Is Your Firm Resilient?
Mark L. Johnson / October 2019
You can read lots of articles in the media right now about the possibility of a recession. Worrywarts key in on headlines and cry wolf: An unending trade war with China? Uh-oh! Recession. A pull-back in job openings? Oh my! Recession. The bond market’s inverted yield curve? Recession, recession, recession.
Yes, the current 10-year economic expansion will come to an end one day, but rather than trying to predict the next recession, I think it’s more important to be prepared for it. The question is, is your firm resilient? Can it handle a challenging marketplace, or not?
Moderate Growth for Now
In August, President Donald Trump dismissed concerns of a recession, telling reporters “we’re doing tremendously well.”
“Our consumers are rich,” the president said. “I gave a tremendous tax cut and they’re loaded up with money.”
Of course, the economic forecast for construction shows a possible downturn coming. “We’re near the top of the construction cycle,” says an August report from FMI. “Continued growth through 2020,” says the title of an AIA online article.
Right now, real GDP growth was 2.0 percent in the April–June quarter, according to the Commerce Department. No, that’s not a rapid rate of growth, but it’s still healthy and is probably better for sustaining the economy in the long run.
How to Be Resilient
Since no one can say for sure when the next recession will begin, now is a good time to start planning for one. What should you do? Three things.
1. Reduce your operating costs. I first wrote about lean construction three and half years ago (“Lean, Mean Building Machine,” April 2016). Good for you if you started applying lean principles back then. You’ll have packed some recession resiliency into your operation.
If you’re just getting around to running a leaner ship, try to build flexibility into your operations. Look for ways you can increase earnings by being more efficient. Consider divesting less-profitable divisions and poor-performing assets.
2. Build up your cash reserves. You need to enter a recession in better shape than your peers. A healthy cash flow buys options.
Harvard researchers studied businesses who weathered the Great Recession and came out ahead of their competitors. According to Harvard Business Review (“What Companies Should Do to Prepare for a Recession”), the researchers found that resilient companies had “far more cash to bring into battle.”
“Once the economy was on the upswing,” HBR says, “resilients were able to use this cash to acquire the assets that industry peers were dumping in fire sales.”
3. Focus on your high-value customers. You want your long-standing, high-value customers to stay with you during a downturn. And that largely depends upon you. What I mean is, don’t try to maintain gross revenue at all costs. Don’t slash your bid quotes just to land contracts. And don’t cut corners on your work.
Hasn’t the Great Recession taught us all that price competition is not the way to go? HBR says: “In some cases, the resilients in our database were forgoing revenues they could have earned through pricing changes.” This proved to be their saving grace because less resilient firms “were more likely to try and maintain revenue at any cost, applying price reductions haphazardly to products and services and sending mixed marketing messages,” HBR says.
Besides the above, additional levers you might want to pull include investing in advanced analytics platforms, component prefabrication processes and prefabrication partnerships. Such moves can bolster your productivity and may drive additional sales in tough times.
25 Percent Performance Variance
While forecasters argue over the timing of the next recession, there’s no need to argue over when to start planning for one. Start today.
In studying the 2007–2009 downturn, Harvard researchers found that by the 2009 low-point, resilient companies had increased their EBITDA by 10 percent while peers saw their EBITDA drop 15 percent—a 25 percent variance in operating performance.
No, I’m not an economist. But, I’ve seen people talk about recessions long before they actually occur. I’ve also seen many businesses prepare for recessions when it’s too late.
Here’s the take-away: Don’t panic, start planning. It’s time to run a lean ship.
Mark L. Johnson writes for the wall and ceiling industry. He can be reached via linkedin.com/in/markjohnsoncommunications.