There is currently a 98% chance of a global recession, according to a probability model run by Ned Davis Research.
Many of us are familiar with the popular measure that is often used to determine whether the US is considered to be in a recession.
If GDP, the value of all goods and services produced during a specific period, falls for two consecutive quarters. That’s the case for the US this year — GDP dropped by 1.6% in the first quarter of 2022 and 0.9% in the second quarter, according to the advance estimate by the Bureau of Economic Analysis.
Even though we have signals that we’re in a recession, as we write this post, the National Bureau of Economic Research has not yet called it a recession by providing an official start date. But whether we can call this period a recession or not, the cost of borrowing money has increased, and layoffs are on the rise. For many, this means greater budget scrutiny, smarter decisions and belt-tightening.
In down cycles, CXOs refer to scenario analyses in place for broad economic changes. This enables them to take proactive and swift action. Managing cash is critical to surviving and potentially thriving. There are many ways to achieve this goal and each company will have different priorities. The focus of this article is to provide an approach for making informed budget decisions when so much is at stake.
4 Key Categories to Consider When Making Budget Cuts
We’ve experienced four downturns with customers. We’ve found that:
- Providing some parameters, e.g., within which percentage range their budget needs to be trimmed and the anticipated future state post-recession, then
- Asking functional/department leaders to approach budget scrutiny from the perspective of those parameters and four categories, provides a good way for them to recommend for your approval, which budget cuts will, or will not, achieve cash management goals and which line items are too risky to cut in order to thrive when the economy starts its inevitable upward cycle.
In this approach, your functional/department leaders would review every line item in their budget and then decide into which of these four categories an expenditure resides:
Keep the lights on.
- These are systems and processes the organization needs to operate to remain in business. These are akin to food and shelter. You might be able to make some adjustments such as where you buy groceries or how often or where you eat out and whether you try to stay in your current home or find a more affordable option, but you cannot do without.
- The same holds true for businesses, if competitors see lights out, they will exploit it fully to their advantage. A keep the lights on example is the company website. If you’re going to stay in business, you need to keep it up and running. Websites require infrastructure (such as hosting), technology (such as security), content, and regular content updates and management decisions. You cannot do without it, and as such, it needs to be funded. The way to decide if a line item goes into this bucket is to understand what would happen if you stopped paying for it. If the line item is deleted and life would pretty much be business as usual, the line item does not belong in this category.
Defend customer and/or market share.
- Customer-centric organizations are thinking about what the economic conditions are going to mean to their customers. Like you, your customers are revisiting their priorities and and making decisions on reducing their spending. You may not be able to afford to defend every customer and segment. Protecting share and retaining customers will require you to know which customers are loyal and valuable in terms of purchase frequency, cost to serve, referrals, etc. and continue to fund these.
- Keep in mind that customer loyalty becomes fragile in a downturn. If the loss of a customer or segment will put you underwater, then the budget to retain this customer should go into this bucket. Make sure you have the resources and funds to cover hard costs associated with your product and services as well as soft costs associated with customer experience and service. Customer-centricity should be pervasive throughout the company, so this tenet impacts most, if not all organizations.
Move the ball down the field.
- Moving the ball down the field refers to making progress and decisions toward the goal. It’s tempting to focus on the short-term and bottom line in a downturn. That’s important, but so is forward momentum. Define the critical victories or outcomes for the organization, that, without achieving them, coming out on the other side in a good position may be unlikely.
- Establish a clear quantifiable target of success and set the budget aside to achieve these. Avoid wasting resources pursuing every opportunity. Stay focused on pursuing what you need to declare success.
Anticipate the most likely future state.
- The economy will eventually have an upcycle. What does their organization need to look like to support the whole? This is your desired future state. What decisions do you need to make today to make progress toward the desired state? What strategy do they need to implement, and how can you resource the strategy well enough for it to take root?
- There will most likely need to be employee reductions in every functional organization. They would think through the future state, as communicated here, as well. It can be tempting to lay off the most highly salaried employees. But often staff at these levels of organizational hierarchies are best able to build back their organization post-recession. They would also consider which employees have the deepest institutional knowledge, enabling them to train new hires.
If an activity, tactic, program, or outcome is not in one of these buckets, they must be willing to let it go. For line items that end up in one of the categories, they would consider the best way to support development and execution. For example, it might be more cost-effective to take a spigot approach and leverage external experts rather than having a full-time person if the work is not ongoing. Boutique or subject matter experts may be more amenable to a spigot approach than larger firms that have a deep bench to keep deployed.
Now, They Need to Go a Level Deeper in Each of the 4 Categories
Even in a down cycle, organizations have outcomes that need to be achieved. Functional/department budgets are used to implement plans comprised of programs and associated tactics and activities that will directly impact the outcomes. Answers to these three questions play a critical role in decisions on what, within each of the 4 categories, must be kept and what can be cut – for now.
- Is there direct-line-of-sight between activity and results? It should be easy to draw a line from activities, tactics, and programs to objectives and outcomes. We call these logic chains. Address anything not directly on the line. If you still cannot get it on the line, maybe it can safely be removed from the budget.
- Is there still buy-in for performance targets for every program, tactic, or activity? Have there been reports on progress? If the reports so far have been positive, you might not want to cut that program prematurely. Is it tied to a key strategy?
- Is the investment hitting its ROI parameters? Functions/department leaders are investing money on behalf of the organization. Is the expectation $2, or $10, for every $1 invested? Do the parameters need to be reset?
After going through these steps, leaders of a functional organization will be well prepared to have an informed and concise conversation with their CXO to identify costs that can be reduced, and by how much. In addition to having a cut – no cut discussion, they will be able to communicate what will happen if certain programs are terminated.
Return Your Focus to the Future with Scenario Analysis
Business is risky in any economic environment. Down cycles require both grit and resilience. While you can’t avoid them, you certainly can be financially prepared to weather them. In addition to being financially ready, be ready to adapt, clarify and amplify the value of your organization, shore up vulnerabilities, and focus on your most profitable services/products.
Part of scenario planning for adverse events, such as a recession, requires effective dashboards that provide data-to-insights for all investments, enabling confident decisions in all scenarios. Look to your dashboard as the first step in deciding what you recommend must be kept as is, or kept at a lower level of investment, and what to, perhaps only temporarily, shut down.
With lessons learned from this down-cycle, revisit your scenario analysis to close gaps, and improve your ability to detect the early warning signals needed to ensure your company continues to remain competitive, creates the desired customer experience, and is prepared for possible market changes.
Laura Patterson is president and co-founder of VisionEdge Marketing, Inc., a recognized leader in enabling organizations to leverage data and analytics to facilitate marketing accountability.
Laura’s newest book, Marketing Metrics in Action: Creating a Performance-Driven Marketing Organization (Racom: www.racombooks.com ), is a useful primer for improving marketing measurement and performance. Visit: www.visionedgemarketing.com
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