15 management decisions to avoid in a recession

From crippling cost cuts to ill-considered discounting, Marc Barber speaks to CEOs and entrepreneurs to find out what you should not be doing in uncertain times.

  1. Putting your head in the sand
    ‘The biggest mistake a business can make at the moment is to wait and see what will happen,’ says Michael Liebow, CEO of mobile software company Dexterra. Liebow joined the US-based company in June and has spearheaded fundamental changes. ‘We’re managing down our burn rate,’ he says, noting that cuts have been made to staff and projects put on hold that aren’t cash generative. Despite the cuts, the company has recently closed a $21.5 million (£14.5 million) funding round from backers that include New Enterprise Associates, Motorola Ventures and Intel Capital. ‘It gives us financial firepower to increase market share,’ says Liebow. ‘What you don’t want to do is hunker down and try to ride the storm out. Clearly, there are opportunities, and our investors felt the market we’re in could shake out and they want to take advantage of that.’
  2. Panicking
    A more concerted effort to sell shouldn’t be confused with a panicky, haphazard approach to marketing. Darren Evans, creative director of design agency The Engine Room, cautions against ‘throwing out adverts and just sending out direct mail that has no real thought or purpose – it needs to be strategic and targeted’. So if you have a product or service that saves customers money, now is a good time to crank up the marketing. Josh Bottomley, managing director of information specialist LexisNexis, says the firm has been pushing services that have tangible cost benefits for clients in the legal, tax and accountancy professions. He gives the example of one piece of risk management software that reduced a law firm’s professional indemnity premium by £100,000. ‘Innovation is the key during a downturn,’ he says.
  3. Being too pessimistic
    Hilary Devey, managing director of pallet distribution network Pall-Ex, admits that she has never seen market conditions like this in the 13 years since she set up the company. ‘I first saw the recession kicking in during August. The company was about 15 per cent down on where we were last year.’ She’s making some tough calls. That means evaluating whether staff need to be replaced when they leave of their own accord, integrating roles and putting certain projects on hold. Devey is confident that the company will ‘weather the storm’ and notes that the recession ‘could end up being a positive’. She notes that, given the falling value of property, it’s a good time to acquire land and invest in the future. ‘If you have a little bit of creative thinking, then there are opportunities to be had. Reducing staffing levels isn’t always the answer. You’ve got to sell and market more and keep the right people for the business.’
  4. Ignoring your IP
    Intellectual property (IP) is increasingly seen as an asset class. In fact, in Germany IP now has to be put on the balance sheet, and you can be sure that the rest of Europe will follow suit. Andrew Watson, co-founder of intellectual property specialist ipVA, comments that European companies are generally poor at appreciating the value of IP in relation to their US counterparts. ‘People are failing to actively manage their patent portfolio compared with other economies,’ he says. ‘They just don’t see IP as a business asset.’ Not factoring in the intangibles of a business could undermine the company’s market value should the time come to sell up. Intellectual property needs to be seen as a tool to generate value, says Watson, as opposed to a purely defensive play.
  5. Missing out
    A recession will lead to a boom for the more predatory businesses out there. Professional services firm Begbies Traynor derives three-quarters of its business from insolvency administration and is expecting to feast during the economic famine. ‘Now is our time in the economic cycle, and it should last for five years,’ says executive chairman Ric Traynor. ‘It has been quiet for some time and we have had to grow by acquisition.’ Now, with insolvencies returning to levels not seen since the mid-1990s, the firm hopes ‘to grow by 15 to 20 per cent a year organically’.
  6. Dismissing growth capital
    There is finance out there for companies, although the terms and conditions have changed drastically compared with six months ago. Ken Woffenden, head of corporate services at law firm Stevens & Bolton, says, ‘Banks are still talking to customers, but when it comes to decision time and it has to go to the credit committee, the terms are tough. ‘There’s more security and collateral and much higher charges. That hurts, for example, if someone is thinking about making an acquisition. I think there is tension within the banks. People on the ground want to do business and lend, but they are being constrained from on high.’ Rose Lewis, a partner at consultancy Pembridge Partners, makes a similar point. She also notes that the regional development agencies are actively seeking to invest and that business angels are once again looking for opportunities. Curiously, she says the government-led bailout of the banks and the onset of a global recession seemed to spark investment activity. ‘I’m not suggesting there’s a hive of activity,’ she comments. ‘But after the bailout there was some movement, and I think that’s because the uncertainty, to a degree, was gone. We now know what the situation is and what to expect.’
  7. Sticking to the 9 to 5
    The cynics among you may be naturally suspicious of letting employees work from home. ‘A lot of owner-managers at smaller companies like to have that comfort factor of seeing employees on site. But if you look at medium-sized organisations, they’re much more in favour of [home working],’ says Robert Epstein, head of small business at Microsoft. As companies of all sizes seek to reduce overheads, not allowing employees to work from home might be a mistake. Epstein notes that at Microsoft’s headquarters in Reading, a new building on its campus can accommodate over 800 people, but far more than that number work there thanks to a hot-desking policy. ‘We have lockers for staff to keep their personal belongings safe but everyone shares desks on a shift basis. It’s extremely cost effective.’
  8. Having too many managers
    An excess of managers is bad for any organisation. Clive Punter, international CEO of transport advertising company CBS Outdoor, is set to relaunch the business internally at the end of January 2009. ‘We need a more straightforward organisation,’ says Punter, who took the lead role 18 months ago. ‘I now have five leaders, including myself, as a central team working with our country leaders, who now report straight to me. I’ve simplified the structure and reporting lines.’ Punter says that when you change an organisation, there is a natural process whereby certain employees decide that their careers lie elsewhere. ‘When you start as a CEO, it soon becomes apparent who is like-minded. I am a great believer that, while you want people with real ability, it’s even better when there is chemistry and rapport too. You have to be on the same wavelength as your management team.’
  9. Exiting for a cheap price
    If you want a true indication of what’s happening in the economy, then follow the sales figures for champagne. Majestic Wine recently said that bubbly sales were down by 6.4 per cent, a sure sign that corporate deals are on the wane. For entrepreneurs eager to sell their enterprise, it’s a case of having to be patient. ‘Unless you’re desperate to get out or are genuinely satisfied with an offer, you should hold off on a exit,’ says Stevens & Bolton’s Woffenden.
  10. Not hunting for bargains
    By equal measure, don’t shy away from buying a business if the opportunity is there for the taking. ‘If you’re looking to acquire, have the confidence and courage to go ahead and do it, as there are bargains around and good businesses for sale,’ says Woffenden. ‘You may regret it if you don’t, as at some point the recession will end and prices will start going up again. There will be a lot of people cursing that they didn’t take advantage of the prices. The trick is not to overpay and hold your nerve.’
  11. Failing to communicate
    When a company hits a sticky patch, it’s easy for the problem to be blown out of all proportion by gossiping staff. The answer is to be open and explain what’s going on with an appropriate degree of honesty. Pall-Ex’s Devey says it’s ‘a process of educating people that we are in a recession’. She has set up forums where the issues have been talked through, and she’s also asked the department managers each to come up with a way to save £500. ‘I’ll give them a bonus of £20 or whatever if they make that saving. The reason I’ve done it is to make them aware that we are watching costs and that times are hard.’ Externally as well, communication needs to be handled with care, especially when cuts are made. Dexterra’s Liebow says that redundancies were made days after the $21.5 million fundraising was announced. ‘In this day and age, people publicise very quickly that you’re cutting. Your employees will talk about what’s happened and your competitors will bring your stability into question.’ By combining the announcement and the cuts, Liebow says that they ‘managed both the external image and the internal reality of the business’.

  12. Neglecting existing customers
    Selling harder doesn’t necessarily mean generating new sales. The Engine Room’s Evans says that now is the time to ‘talk to customers about why they really use you. In times of recession, you will always get people who stop using you for whatever reason, but you will keep a core.’ Peter Stokes, chief executive of STG Aerospace, which makes the luminous safety strips found on aeroplanes, says, ‘Small companies are rarely going to be as successful trying to do the same things as large companies. They have to find niches in which they can maximise sales and profits and minimise competition.’ To this end, STG has a comprehensive set of patents that have been challenged by some large airlines and successfully defended, and it invests heavily in research and development (R&D) to maintain its unique market position. The company, which is an admirably light operation, with 14 staff in the UK and four in the US, spends around 20 to 25 per cent of its £5 million annual turnover on R&D. It also outsources a lot of services, such as marketing, and uses contractors on a project-by-project basis. Stokes says his sales team are in constant communication with the airlines to find out what they need. ‘All of our sales are based on saving people money,’ he says.
  13. Staying the same
    Even mighty corporates like Microsoft are adjusting strategy to take market conditions into account. Head of small business Epstein says that, rather than promoting the latest versions of products, the emphasis has shifted to helping customers get the most out of what they have already purchased.
  14. Assuming your brand is perfect
    Take a moment to evaluate how customers perceive your business. Jamie Knivett, owner of organic food supplier Creative Nature, says, ‘Over the past couple of months, things have definitely got tighter. Like everyone else, we’ve been affected by the slowdown.’ Creative’s products can be found on the shelves of nearly 500 health food shops, as well as the likes of Waitrose and Tesco. As sales diminished, Knivett decided to build up the company’s brand. ‘If people don’t understand the reasons why our products are more expensive, they will buy other ones at a third of the price. ‘Our tactics have involved doing lots of public relations to push people onto the website, so they realise we are still here. We’ve also been doing things like partnering with magazines to promote our products.’ At The Engine Room, Evans says they have restructured how they package their services so the benefits of using a design agency are more tangible. ‘We now refer to specific products that we offer,’ he says. ‘This allows people to understand exactly what they’re buying.’
  15. Cutting prices
    In theory, you may be able to grow sales by lowering your fees. That is the beginning of the end for some businesses as the value attached to a product or service diminishes.
    Jennifer Irvine, founder of weight-loss food delivery company The Pure Package, has kept a close watch on finances and bravely opted to go in the other direction. ‘We increased prices six months ago to reflect the cost of ingredients going up, and managed to improve our cash position by getting advance orders from clients.’ Irvine highlights this as an important factor in retaining a healthy market share, particularly as one of her competitors closed down recently due to debt problems. It helps that she operates in an exclusive niche: ‘We’ve managed to continue to do well in our sales because we have a broad base of clients, such as models and celebrities, who aren’t all necessarily feeling the pinch. ‘I believe that by providing a really good service with the best ingredients we’ve managed to retain our clients. Costs have been cut in other ways, for example by sending out newsletters via email instead of by post.’

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.