The current crisis in the UK steel sector has dominated the headlines with 40,000 jobs said to be at risk. But other sectors, lacking steelmaking’s iconic image, have quietly haemorrhaged even more jobs. The oil and gas sector had shed 65,000 jobs to September 2015 with many more since then and the four main high street banks cut 189,000 positions in five years to 2013. Losses ripple rapidly down the supply chain from blue chip multinationals to SMEs, and it is at the bottom of the pyramid that firms find themselves under most pressure. So how should management react to a downturn in their sector?
The first question to ask is, is the downturn cyclical or structural? The only way to adjust to structural decline is to move quickly while your balance sheet is still strong, and move the focus of your business to areas which are growing and your company’s skills and experience can be profitably employed. IBM spotted the decline in the mainframe computer market and in the late 1990s moved decisively into IT consultancy. In 2015, its revenues were over $80bn. Blockbuster Video on the other hand, had 60,000 employees and 9,000 stores in 2004. As the market went digital, it could have become the next Netflix. It didn’t and instead has disappeared completely.
Cyclical downturns require a different set of judgements; estimating how long the downturn will last and determining where the market’s hit bottom. Survival becomes a question of hoarding enough cash to last until the market recovers. Downturns are very difficult to spot at the beginning and typically a company may make some modest reductions in overheads as revenues drop. But once the downturn has continued for a while, it becomes essential to reduce monthly outgoings to match the thinnest point in your forecast order book, often requiring a complete restructuring of the company’s management team and processes. This requires a radical change of mind-set, from ‘how can we keep our best people?’ to ‘what would a £xm turnover business look like?’ This will often mean salary cuts, directors (particularly owne- directors) working for sharply reduced pay, management functions that no longer fit a shrunken organisation being cut out, and discretionary budgets being slashed. In many case one of the hardest things to cut will be premises – leases are notoriously inflexible. But if you find yourself rattling round an office or factory unit which has become far too big for your requirements, it’s always worth thinking about subletting (if allowed under your lease) talking to your landlord about possible options – who may actually be pleased with the opportunity to re-let at an increased rent.
The quicker the changes are put through the better. Reducing costs will almost always mean reducing the workforce and this will inevitably be expensive in terms of redundancy costs. There comes a tipping point where there aren’t enough resources available to cover these and once this is reached, the only options will be a fire sale or administration. While pre-pack administrations can allow the company to sidestep its obligations to suppliers and staff, whilst enabling the existing management team to be back in place under a different company name the following day, it’s not always an honourable way to do business. Far better to move fast and stay solvent.
The end result should be a return to profitability and positive cash flows, however much reduced from previous levels. Planning for growth can start all over again.