Even as some countries begin to lift lockdown restrictions and ease back into a new normality, the devastating numbers continue to come, be they infections, deaths or jobs lost. The gyrations in markets from country to country and from day to day illustrate the complexity of this situation. When a sustained recovery will begin is as unknowable as the virus itself.
What is clear is that leaders are going to need to continue to act now and into the future to manage the economic impact of this public health crisis. The levels of disruption have been compared to the 2008 financial crisis, but this pandemic is an altogether different beast with social distancing requirements fundamentally changing how we relate and work. Knowing how and when to act is critical, but we need to create a new blueprint for action – past approaches can’t be re-rolled out.
Organisations need to evaluate the likely impact of the crisis on the economics of their business and then enact cost-cutting tactics that protect the health of the business without diminishing capacity in a way that will hamstring recovery. These tactics can be deployed in three waves.
Scenario planning: Develop a point of view
As a result of the pandemic, two major forces are impacting business: change in demand (depth) and the length of time it will take to contain the virus (duration). The interplay between these two dynamics produces four broad scenarios.
The first step for all leaders is to develop a point of view about which scenarios are likely for their organisation as a preliminary step to prioritising cost management measures. This needs to happen in the context of publicly available health data, information on government action and economic data.
Wave one: Immediate savings
As the depth and length of the crisis has revealed itself, many leaders have already acted to protect the immediate economic health of their businesses. These moves are about one-time, near-term expense savings, including:
- Take-out tactics: short terms saving through specific and defined cuts, including cancelling events and eliminating travel.
- Timing tactics: delaying actions to soften the earnings impact of a short-term revenue decline, such as delaying hires or new product launches.
- Capturing variable expense savings: as revenues decline, variable expenses (including bonuses and incentives) correspondingly drop. Companies will have to consider how much of those savings they want to capture to keep suppliers, customers, and employees engaged
Wave two: Reduce expenses, increase efficiency
For many businesses, wave one will not be enough, particularly as the duration lengthens. Wave two tools are about reducing expenses to deliver savings within the calendar year, while increasing efficiency. These tools include:
- Optimising rewards spend: Build understanding of the value your rewards program generates and make changes to deliver what employees value most while making savings on lower-value elements.
- Auditing your operational model for redundancies: Look for opportunities to create shared service centres or centres of excellence. Acquisitions that haven’t been fully integrated often leave many opportunities for consolidation on the table.
- Tackling process efficiency: Investigate the potential for new technologies or role restructures to simplify complex and costly processes.
Wave three: Foundational restructuring
The final wave of tools are about generating long-term savings associated with fundamental changes to the business, often involving near-term cash flow declines due to the upfront investment. The success of wave three measures is predicated on absolute clarity on the organisation’s priorities and a shared commitment to achieving them. They might include:
- Rightsizing layoffs: As businesses understand the depth of the impact, they can make decisions about taking costs out of line functions e.g. sales, manufacturing, service.
- Capex cuts: Reducing spending on capital projects will be important for businesses that have been hit hard.
- Outsourcing: Companies may choose to outsource functions that aren’t part of their core brand proposition.
Cutting costs is hard on employees already depleted by the risk of the virus to their health and safety. But for the majority of businesses some costs will necessarily have to be realigned or removed. Doing so honestly and with empathy, while communicating the full context, will help maintain your employees’ engagement while positioning the organisation for recovery.
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