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Dealing with the Downturn

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									    Dealing with the

      OCTOBER 2008

Dealing With The Downturn_FINAL v2.indd 1   17/10/2008 10:19:10

                                    Foreword by Alan Leaman,
                                    Chief Executive of the MCA
                                    Whether or not the economic times, in the phrase made       Management consultancies provide a rich seam
                                    famous this Summer by the Chancellor, Alistair Darling,     of knowledge, understanding and advice. Much of
                                    are “the worst they’ve been in 60 years”, it is now clear   it has been distilled in this document to create a ten-
                                    that the British economy faces a significant downturn,      point action guide. Many of our member companies
                                    with low or negative growth, rising unemployment, and       are already working with clients at the highest level
                                    a squeeze on real household incomes. At the same time,      to ensure that they can deal with the downturn and
                                    the Government’s own finances have deteriorated: its        emerge in the strongest possible shape.
                                    fiscal rules are under threat from higher borrowing and
                                    public spending plans are inevitably under enormous         One message stands out from these contributions:
                                    pressure as the deficit mounts.                             this downturn presents an unprecedented combination
                                                                                                of challenges.
                                    Recent events in the financial markets and financial
                                    services sector on both sides of the Atlantic have only     The globalisation of our economy means that
                                    added to the scale of the problems.                         there is no hiding place; there should be no retreat
                                                                                                into protectionism. Gridlock on the credit markets has
                                    Others will assess the validity of the Government’s         stifled investment and risk-taking, both key to recovery.
                                    claim that Britain is well placed amongst the leading       The complexity of supply chains and higher customer
                                    industrialised countries to weather this set of storms.     expectations requires a sophisticated approach and
                                    Many argue not.                                             careful reputation management, often difficult when
                                                                                                times are tough. Political weakness and uncertainty
                                    What we have done in Dealing with the Downturn              in the UK has created additional difficulties and is
                                    is to look at the consequences of this situation for        already leading to new demands for regulation. The
                                    those people who are running businesses or parts            use of business-friendly tax and other measures is
                                    of the public sector and who are faced with the day-        strictly limited.
                                    to-day challenges of making their organisation
                                    a success. Many of them will be experiencing a period       No-one should underestimate these challenges.
                                    of sustained economic difficulty for the first time in      Leaders of organisations are about to prove their real
                                    their working lives.                                        worth. Equally, no-one need be intimidated. Fortune,
                                                                                                in this case, will favour those who take the best advice
                                    What are the lessons of previous downturns? How is          and act upon it.
                                    this one different? Is British business and management
                                    well-equipped to respond? Is our labour market
                                    working as it should, and how can employers keep hold
                                    of their best people? What opportunities open up in
                                    a downturn for the fleet-of-foot and how can we take
                                    advantage of a recovery when it comes?

                                    These are the sorts of questions that thousands
                                    of leaders in companies and other organisations are
                                    now asking themselves. It is vital for the health of our
                                    economy and society that as many as possible of them
                                    get the answers right.


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                                                                                                           DEALING WITH THE DOWNTURN

      Executive summary
      Member firms of the Management Consultancies              1. Demonstrate leadership: Senior executives need
      Association work with more than 90 companies                 to show they are worth the investment shareholders
      in the FTSE 100. They advise and work with many              make in them by responding thoughtfully, not
      parts of central and local government. Management            precipitously, to events and staying open-minded
      consultancies understand how the economic slowdown           to new ideas and opportunity.
      and dramatic events of the last few months are having
      an impact on business and economic life in the UK –       2. Invest in planning: Organisations have to
      and what now needs to be done.                              improve their ability to plan and forecast so
                                                                  that they are better able to gauge the impact
      A credit squeeze and higher commodity prices have           of economic changes.
      triggered an unprecedented shake-out of the financial
      services sector, but their implications are more far-     3. Re-think strategy: Re-evaluating their strategy
      reaching, potentially extending to every corner of the      and business models will help ensure organisations
      economy. The ramifications of this on business will         have the resilience, not only to cope with the harsh
      be different to those of previous downturns because         conditions of the short-term economic climate, but
      organisations are more global and dependent on a            to prepare effectively for their future recovery.
      network of suppliers. They also have higher levels of
                                                                4. Focus: Decide which functions and initiatives to
      debt and have less operational fat to cut in order to
                                                                  concentrate on, and which should be outsourced
      maintain their profitability.
                                                                  or stopped altogether.
      Using the experience of our members, we have
                                                                5. Seize the opportunities: Smart organisations will
      identified ten critically important actions that
                                                                  steal a march on a struggling competitor or acquire
      managers should take. To survive, even succeed,
                                                                  assets at low prices.
      in a recession, organisations cannot rely on doing
      what they have always done:                               6. Look after customers: Consumers’ expectations do
                                                                  not change simply because they are spending less.
                                                                  Giving in to the temptation to cut quality or service
                                                                  only creates a hostage to fortune.

                                                                7. Improve productivity: Cutting costs indiscriminately
                                                                   will result only in short-term gains and may damage
                                                                   an organisation’s ability to compete in the future.

                                                               8. Look after suppliers: In today’s complex and
                                                                  interconnected business environment, organisations
                                                                  are far more dependent on their suppliers than ever
                                                                  before. Forcing them to drive down their costs is

                                                               9. Look after employees: The performance of an
                                                                  organisation typically rests on a small number of
                                                                  key people; these are just as likely to leave when
                                                                  times are bad because there will always be
                                                                  opportunities for them.

                                                               10. Don’t expect the Government to solve the problem:
                                                                  Good management, aided by an appropriate
                                                                  regulatory response, is the key to recovery.


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                                    A changing economic landscape                                  Business has changed
                                    We have seen nothing like this before. “There has              But it is not just the macro-economic picture that
                                    never been a credit crunch on this global scale,” says         has changed: business has changed too.
                                    KPMG’s Andrew Smith. “People have never been as
                                    personally indebted as they are now, and there’s been           • Globalisation: Compared to the early 1990s, big
                                    an extraordinary loss of control in the financial sector.”        business is far more global, with the result that
                                                                                                      their exposure to the economic woes of any single
                                    The last recession in the UK economy – technically,               economy is less and that falling profits in one
                                    the early 1990s – was the last in a series of classic boom        market can be offset by growth elsewhere. “I was
                                    to bust cycles. Inflation was high, as was the cost of            talking to the chief executive of a construction
                                    capital. Although today’s rate of inflation is exceeding          company and expected him to be full of doom and
                                    the Government’s targets – Ernst & Young’s ITEM Club              gloom,” says Mark Thomas at PA Consulting Group,
                                    expects inflation to peak in November, possibly around 5          “but it was quite the opposite. He’d just sent 40
                                    percent, and stay above 2 percent in 2009 – it is still low       project managers to the Gulf, where there’s an
                                    in comparison. On the other hand, headline borrowing              extraordinary amount of construction going on.”
                                    rates are not high compared to the 1990s, but banks               For this company, the fact that the UK housing
                                    are being far more discriminating about who they are              market was in difficulties was less relevant than it
                                    willing to lend to: “The rates for high risk borrowers            would have been even five years ago, because only
                                    have just exploded,” points out Ian Stewart at Deloitte.          ten percent of its profit comes from the UK. Growth
                                    “Banks’ willingness to lend has been sharply reduced              in the Middle East means that it already knows it
                                    and considerable damage has been done to their                    will exceed next year’s profit targets. “They’ve taken
                                    balance sheets; witness the demise of Lehman Brothers             advantage of global growth,” says Thomas. “Any
                                    and other long-established institutions.”                         company doing that is in a very different situation.”

                                    Lower inflation, the prospect of rising unemployment,           • Greater efficiency: Most organisations have
                                    lingering memories of the huge numbers of jobless                 already been through successive rounds of
                                    people in the early 1990s and the declining power of              cost-cutting, making it harder for them to identify
                                    the trade unions all mean that wage demands are                   “fat” this time around. At Charter Solutions, Trevor
                                    subdued, again relative to previous downturns.                    Bargh remembers working with Courtaulds when
                                    Businesses are also far more aware of the dangers                 the manufacturer was struggling in the 1970s:
                                    of creating a spiral in which rising salary costs will            “You could take out 25 percent of costs across
                                    feed through into higher prices for consumers. “The               the board. Because efficiency was so poor, it was
                                    Government has been very clear about this message,”               easy to do. Today’s businesses are already more
                                    says Hetal Mehta at Ernst & Young. “Moreover, because             efficient and their ability to cut service or quality
                                    overall profitability levels, at least outside the financial      is constrained by the expectations of consumers
                                    services sector, are comparatively high and because               which are much higher.”
                                    the price of oil is already falling, there’s less immediate
                                    pressure to offset small increases in salaries with either      • Networks of suppliers: The relentless focus on
                                    price hikes or lay-offs.”                                         efficiency means that today’s organisations are far
                                                                                                      less vertically integrated than they were in the past.
                                                                                                      Triggered initially by the recession in the early 1990s,
                                                                                                      organisations have defined and re-defined their core
      “This downturn is                                                                               business, outsourcing non-core activities as they
                                                                                                      go. That trend has, in turn, created complex supply
      very different: the                                                                             chains in almost all sectors and made organisations

      causes are different,                                                                           far more interdependent. Little has demonstrated
                                                                                                      this more clearly than the full-scale restructuring
      but so are the effects”                                                                         of the financial services sector: the recognition, for
                                                                                                      example, that giant US insurer, AIG, played a crucial
      Mark Thomas,                                                                                    role in covering other institutions’ exposure to the
                                                                                                      sub-prime crisis. “A company assessing its exposure
      PA Consulting Group                                                                             to the economic conditions can’t just think about
                                                                                                      itself,” Caroline Firstbrook at Accenture points out.
                                                                                                      “They also need to consider what would happen to
                                                                                                      them if one part of their value chain should fail.”


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        • Unrealistic asset prices: Property and financial          The final outcome, both in terms of the depth and
          instruments have been over-priced because their           longevity of a downturn, is still not clear. Annual
          valuation did not take risk into account. Thus, the       trading in the credit default swap market is worth
          sub-prime mortgages that have so decimated the            around $60 trillion, which is higher than the world’s
          balance sheets of certain banks would have been           entire GDP. “It’s going to take some time to unwind
          worth less had the probability of their owners            the economic excesses of the last few years,” argues
          defaulting been taken into account. One of the            Andrew Smith, “and that will keep economies at best
          repercussions of available, over-valued debt has          subdued for the next two years.” “When you look at
          been the extent to which businesses have relied           some of the areas that could be affected, we’ve barely
          on it, rather than other, more traditional sources        scratched the surface,” adds Mark Thomas. “No one
          of funding, for investment. “There are a lot of           knows how big this is: the amount of damage the
          businesses out there that have a high debt burden,        financial system has done to itself is unbelievable. Some
          because they’ve been using financial engineering to       investment banks – those still standing – have wiped
          create profits, which will suffer disproportionately      out their corporate profits to the extent that they won’t
          more and more quickly as a result,” says Firstbrook.      pay tax for 50 years.”

      The first of these factors – globalisation – may give
      companies a degree of breathing space and may even
      allow them to move their resources around the world,
                                                                                                    “Managers need
      ahead of the downturn. The other three, however, mean
      that organisations have less room to manoeuvre: they
                                                                                                    to exercise vision
      are more complex, leaner and more dependent on the                                            and leadership;
                                                                                                    stakeholders need
      banking sector than ever before.

      The impact on business
                                                                                                    managers to
      These factors also mean that the impact of the
      downturn is patchy. The financial services sector is
                                                                                                    earn their money”
      unquestionably the worst hit at the moment, but                                               Ian Stewart, Deloitte
      falling profits here will cut revenue to suppliers, from
      restaurants to accountants. There are implications, too,
      for any business that needs to raise money, because
      credit conditions are tight. But, even within a sector,       A proportionate response
      there are winners and losers. The more conservatively-
      run banks, less exposed to the sub-prime crisis, have         Faced with economic upheaval and working to a
      been able to acquire competitors at rock-bottom prices.       new set of business rules, how should organisations
      A resource company with a global footprint will benefit       respond? The MCA has identified ten key actions for
      from a spread of markets while a national retailer, hit       executives to enable them to deal with the downturn.
      by high fuel and distribution costs, struggles. “It’s a bi-
      polar situation,” observes Mark Thomas. “I’ve never seen
      bankers so depressed at a time when others are looking
      at strategy for growth.”

      So far, with the exception of the banking sector, the
      reaction to the economic situation has been measured.
      “There’s been a lot of pain at the macro-economic level
      and certainly at an individual level, but the impact has
      still to be felt at the mid-level for individual firms,”
      says Dr Simon Rawling at PIPC. “Some organisations
      are trying to accelerate big operational improvement
      programmes more but others continue to sit on their
      hands, waiting to see how it will affect them.”

      “In the financial services and construction sectors
      we have already seen people losing their jobs as a
      direct result of the financial crisis. But, these sectors
      apart, the axe has not yet fallen heavily across the
      economy and cost cutting has been confined to
      resolving specific problems,” agrees Ian Tinsley at
      Hay Group. “This, however, is clearly going to change
      as the turmoil in the stock-markets filters through
      to the rest of the economy.”

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                                    1. Demonstrate leadership
                                    The greater the level of uncertainty                       “The message should be, ‘don’t panic’,” argues Phil
                                    and turmoil, the more important                            Walker at Capgemini. Organisations should not over-
                                                                                               react to the media coverage: the fact that house prices
                                    it is for organisations not to                             are falling should be seen as a correction to inflated
                                    react precipitously. Slashing costs                        property prices and not necessarily as a bell-wether for
                                    indiscriminately could destroy the                         the rest of the economy, where the impact of the credit
                                    ability to compete in the long-term.                       crunch and high commodity prices has been patchy. “We
                                                                                               should reflect on what happened last time,” says Walker.
                                    Cutting prices in order to maintain                        “The world did not end; the economy did recover. The
                                    volume could leave your organisation                       trouble is that people don’t remember.”
                                    worse off when the expected increase
                                    in sales does not materialise.
                                    A survey by Pentacle in March 20081 suggested that
                                    as many as 70 percent of managers do not know how
                                    to handle a recession. The knee-jerk reaction of any
                                    organisation in crisis is to re-organise and performance
                                    will dip as a result, largely because staff become
                                    confused and de-moralised.

      5                                                                                                                              1

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                                                                                                              DEALING WITH THE DOWNTURN

      2. Invest in planning
      One of the frustrating aspects of the                      Why then do so many businesses appear to have been
      current situation is that it was, in the                   caught on the wrong foot? How many companies,
                                                                 reaping the benefit of the years of plenty, are prepared
      view of many economists and strategic
                                                                 for the lean ones? At Deloitte, Ian Stewart attributes it,
      thinkers, quite predictable.                               at least in part, to an ostrich-like approach to discussing
                                                                 the R-word: “It’s nonsense to say that you can talk your
      Tightening credit has had an inevitable impact on          way into a recession,” he argues. “The economy is weak
      house prices; higher fuel and commodity prices             because the financial system is under great pressure
      have put pressure on consumer expenditure; falling         and the price of oil has tripled, not because people are
      consumer confidence means that people are spending         talking about these things.” This points to a degree of
      less on mobile phones, holidays and cars. “The media       economic blindness: businesses have tended to focus
      presents all of this as a tremendous shock, but they’re    on operational and HR issues, and on immediate
      all logical and entirely foreseeable consequences,” says   financial metrics, rather than the wider economic
      Caroline Firstbrook. “You can see the ripples moving       environment which is now starting to affect them.
      across the economy. When people in the US started          “Understanding these issues and their potential impact
      making their mortgage payments by credit card, it is       on businesses should be a priority for companies,” says
      evidence that they are likely to default in the future,    Stewart. “Corporates have to communicate to their
      feeding lenders’ concerns about risk and making it more    stakeholders what’s happening in this volatile world
      difficult for others to get mortgages. As the housing      and how it affects them.”
      market slows down there are predictable consequences
      across the economy, from installation of telephone         The challenge extends to the way in which
      landlines, to newspaper advertising revenues.”             organisations develop their strategies: better economic
                                                                 understanding and careful planning mean they can
                                                                 anticipate challenges rather than simply react to them.
                                                                 Scenario planning has been making a comeback, partly
                                                                 as organisations try to understand the impact of higher
                                                                 fuel prices, but managers are still tempted to view
                                                                 trends as linear and isolated, not complex and inter-
                                                                 related. Conventional business planning cycles rarely
                                                                 provide managers with the opportunity to stand back
                                                                 and look at their organisation as a whole.

                                                                                                   “Organisations need
                                                                                                   to position themselves
                                                                                                   for what comes next.
                                                                                                   Innovation isn’t
                                                                                                   something you only
                                                                                                   do in an upturn: it’s
                                                                                                   not a luxury”
                                                                                                   Ian Tinsley, Hay Group


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                                    3. Re-think strategy                                          4. Focus
                                    The most dangerous thing organisations                        A truism of recessions is that the
                                    can do is stop and freeze. While knee-                        unwillingness to do anything new is
                                    jerk reactions can destroy value, it is                       matched only by the reluctance to stop
                                    equally important not to swing too far                        something in progress.
                                    in the other direction and allow events
                                                                                                  That has, in part, been driven by a failure to see the
                                    to paralyse decision-making.                                  activity of an organisation as a whole and to assess
                                                                                                  projects’ contribution on an individual basis rather
                                    A downturn should trigger some serious reflection
                                                                                                  than as part of a portfolio. “They have to balance the
                                    within organisations as they come to terms with the
                                                                                                  short-term initiatives, aimed at maintaining profits
                                    changing economic landscape. Fast-moving companies
                                                                                                  and keeping City analysts happy, with longer-term
                                    have already changed gear. Discount retailers may be
                                                                                                  investment,” argues David Bailey at Hitachi Consulting.
                                    getting ready for an influx of price-conscious shoppers,
                                                                                                  “Portfolio management also ensures they can react
                                    but it barely took the blink of an eye for Marks &
                                                                                                  quickly to changing conditions, prioritising one area
                                    Spencer to switch its advertising message to value for
                                                                                                  over another as the market gets better or worse.”
                                    money. A downturn is a good time to undertake a more
                                    radical re-think.                                             But human nature makes it hard for organisations to
                                                                                                  stop projects. Such decisions usually end up with the
                                    “There’s a real need for people to challenge their most
                                                                                                  Board where it becomes clear that every director has
                                    fundamental assumptions,” argues Mark Thomas.
                                                                                                  their own pet project which they’re reluctant to cancel
                                    “Focus is important, but if you take a fundamentalist
                                                                                                  and no one is really prepared to challenge that.
                                    approach to sticking to your knitting you’re in trouble.
                                    It can become a liability.” But persuading people             One of the outcomes of such thinking will inevitably
                                    to abandon long-cherished beliefs can be a huge               be an increase in the level of outsourcing. A survey
                                    challenge, managerially and psychologically. He argues        carried out by the MCA in the financial services sector
                                    that it is not enough simply to explain the threats.          earlier in 2008 indicated that 90 percent of companies
                                    “You have to shock them. Show them a customer who’s           had already outsourced at least some of their non-core
                                    decided to stop buying their products. Take them to           activities and that more than 40 percent expected to
                                    Dubai or China so they can see how frenetic the pace          outsource more in the future. “We’re already getting
                                    of change is there.”                                          calls from companies that think they can select an
                                                                                                  outsourcing supplier, negotiate a deal and sign a
                                    It is not just private sector organisations that need to
                                                                                                  contract in the space of seven days,” says Tim Lloyd
                                    re-think. The next couple of years are clearly going to
                                                                                                  at Alsbridge. “As with so much at the moment, it’s
                                    be difficult in the public sector as tax receipts fall and
                                                                                                  important to plan an outsourcing deal properly and
                                    the Comprehensive Spending Review starts to bite. On
                                                                                                  not treat it as a shot-gun wedding.” Offshoring will
                                    top of this, the UK Government will be going into the
                                                                                                  change, too, with inflation in India driving companies
                                    most fiercely contested election for 15 years. “Public
                                                                                                  to locations such as Vietnam, the Philippines and even
                                    sector managers, as well as their political masters, will
                                                                                                  China. Pathfinder projects in the public sector, like that
                                    be looking for more for less,” says Mark Campbell at
                                                                                                  between IBM and several local authorities in the South
                                    Mouchel. Conventional efficiency improvements will not
                                                                                                  West, look as though shared services will finally become
                                    deliver the kind of savings required. Instead, he believes,
                                                                                                  a reality here. Moreover, deal sizes are getting smaller
                                    technology and the private sector are going to play an
                                                                                                  and the economic threshold at which they are justified
                                    ever greater role in the delivery of public services. “The
                                                                                                  is falling because suppliers, having invested heavily in
                                    solutions here are going to have to be more radical:
                                                                                                  facilities, now have acres of empty desks to be filled.
                                    the debate will be around whether public sector
                                                                                                  “Over the next ten years we also expect to see more
                                    organisations can continue everything they currently do.”
                                                                                                  in the way of knowledge process outsourcing – legal
                                                                                                  services, tax and actuarial services, rather than more
                                                                                                  routine administration,” says Lloyd.

      “Speed of decision-making
      will be absolutely crucial”
      Dr Simon Rawling, PIPC


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      5. Seize the opportunities                                  7. Improve productivity rather than
                                                                  just cut costs
      If an organisation is prepared to act,
      the opportunities can be significant.                       Another problem is, as Andrew Smith
      Downturns are famously the best times                       points out, that productivity always
      for buying assets at knock-down prices;                     drops in a downturn: “Organisations will
      good people can be recruited at more                        be achieving less with the same workers,
      reasonable salary levels.                                   not because their staff are performing
                                                                  badly, but because demand is weaker.”
      “For organisations that are in a strong position, now is
      the time for big acquisitions,” says Caroline Firstbrook.   Forthcoming research by the MCA indicates that
      “There’s a lot of room in many industries for further       most organisations have mostly relied on installing
      consolidation and economies of scale.” Such deals will      new IT systems and re-engineering processes to
      not be confined to failing organisations: downturns         improve productivity, but that this may not be enough.
      mean that organisations are far more open-minded            Behavioural change will produce at least as many
      when it comes to mergers and acquisitions than they         benefits as technology, even though it has typically
      would be in an upturn. “There are a lot of cash-rich        received only a third of the investment. Trinity
      companies out there with a once-in-a-generation             Horne’s Brendan Cahill explains: “You can have
      opportunity to do deals,” agrees Ian Stewart.               excellent systems and processes, but if you get
                                                                  the people bit wrong, you will not optimise the
                                                                  improvement potential available to you, and even
                                                                  if you do, it will not be sustained. The key to sustained
      6. Look after customers                                     productivity improvement is the behaviour of the
                                                                  first line managers and leadership.”
      One thing that does not change in
      a downturn is consumer expectations:
      someone spending less in a supermarket
      will still not want to queue at the
      checkout. Maintaining, even increasing,
      standards of customer service will
      be crucial.
      Rather than fighting to increase share in a shrinking
      market, organisations would do better to focus on
      keeping the customers they have. “You need to decide
      who your most important customers are and look after
      them, because they’ll look after you,” says Trevor Bargh.

      Two things make this harder than it might otherwise
      be. First, marketing has always been the first casualty
      of a downturn. Despite all the efforts to measure its
      effectiveness, its rate of return is still questioned by
      many organisations. Unlike sales, it does not obviously
      bring money in through the door. Second, it is easy
      to be paralysed by the waves of bad news in a
      downturn. “Don’t listen to the Jeremiahs,” advises
      Bargh. “You need people who’ll stay focused on the
      external marketplace, who can come up with innovative
      new ideas, and who’ll look at ways to increase value
      rather than compromise on price. Every business
      depends on one thing: its customers.”


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                                    8. Look after suppliers                                          “You have to focus on what
                                    One consequence of increased                                     really matters, and key will
                                    outsourcing is that most organisations                           be customer retention”
                                    now rely on a far more complex supply
                                    chain than would have been the case in                           Phil Walker, Capgemini
                                    the early 1990s. Just as convoys can only
                                    move at the speed of the slowest ship,                        9. Look after employees
                                    the efficiency of organisations within
                                    any given supply chain is dependent                           One of the biggest risks in any downturn
                                    on each other.                                                is that organisations summarily axe
                                                                                                  functions and departments, often with
                                    Forcing suppliers to cut costs can have a negative
                                    impact on quality and, ultimately, sales and customer
                                                                                                  little regard to the quality of people they
                                    retention; it may even put suppliers in a stronger            may be losing or the long-term messages
                                    competitive position in the upturn, allowing them             they are sending to the labour market.
                                    to take some of their customers’ business.
                                                                                                  “Attracting that talent back will be harder when the
                                    Dennis Geary at EC Harris contrasts the situation of the      market picks up and you’ll pay the price as you won’t
                                    construction industry with the utilities, telecoms and        be able to respond quickly enough to take advantage
                                    transportation sectors. “Where property companies             of the upturn,” says Mark Goodridge.
                                    can simply stop development on building schemes,
                                    those other sectors have to keep investment running,          “Clearly, organisations face a huge challenge at
                                    so they’ll have to make their capital expenditure more        the moment in terms of higher input costs,” says
                                    efficient and save costs in operational areas. Because        Hetal Mehta, “and the temptation is to make people
                                    internal cost-cutting has been done to death, they’re         redundant because it increases productivity. But they’ll
                                    turning to their supply chains, but there’s a limit to how    only have to re-hire when the economy picks up. With
                                    far you can push your suppliers, especially when many         profit levels still comparatively high, businesses would
                                    are also grappling with higher input costs. In most cases     do better to bear the rising costs for a while. There’s
                                    confrontation doesn’t work anymore; working together          only so much profit protection you can do.”
                                    to achieve mutual gains does”.
                                                                                                  Moreover, rather than focusing on who to let go,
                                    A better approach is to use the downturn as an                organisations should start with identifying who they
                                    opportunity to increase market share by improving             need to keep. It is a myth that your best employees
                                    quality and service. “Last year’s necessities will be next    will stay with you during a downturn. Recent research2
                                    year’s luxury items,” says John Forrester at Oakland          suggests that up to a quarter of employees do not
                                    Consulting, “so you can’t afford poor quality regardless      feel any deep-seated loyalty or commitment to their
                                    of price or volume of sales”. The key to success here         employers. Put that together with the fact that a third
                                    will be to take control of your supply chain. “Many           of companies have said they are freezing or severely
                                    companies, especially those relying on suppliers in           limiting salary increases, and the probability that
                                    Asia, don’t have a good overview of quality, especially       good people will walk increases significantly.
                                    in fragmented supply chains,” he says. Having good
                                                                                                  “Because we don’t know how long this downturn will
                                    visibility will be critical. That means carrying out better
                                                                                                  last, organisations are going to have to do some hard
                                    due diligence of prospective suppliers as well
                                                                                                  thinking about how to survive and emerge in as good
                                    as working with existing ones to improve quality
                                                                                                  a shape as possible,” says Ian Tinsley. When times are
                                    rather than trying to whittle down their prices.
                                                                                                  good, organisations tend to be kept afloat by a rising
                                    The imperative here will be to move away from the             tide of demand and profits. They are not aware of the
                                    antagonism that still characterises many supplier-            extent to which their success is dependent on a small
                                    customer relationships. “There’s no point hammering           number of excellent people and it is only when that tide
                                    suppliers on prices when the cost of their raw materials      starts to go out and they find themselves beached, that
                                    is increasing,” says Chris Wakerley at Boxwood. “The          they realise their best people have left. Tinsley advises
                                    question instead should be how they can engineer              starting now on the process of identifying the best
                                    an end-to-end value chain in which every participant          people, understanding what engages and motivates
                                    works together to keep costs low and quality high.”           them and ensuring that, during the downturn, they
                                    Organisations assume that one size fits all when it           are not alienated. But the key, he believes, is innovation:
                                    comes to suppliers but building an effective yet efficient    “You have to allow these people to be creative, to task
                                    supply chain depends as much on the way in which the          them with spotting the opportunities and to develop
                                    buying organisation changes as its suppliers. “You have       new propositions and markets.”
                                    to treat them as partners,” he says. “It’s hard work, but
                                    the financial benefits are enormous.”

      9                                                                                                                2
                                                                                                                  and CIPD

Dealing With The Downturn_FINAL v2.indd 9                                                                                                                    17/10/2008 10:19:14
                                                                                                                     DEALING WITH THE DOWNTURN

          10. Don’t expect the Government
          to solve the problem

          The differing response of the US
          Government to AIG and Lehman Brothers,
          mirrored by Northern Rock and HBOS
          in the UK, has shown that politicians
          are primarily prepared to act when the
          interests of ordinary citizens are at stake.
          Elsewhere, investors are being left to bear
          the brunt of corporate failure.
          In macro-economic terms, the hands of the UK                 But, if the opportunities for the Government to help are
          Government are substantially tied. It could step in          limited, they definitely have the ability to do great harm.
          with measures that relax pressure on the housing
          market and adjust interest rates a small amount, in          There is, now, a real danger that the current situation
          order to maintain levels of disposable income and            will lead to calls for greater regulation, with higher costs
          demand which will, in turn, help to keep people in work.     as a result. Past economic crises have almost always
          However, it would have to break its own, self-imposed        been followed by increased regulation. Politicians want
          fiscal targets to do this in the run-up to what promises     to appear proactive and responsive, and regulation
          to be the most tightly fought election in a decade.          has been viewed as tangible evidence of this. The
          Politicians will also want to demonstrate that interest      problem is ensuring that, in the heat of the moment,
          rates can be lowered without triggering a return to the      the regulatory response is both appropriate and
          irresponsible behaviour by financial institutions which      proportionate. “We could,” warns Ian Stewart, “end up
          contributed to the current turmoil. “If you take the view    with banks that look more like utilities if governments
          that low interest rates have given rise to a series of       intervene too much.” Equally, an over-extended Treasury
          bubbles, of which the housing crisis is simply the latest,   could soon be looking to impose significant increases
          then you won’t lower them, at least in the short-term,”      in taxation, which could quickly dampen any recovery.
          argues Andrew Smith.
                                                                       The picture is different at the micro-economic level.
          Moreover, changing interest rates has no material            The accumulated weight of regulation often makes
          impact when banks are not prepared to lend: a                it hard for UK companies to compete. “We have the
          capitalist system requires a low-cost credit mechanism       longest tax code in the developed world,” Ian Tinsley
          and, if you end up regulating the banking system so          points out, “and the burden of regulation is far too
          that the banks are not as imaginative or flexible, then      heavy in many areas.” The Government must act
          you raise the cost of credit.                                to ensure that regulation is always proportionate,
                                                                       employment markets are flexible and that there is no
          The authorities will, however, need to act effectively       retreat into protectionism. This will be an enormously
          when they can to ensure that the banking sector is           difficult trick for governments to pull off, particularly
          able to survive the worst of the current crisis and that     when they are already weakened by the political and
          the economy can respond as and when conditions ease          economic situation at home.
          in the capital markets. It will be important for policy-
          makers to keep an open mind at that point about the
          role of fiscal and monetary stimulus and be prepared
          to take necessary steps.

D                                                                                                                                              10

    Dealing With The Downturn_FINAL v2.indd 10                                                                                         17/10/2008 10:19:14
      Tom Abram                              Tim Lloyd
      Director                               Managing Partner
      Atkins Management Consultants          Alsbridge   

      David Bailey                           Hetal Mehta
      Managing Vice President                Economic Consultant
      Hitachi Consulting                     Ernst & Young
                                             Dr Simon Rawling
      Trevor Bargh                           Group Managing Director
      Managing Director                      PIPC
      Charter Solutions            
                                             Andrew Smith
      Brendan Cahill                         Chief Economist
      Chief Executive                        KPMG
      Trinity Horne                
                                             Ian Stewart
      Mark Campbell                          Director, Research
      Managing Director                      Deloitte
                                             Ian Tinsley
      Caroline Firstbrook                    Director
      Managing Director, Strategy EALA       Hay Group
                                             Mark Thomas
      John Forrester                         Head of Strategy Practice
      Executive Director                     PA Consulting Group
      Oakland Consulting           
                                             Chris Wakerley MBE
      Dennis Geary                           Managing Director
      Partner                                Boxwood
      EC Harris                    
                                             Phil Walker
      Mark Goodridge                         Vice President
      Chief Executive                        Capgemini
      ER Consultants               

      Management Consultancies Association

      60 Trafalgar Square
      WC2N 5DS

      Tel: +44 (0) 20 7321 3990

Dealing With The Downturn_FINAL v2.indd 11                                     17/10/2008 10:19:14

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