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October 2008

A new world of business

As far as can be predicted, a thin layer of dust is now settling on the immediate banking crisis, thanks to a concerted effort from central banks across the developed world. They have pumped around £2 trillion into the system, a relatively small amount of which will be used to prop up overextended banks, but the majority of which is simply to ensure a workable level of high-grade liquidity.

This intervention has given the banking sector, and the rest of us in the broader commercial sector, breathing space to re-evaluate. There’s no question that we stand on the brink of a new world of business.

The fact is, the credit crunch is only one facet of this new world. The markets are at the mercy of consumer and trade confidence, so when the markets crash, they crash hard and fast. They grab the headlines. Moving forward, though, it’s the broader economic fundamentals which matter. Unemployment rose by a staggering 164,000 between June and August 2008; and it is these figures -  the rate of attrition of physical productivity from real people in real jobs, selling and exporting real goods in a globalised environment – which will matter in the long run.

Not only are we only just beginning to see the effect of these fundamentals on business, we’ve also never seen anything like this before. Back in the 1970’s, Jim Callaghan dealt with recessionary trends from the comfort of the Cabinet room. Gordon Brown had no such luxury- only action on a global scale from G7 finance ministers in concert stemmed the downward spiral.

Despite all this, there are positive differences, too, between our current situation and previous troughs in the cycle. An entire generation of under-40’s has no expectation whatsoever of “a job for life”. They are mentally agile and capable of reskilling in a matter of weeks. They take nothing for granted- jobs, pensions, or healthcare, for example. In the words of the CBI's Deputy Director-General, John Cridland, “Changes in the economy since the recessions of the eighties and early nineties should help us avoid the levels of unemployment we saw then. The UK labour market is much more flexible and the recent moderation in pay settlements will help.”

Corporate management structures have changed as well. Throughout the 1990’s, layers of the management pyramid were systematically removed, leaving many larger companies with fewer tiers between the CEO and the lowliest postroom clerk. Often, the pyramid has been all but dropped, in favour of efficient departments corresponding to operational functions. All this is good news for businesses which suddenly find that agility will be nothing short of crucial to their survival.

In this new world, survival of the fittest will demand that company boards rediscover old disciplines, and make the most of some new ones. In the poetically nautical words of Financial Director Magazine’s Anthony Harrington, “By highlighting weaknesses in both strategies and processes, the credit crunch has given management a chance to get ship shape and to adjust to new realities. Managing through the downturn, in other words, should be about far more than battening down the hatches and sitting on one’s hands, waiting for the squalls to pass. Plot the right course to take advantage of the trade winds.”

The greatest focus will of course be on financial management. CFO’s must not only look to cut operational costs to the quick, but also reacquaint themselves with cash. This isn’t an Enron-style issue of governance (despite the fingers pointing currently at regulators). Rather, credit will not be available on a grand scale anytime soon, and yesterday’s sources of money through leveraged debt might as well be consigned to a bygone era. Cash is king, and that requires exceptional financial prudence. Shareholders, used to endless quarters of guaranteed growth, will also fall by the wayside. To ride the storm, CFOs will need to manage their liabilities in a more conservative fashion, wooing long-term investors; funders who are committed to riding out the cycle rather than making a fast buck.

A new agility will also be in demand from HR specialists. Remuneration practitioners will be key to cutting costs, and they need to achieve this without cutting out individuals who may be repositories of important company best practise.

And at the top, above all employees need to see demonstrable leadership. Executives need to be inspiring, committed, decisive and visionary. Not visionary in the messianic sense of so many startups of the past decade, but rather forward-looking enough to spot opportunities round the corner, and focused enough to put effective contingency plans in place for an uncertain future. In a simple sense, everyone at board level must now become a change management guru.

Having the right people in key management positions becomes more, not less, important in troubled times. Malcolm Alexander, MD of Interregna, says “From the cornershop to the top echelons of the FTSE100, there’s no longer room for businesses to make mistakes. Whereas six months without a key appointee in a major role used to be an irritation rather than a challenge, now a six week gap exposes any company to a disabling lack of strategic direction.”

“What has been trashed these last few weeks are trust and confidence”, says Archie Coulson, a founding Director of Postern, the turnaround specialists dubbed the ‘company doctors company’. “What now needs to be done is to look around for the grey beards who have been here before and have the certainty of touch that comes from experience.”
As we navigate through troubled economic waters, interim talent (from a pool which by rights ought to be increasing thanks to corporate misfortunes) has an ever greater role to play in bringing experience, focus and diligence to the board. Interregna has a roster of talent with experience in essential management areas - executive, finance, HR, technology etc. - and across a wide range of industry sectors. In the new world of business, every company needs to come to terms with a harsher trading environment. A fresh pair of new, experienced eyes may be the ideal way to make the transition smoother.

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