash and ensuring that the cash going out does not outpace cash coming in are important. But for most companies, cash constraints are not the only problems. Leaders have to sharpen the focus of their businesses. Many businesses will have to grow a lot smaller than they were only a few months ago. Their revenues will be lower because many consumers of their products and services do not have sufficient cash or credit. Many other consumers hold tight to the cash they have because they fear losing their jobs in the next round of layoffs. Announcements of job cuts occur daily.

The size and configuration of businesses must reflect the reality of sharply lower revenue. Many corporations will have to close plants, reduce product lines and cut overhead, all resulting in severe reductions in head count. Unemployment is almost certain to increase. Unpleasant as it is, this is the new new reality.

Leaders in the auto industry face this reality in spades. At press time, demand for cars had declined 35 percent from the peak in about 60 days. Chrysler, GM and Ford are closing plants for longer periods than usual, and their leaders claim that they are running out of cash. Some experts claim that one or more U.S. automakers will end up in bankruptcy, resulting in huge job losses. It is no longer certain that they will survive. Their problems will create a domino effect on suppliers, dealers and partners—almost doubling the job losses at the Big Three automakers.

Small companies cannot escape this vicious tsunami. Take, for example, a service company that has 300 employees, headed by a hands-on owner who wears many hats and depends on two big customers for 40 percent of revenue. If one of those customers closes its doors for lack of credit, the service company is deeply affected. How can the owner afford to keep all 300 employees? To survive, she has to totally reconstitute her company and lay off some employees. She will try to get other customers, but it will be difficult to succeed in this credit-short environment. As total demand for goods and services continues to decline nationwide, this owner—and many others like her—will probably end up with fewer people on the payroll for some time to come.

Leaders of smaller companies—say, with 100 employees—face an even more difficult situation. They have few people to dismiss in the first place. They, too, have to go through the trauma of revenue decline. They must keep their courage and engage employees in useful activities, perhaps spending more time with existing or potential customers, as they struggle to survive. They, as with leaders in every business, must be mindful of cash and liquidity.

The Urgency to Act

This is a time for thoughtful action. We cannot assume the worst is over. More likely, revenues will continue to decline. The global financial system has not yet fully unclogged. Business leaders should take to heart the following guidelines:

Get ahead of falling revenue. Imagine the worst-case scenario regarding cash. If that scenario comes to pass, how can the business break even? What has to happen to production capacity, payroll and overhead? Make cuts before the worst-case scenario comes to pass. Poring over statements of historical financial numbers will be of little use now.

Aggressively gather information you need to make decisions. Don’t let it slowly filter through cumbersome bureaucracy. Get timely and reliable information directly from sources, for instance, by talking to salespeople or suppliers.

Decide who should be on your team. Crises reveal people who are good at getting projects done and expose those who are indecisive or loners. Weakness in execution will be ruinous. If some of your direct reports are unable to accept current realities, frankly, you can’t depend on them. Leadership traits you admired in the past—like devising lofty plans—may be less useful now. Consider who can stay connected to the front line and drive necessary changes fast.

Reduce layers of management. Restructure as your business focus narrows and the numbers of employees, product lines and facilities shrink. Consider centralizing functions such as legal advice previously provided by separate units or geographies.

Rethink outsourcing and insourcing decisions. Outsource activities not key to the business. In doing so, leaders increase their flexibility by making fixed costs variable. But leaders of companies who rely heavily on contractors and face big layoffs of their own employees may want to go the other way, bringing some of those outsourced activities in-house.

DuPont’s Swift Action

In my book, Leadership in the Era of Economic Uncertainty (McGraw-Hill, 2008), I describe DuPont’s response to the recession. In early fall 2008, when DuPont Chairman and Chief Executive Officer Charles O. Holliday Jr. saw that an economic downturn was coming, he immediately put that reality on the table. He pulled together his top team of people to pool their thinking about how serious and long the downturn might be—and how it would affect DuPont’s business. Unmistakable signs suggested that a severe downturn was indeed setting in. For example, bookings at the hotel DuPont owns in Wilmington, Del., serving mostly business customers, had fallen sharply.

DuPont was fundamentally strong, but Holliday wanted to ensure that the company stayed ahead of the situation. Cash had to be protected, and the company would have to reduce its costs quickly, ahead of a sharp revenue decline. No one likes to close production facilities, but Holliday did not sidestep the issues of shifting production and perhaps shuttering some facilities. Those sensitive issues had to be explored.

Meanwhile, the CEO tirelessly drove the message about the need to reduce costs and conserve cash throughout the company. Some actions were taken immediately. The company released many of its outside contractors, in some cases shifting work to employees whose work was slowing.

Even as leaders planned their courses of action, Holliday questioned the pace. Conscientious leaders were promising to make changes two or three months out. Holliday realized that many of those actions had to take place right then and pushed execution into high gear.

Holliday rose to the challenge before him, as did many leaders throughout DuPont. He didn’t stay in his office or wash his hands of the challenge by delegating. He faced it head-on and drove execution throughout the company. His own confidence in grappling with the uncertain and difficult circumstances became contagious.

The Role of HR Professionals

Many of the skills and the initiative Holliday demonstrates apply to business leaders with titles other than that of CEO. A human resource leader, for example, must also be decisive and communicative. He or she must carefully examine cash use and costs in the HR department and ensure that people execute new priorities.

In addition, HR professionals have special roles to play:

Take the lead in rethinking bonuses and incentives in light of new conditions. If, for instance, employee incentives and bonuses have been based on sales growth, you may have to change that. Revenue-growth goals will be impossible now, and people will only get frustrated and demoralized. Consider instead incentives and bonuses for those employees who make a priority of generating cash and delivering desired margins. Achievable goals will have a big impact on employees’ states of mind.

Become a partner to business leaders who must re-evaluate their people. HR professionals can use their expertise to help judge who has the qualities and skills to lead now. This requires a keen, objective, constructive view of people, focusing on their God-given talents. Any hint of politics or unfounded bias will destroy your credibility. But offering your best insights into people will make you a trusted business partner.

In executing these specific steps, HR professionals will go a long way in helping their companies—and the nation—out of the recession.

The author is an advisor to chief executive officers and corporate boards. He has written 16 books, including

Leadership in the Era of Economic Uncertainty (McGraw-Hill, 2008). He is a distinguished fellow of the National Academy of Human Resources and is based in Dallas.

Buy This Book

Leadership in the Era of Economic Uncertainty


Ram Charan provides his unique perspective on seizing opportunity and preserving profit in today’s global economy. This book is available from SHRMStore.

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