Fragile days ahead as economies climb out of recession: Lessons from change report outlines key performance goals
(As originally appeared in Director Journal, February 2010)
By Jeff Charriere, Canadian Markets Leader, Ernst & Young LLP
The economic recovery will be gradual for most companies, fragile for many, and largely dependent for all on the ability to learn from past mistakes. The recession has shattered many business models, provided opportunities for some companies and accelerated changes already underway in others. Regardless of how hard a sector was hit, all companies should be building their new strategy by first assessing what they have learned.
If your board has not already done so, now is the time to work closely with management to ensure the lessons learned from this period of great change are being applied across your organization. Not all these lessons will be new, but they are taking on a new importance. Integrating them into your strategy now can make the difference between just surviving the recession and actually thriving in the upturn.
EY’s recently published report, Lessons from change, finds the most important lesson businesses can master is this ability to learn from the past. The report shares insights from conversations that more than 500 EY partners around the world have had with their international clients in the recent months.
There are three overarching themes that emerged from the report.
- First, as businesses begin to emerge from the crisis, they are realizing that it is no longer business as usual. Many assumptions have been reset and practices have been changed or are recognized as needing to change.
- Second, while cash remains important, it is no longer central. Even companies that are “cash rich” have a new focus on working capital management and getting the balance of their funding right.
- Finally, it is clear that a new business agenda is emerging. While we might be back from the brink, the economy and the market environment are not getting “back to normal.”
Lessons from change identifies eight primary performance goals that should be top of mind for directors today to help prepare their organization for the rebound and to succeed in the new economy:
1. Re-evaluate your business model. Embed innovation and constantly challenge your existing business models against the new business environment. Look at how well your strategy stood up in the downturn and consider the major changes, if any, you have made as a result. Assess whether your organization’s current strategy still fits in the new environment.
Over half of those surveyed say they are re-focusing on core competencies. And over half are also busy trying to better understand customer and segment profitability, and are proactively challenging the fit of strategy and traditional organizational structure to new business realities.
2. Optimize the flexibility of your operations. Improve the responsiveness and flexibility of your organization to drive down cost, improve efficiency and adapt more quickly to changes in the market.
Look at how quickly your organization could profitably respond to a 25 percent increase in demand or a 25 percent fall. Compare your cost base with your competition and new players from emerging markets. And make sure your management team is exploring how outsourcing, off-shoring or shared service centres can fit into your operational strategy.
3. Maximize capital availability and deployment. Reflect the continued importance of cash and constricted funding by optimizing the availability and deployment of capital for a more flexible and robust balance sheet.
4. Examine your market reach. Optimize your global market reach and product/service mix to exploit opportunities, achieve optimum returns and mitigate risk. Consider what emerging markets will be the most important to your organization in the short and long term, and how your investment plans prioritize them. Make sure you have the right information systems and experiences to assess these market opportunities.
5. Accelerate your decision-making and execution. Make and execute decisions more quickly to take advantage of shorter windows of opportunity and to respond more quickly to adverse developments.
It is important to make sure your management team understands the strategy and the increased urgency of execution. Deal windows are opening more quickly, but closing just as fast, and many established decision-making processes are not cut out for the speed. While your organization may be able to move quickly on an exceptional basis, this new speed will need to become your norm.
6. Revitalize the way you manage risk. Identify the full risk complexity of the market and develop and align a strong control framework for your business. Look at how your organization balances performance with risk, and if you have not already done so, consider embedding risk management across your global operations and acquisitions strategy. Be sure to consider how you have accommodated reputational and fraud risk in your risk framework.
7. Strengthen your management talent. Gain, retain and deploy a management team that is capable of addressing the complex market and organizational environment. If you are looking to make strategic hires, be aware of the need to act proactively on retaining your own key talent. Do not underestimate the impact of a pay freeze to de-motivate and disengage the organization’s employees.
It is also important to consider how you can best attract a diverse pool of people with different skills and perspectives at the employee, management and board levels. It is clear that diversity of thought is paramount to powering innovation — and is therefore key to fostering economic growth and long-term success. That is why diversity and inclusiveness programs have an important role to play in broadening the perspective of management and boards, and hence improving decision-making.
8. Rebuild your stakeholders’ confidence. Regain and retain stakeholder confidence through transparency and better communication on financial and non-financial performance. Question whether your reporting and communications with stakeholders are evolving in response to business changes, new regulations and market sentiments. Be sure these reporting mechanisms are effective and are regularly reviewed by external experts.
Steering your future — now is the time for management to take action
It is easy to look at the history of the past two years and identify what has failed or looks to be failing. It is much harder to identify with confidence the actions that will work in the future and certainly far too early to be identifying those practices that will be “best” in performance. The eight performance goals we have outlined can serve as a useful framework for you to set that agenda for success in your own organization.
Boards that focus on learning from the past and establishing a new agenda are most likely to succeed in today’s environment. Thriving in this challenging business climate requires flexibility, creativity and imagination — qualities that can be nurtured only by a diversity of ideas and viewpoints.