Propelling yourself out of the recession

This time last year, a lot of us were writing about how to "recession-proof" a business going into the recession. Today, I think, it is appropriate to start thinking about the recovery. Early and conservative indications are that Malta will probably have come out of the recession by summer, so in my opinion it now makes sense for businesses in general to start thinking of post-recession strategies.

The latest business research shows that 17 per cent of businesses generally don't survive a recession. Conversely, 85 per cent of market leaders get dislodged during a recession and nine per cent propel themselves out of the recession as the post-recession winners. That is to say that they leap-frog their rivals and register above-average growth levels. Wouldn't you like to be part of that elite nine per cent?

A year-long study by Harvard Business School in conjunction with Kellogg School of Management about the past three global recessions (1980-1982, 1990-1991 and 2000-2002) shows that the companies which cut costs by selectively focusing on operational efficiency (i.e. cutting into fat and not muscle or tendons) and at the same time investing more on marketing spend, asset acquisitions and product innovation, on average tend to fare much better than their rivals coming out of the recession. This may sound easy, but the truth is that in 2009 most companies, unfortunately, did not do this and adopted draconian financial policies especially when managing trade payables and trade receivables. I know that "cash is king", especially in a recession, but what some businesses don't appreciate is that overly aggressive and restrictive cash flow policies can be counter-productive and negatively affect their own industry with copy-cat policies.

In my opinion, the secret lies in mastering the delicate balancing act between cutting costs selectively to survive today but at the same time investing to grow tomorrow. So yes, do improve operational efficiency so as to reduce costs but don't slash your number of employees just to meet your profit targets. Companies that rely solely on cutting the workforce have only an 11 per cent probability of being a post-recession winner.

It may sound simple, but believe me it is not. Locally, two companies perhaps fit the bill as good examples: Island Hotels and Malta International Airport. Winston Zahra Jnr recently made a very interesting statement: he claimed that the primary reason why Island Hotels went ahead with the €12m Ħal Ferħ investment, in the midst of the doom-and-gloom of the recession, was because of the "timing". How interesting that he should claim that it wasn't the price, the location or anything else but the "timing" of the investment decision.

Despite depressed markets, Malta International Airport continued throughout 2009 and up to the present day and beyond to invest in its assets (such as the €16m Business Park). These companies are able to cut costs, mainly through improved operational efficiency, not by indiscriminately slashing the head-count or the marketing budget, for instance. At the same time, however, they invest in (that is, spend more on) assets that enhance the competitive position of the business.

What I am writing may sound contradictory to some. What is the point of say squeezing one per cent of operational efficiency out of a business only for you to then go and increase marketing expenditure by three per cent or to acquire an asset worth millions of euros? If you look at it from a purely accounting (financial) perspective it makes little sense, but from a strategic point of view, looking at the medium term and taking into consideration the economic cycle, it pays to make those investments now.

My advice is, do not cut costs if there is a risk of negatively affecting the quality of your product/service because this will in turn affect customer satisfaction which will damage your brand reputation which takes years to build. You should also not let the finance department take leadership in your cost-cutting decisions because the tendency of the finance people is to make across-the-board cuts indiscriminately, which garner short-term results including higher profits even in a recession but this undermines the competitive position of the business for the recovery.

I say, invest in product innovation, marketing and branding and assets because this will pay off in the recovery. I think the Maltese tourism industry is a good example of an attempt at this: we have or we are as a country investing (public and private) in new air routes, marketing efforts abroad and our assets (such as roads, hotels, the capital city) and this I think will pay off when Malta enters the recovery and boom years. Apply the same approach to your business and you might surprise your competitors, who probably have been delivering a poorer service to customers during the recession.

Propel yourself out of this recession and be part of the elite nine per cent. Think strategically about the drivers that make your business of value to customers and invest accordingly. So if your people are a source of competitive advantage in delivering a superior customer service invest in them. Or if you are a manufacturing company take advantage of the tax credits or EU funding and invest in plant machinery or assets now. I would rather break even in 2009 and 2010 knowing that come the recovery I will be in a fit position to leap-frog industry leaders and obtain an attractive return on investment.

Mr Fenech is managing director of Fenci Consulting Ltd.

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