Every company cuts costs during a recession but only some companies
actually improve their competitive position. Forty-eight percent of the
companies who cut expenses across the board during the last major
recession either lost ground or remained an also-ran, according to a new
research report by Diamond Management & Technology Consultants, Inc.
(NASDAQ: DTPI). However, more than half of the companies Diamond
examined actually increased gross margins during the recession year of
2001, and by the end of the recession had improved margins by an average
of 20 percent.
“Don’t waste a
crisis,” said Adam Gutstein, Diamond’s
President and CEO. “Staying the course in
times of uncertainty may seem like a safe option. But in fact, honestly
assessing your company’s performance during
the last recession and building a roadmap to realize value from
cost-cutting and investments during this downturn are the keys to
emerging from a recession as a winner.”
In a new report, “Don’t
Waste a Crisis: Lessons from the Last Recession,”
Diamond reports on its analysis of 400 companies with annual revenue of
more than $100 million and their performance before, during, and after
the recession of 2001. Performance was measured on a variety of
financial indicators, including return on equity, return on invested
capital, and EBITDA1 as a percentage of
revenue. Then the consulting firm analyzed each company’s
investment and expenditure patterns over that same period.
“Our research reveals that at the very time
when leaders are tempted to shorten their time horizon and make
arbitrary across-the-board cuts, superior performers dig into the data
about their company performance and outsmart the competition,”
said John Sviokla, Diamond’s Managing Partner
of Innovation and Research. “Everyone cuts
costs, but doing so in a way that improves the design and performance of
the business separates the winners from losers.”
Diamond found that companies fall into one of four categories, based on
how they enter and how they emerge from an economic downturn. “Stalwarts”
are consistently high performers, ranked within the top quartile among
their industry peers before and after a recession. “Low
idlers” did not show any significant
difference in performance regardless of economic conditions.
Two other categories of companies experience significant swings of 10
percent or more when comparing their financial performance relative to
their industry peers. “Disappointed Stars”
suffer worse performance when a recession turns. However, companies
identified as “Opportunists”
rebound from a recession and improve their relative competitive position.
The financial performance of four in ten of the companies analyzed moved
up or down in the period from 1998 through the post-recession period of
2003. In that time Stalwarts and Opportunists created more than $350
billion in market value. Low Idlers and Disappointed Stars destroyed
over $200 billion.
“Our research shows that tough economic times
mark a turning point for many companies,”
said Diamond partner Paul Blase. “Strong
performance before a recession does not guarantee a higher tendency for
success once the economy recovers. But a recession, as painful as it may
be, is often an opportunity for growth and improved performance at
companies willing to invest carefully.”
Recent examples in the current downturn support that opinion. Diamond
helped a leading credit card company rethink their approach to customer
service, lowering costs and increasing customer satisfaction by
improving customer self-service capabilities. At a large insurance
broker that was planning an across-the-board cut of 10% on its
technology budget, Diamond’s analysis
uncovered opportunities for even greater savings by standardizing
processes across its new business development group. At the same time,
the company increased its speed in setting up new businesses.
Having helped companies in many industries, Diamond has identified seven
lessons to thrive in a downturn, while improving the fundamental design
of the business.
1. Cut the right costs by getting at the root cause of expenses–
Firms that performed more thoughtful reviews created more value. For
example, a large HMO conducted a root cause analysis of the economics of
customer transactions and interactions. Rather than across-the-board
cuts that would have decreased customer service, the HMO introduced
call-deflection tactics that generated $21 million in annual savings
while keeping customer satisfaction high.
2. Automate, Automate, Automate– For
leading competitors the cost-cutting mandate during a recession is an
opportunity to take advantage of the rapid decrease in the cost of
information technology. Southern Company, the huge, Atlanta-based
utility, installed an automatic meter-reading system in 2008, yielding
both cost savings and the opportunity to improve its business design by
providing meaningful data about power usage.
3.Use Vendors to Create Lower, Variable Costs –Companies that nurture their in-house core competencies and
carefully offload other functions to vendors often reduce near-terms
costs. Furthermore, adding more variable costs to the design of the
business gives management more freedom to respond to shifting economic
conditions.
4.Identify the Customers to Grow On –
Unprofitable and highly transactional customer relationships should be
reassessed during a recession. Singapore Airlines remained profitable
when East Asia suffered from a currency crisis in 1997 by cutting back
on short-haul routes and investing $300 million to cater to business and
first-class travelers.
5.Optimize the Marketing Mix –As
every advertising agency knows, cutting the marketing budget is typical
in a downturn. Leading companies analyze all their customer channels—advertising,
the web, phone-based customer service, face-to-face—to
match the optimal channel to the optimal interaction. For example, an
investor services company has invested in a new Web capability that
allows brokerage firms to host their own investor chat rooms and
validate how many shares of stock a chat room participant has in a given
security. By building a social media channel for its clients, this
company is looking to increase financial transactions with minimal costs.
6.Invest When Others Can’t –Stalwart companies keep investing in R&D when times are tough, the
Diamond research revealed. Gillette, for example, launched its Sensor
brand of shaving products in mid-recession in the early 1990’s
and by 1997, 49 percent of Gillette’s sales
came from new products introduced in the previous five years. Intel
invested 14 percent of sales (a whopping 174 percent of 2001 profits)
during the 2001 recession on production innovations to produce faster,
cheaper, smaller computer chips. Intel then launched new products months
ahead of schedule and reported its highest growth rate since 1996.
7.Focus on Your Core –Across-the-board
investments don’t work any better than
across-the-board cuts during a recession. Leaders succeed by focusing
new investments in core strengths or developing their next core
strength. During the 2001 recession Microsoft bet on the launch of one
product: the Xbox game console. One of the most successful launches in
videogame history, Microsoft sold 1.5 million Xboxes in the first two
months.
“Managing risks in times of uncertainty is
paramount,” said Gutstein. “That’s
why it’s important for management to ask hard
questions. How did we perform during the last recession? How well
prepared are we this time? Did we learn the right lessons? And have we
done the analysis and plotted the course to emerge stronger this time?
“Leaders that follow these principles and
execute a structured plan can proceed with confidence and emerge
stronger when the market turns.”
About Diamond
Diamond (NASDAQ: DTPI) is a management and technology consulting firm.
Recognizing that information and technology shape market dynamics,
Diamond’s small teams of experts work across
functional and organizational boundaries to develop new strategies,
improve operations, and deliver results. Since the greatest value in a
strategy, and its highest risk, resides in its implementation, Diamond
also provides proven execution capabilities. We deliver three critical
elements to every project: fact-based objectivity, spirited
collaboration, and sustainable results. To learn more visit www.diamondconsultants.com.
1 EBITDA: Earnings Before Interest, Taxes,
Depreciation, and Amortization
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