Is Your Business Ready for a Recession?
Preparing in advance can reduce negative impacts.
As concerns were mounting about the US subprime mortgage market and loose credit standards in 2007, Citigroup’s then-CEO Chuck Prince defended the bank's leveraged lending practice.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he told the Financial Times.
The comment would become banking lore—representing the kind of willful risk-taking that most believed wouldn't end well, even though few predicted how bad things could get. Prince's remarks also underscored a truism about business leaders: Nobody wants to talk about recessions.
The fact is we're not very good at predicting recessions, especially important details like the depth and length of downturns. And many of the triggers that cause rapid economic changes, like pandemics and war, are impossible to predict. Regardless, it’s always smart to be prepared. Historically, recessions have occurred every six years or so since the mid-20th century, so it’s a matter of when, not if the next one will occur.
Preparing for a recession is the right thing to do, both for your business and your people. By making thoughtful decisions before the economy turns, businesses can limit harm to employees, suppliers and communities – not to mention the bottom line.
In spite of this reality, many financial services companies don't have a plan for dealing with a recession, in part because they're politically sensitive and nobody wants to be the bearer of bad news. That's a shame. Preparing for a recession is the right thing to do, both for your business and your people. By making thoughtful decisions before the economy turns, businesses can limit harm to employees, suppliers and communities–not to mention the bottom line.
At this point, the question of whether we are currently in a recession is an academic one. There are certainly enough flashing warning lights to cause concern. Inflation and employment are high, the Federal Reserve is laser-focused on getting prices under control, and real US GDP shrank in the first two quarters of 2022.
Failing to plan is the same as planning to fail.
In reality, a recession could happen. And by the time an economic downturn is obvious, it can be difficult to make wise decisions.
Taking a human-centered approach to business means planning for the worst, even in good times. Decisions get harder when the proverbial music stops. When leaders scramble, they cut costs quickly in ways they may later regret. Psychologists have found that stress strongly influences decision-making, often leading us to take additional risks and act with less empathy.
Consider a recession plan your insurance policy, helping you defend against the unknown and keeping you stable, emotionally calm, and ready to lead through difficult times.
Key Considerations
When we partner with firms on recession readiness assessments, we focus on a few core themes.
- Discreetly develop a just-in-case plan. When it comes to recessions, length and severity will determine the impact on your business. That's why we recommend having a pragmatic strategy for different scenarios. What will you do if the market falls another 5% or 15%? Have you considered a 30% drop? Organizations often fail to plan for worst-case scenarios.
- Dive deep to find organizational efficiencies (but not too deep). The obvious, crucial imperative for any business in a recession is to increase cash reserves by reducing operating costs. There are other ways to increase efficiency as well. Keeping a close pulse on your customers will help you anticipate how a recession might change their habits and expectations.
- It’s also important to double down on retaining staff in key roles as well as high performers. Downturns don't last forever, and your organization will need these people to accelerate once the economy begins to improve.
- Maintain an adaptive strategy. Working through recession plans will help your organization build muscle memory for navigating the chaos of a downturn. But it's important that your planning process be flexible—organizations must be able to pull back or accelerate as appropriate.
- An iterative planning process—as opposed to one that happens on an annual basis—allows you to tweak your approach as you get new information. This is especially critical as conditions improve and it’s time to invest and grow. Research shows that companies that strike a balance between selective cost-cutting and strategic investment are most likely to come out on top following a recession.
Benefits of planning ahead
There's always a reason not to plan for a recession, whether it's sensitive internal politics or a bias for optimism. Rather than focus on these hurdles, Point B encourages companies to consider the advantages of having a recession plan.
Organizations with a strategy move quickly when conditions turn and do so more confidently because they are proactive rather than reactive.
Having made measured decisions, these companies are poised to outcompete rivals during the recovery.
Finally, they're more likely to save money, having cut costs strategically rather than through brute force. While laying off employees may seem an efficient way to increase cash reserves, it often leads to significant costs to the organization in the long run.
The Bottom Line
Regardless of what the future holds, the process of planning for a recession will sharpen your company's thinking and highlight efficiencies. And additional readiness will arm your executive team with peace of mind and an ability to adapt to the unknown.
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