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Surviving an Economic Downturn – The Ultimate Leadership Test

Arnaud Lachaume
Stephane IbosLink to author's LinkedIn profile
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May 24, 2023
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14
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Business is tough. That’s an established fact. Like bull and bear markets that alternate every so often, business conditions cycle through both good and bad times. Most professionals and company leaders are used to these highs and lows and tend to prepare for darker times when the skies are clear – it is a perfectly normal cycle, theorized last century by Kondratiev and Schumpeter among others.

What makes the situation today unique is the seemingly relentless succession of crises hitting all parts of the global economy. No one could foresee the COVID-19 pandemic – a once-in-a-lifetime event that managed to force the entire world to a grinding halt. And just when we thought kinder days were ahead of us, war was waged at the very doorstep of Europe – an event that again was all the more unexpected that war on European soil is for most of us a dark historical souvenir of days long gone. And of course, this war had an immediate negative financial and economic impact, which is still very much at play today – and in all objectivity is not likely to dissipate anytime soon. And because bad things come in threes, we recently saw the very spectrum of the 2008 GFC reappear in our lives with the collapse of banking giants Silicon Valley Bank and Crédit Suisse sending ripples all over the global economies. 

It's no surprise that such a succession of crises – all very serious on their own, let alone combined – has sent shivers down the spines of most businesspeople and company leaders. The current situation is unprecedented, and therefore we are all navigating unchartered territories to some degree. 

So, the question is: How do businesses survive such an economic downturn? And surprisingly, in an era where machines, automation, algorithms, and AI prevail, I totally think that the answer lays with the smartest of all resources: the humans. Let me elaborate. 

“Are we flying?”

Leading a business is somehow akin to flying an airplane. As the CEO, or a member of the executive team, your duty is to carry people with you from a point of departure to a destination, safely, efficiently, and as smoothly as possible. 

Who do you carry? Your employees, your shareholders, your customers, your partners, and all the folks who help your company thrive. Your company needs fuel to run, much like a plane. And fuel for a business is money. Without money, your company will collapse, very much like a plane will crash on an empty fuel tank. And very much like a plane, at times you have to weather storms. 

Every pilot will tell you that in case of a crisis or an abnormal situation that affects the aircraft, the first question in the cockpit is “are we flying?”. This is not a trivial question as it goes beyond the meaning of flying. It is an immediate assessment of the crisis at hand when it comes to the viability of the aircraft. Is the situation so degraded that the plane is not able to fly anymore? As opposed to: “There is a crisis but we are in a somewhat stable situation where the immediate safety of the flight is not compromised.” It is easy to understand that while the second situation offers some headspace to elaborate a resolution plan, the first one begs for immediate life or death decisions without much time for reflection. 

So back to the current unprecedented economic downturn, as a business leader, ask yourself: “Are we flying?”, and if so,  “For how long?”.

This scenario calls for a complete impact assessment on your organization where you need to look deeply into the following questions:

  • What is our financial runway? Is our burn rate correctly balanced in regard to our income?
  • Do we have the right teams and skills to operate the company? Who are our critical resources? 
  • Are we still able to maintain high-quality standards across our offering? Are all our offerings still relevant in the current market?
  • How are our customers doing? Who are our best customers? Are they also impacted by the crisis and are we at risk of losing them because of it?

These fundamental questions – while broad in scope – are the basic checklist to assess if your business is flying. 

In times of a severe downturn, a red flag answer to any of these points can signify the imminent demise of your business. A stark perspective that, although highly displeasing, is better off identified than ignored. One cannot correct what one cannot see. 

From here, we can look at what a leader should do to maximize the chances of survival in a severe economic downturn. And as a good French man, I naturally had to involve FROGs in the story… 

The F.R.O.G. methodology to ride the storm

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Focus

Like a plane in the middle of a storm, paradoxically, survival means somehow reducing “speed” to avoid catastrophic breakage. 

In the case of a business, you certainly do not want to reduce the speed of growth of your top line or of your customer acquisition. But you want to reduce the speed of distractions. In other words, you want to ensure that Focus is applied company-wide to the most important aspects of your company in a degraded environment, namely: lights on (= money in), products out, happy customers. 

In the thick of a severe downturn, there is nothing else that should immediately matter. Legendary entrepreneur and Y Combinator founder Paul Graham coined the term “Default Alive” some years back. And as recently as early 2022, Y Combinator sent a 10 point survival strategy to their startups to strongly advise them to switch to Default Alive mode, which more or less consists of stripping operations to their bare bones in order to extend the runway while operating the business and attempting to reach profitability. Revenues, sales, happy customers. Nothing else should matter when the outlook is grim around you. 

It might not be pleasant, and it might even go against the DNA of your business, to look only at the immediate times and focus on the now. This is particularly true for startup leaders who always have an eye on the more or less distant future to “put a dent in the universe.” But remember, it’s better in these times to park the dream than to end up dreaming in the park. Once on the other side of the tunnel, you will emerge stronger than ever (hopefully) and better equipped to resume working on your grand plans. 

In order to achieve this, there are some restrictions that the leaders will have to put in place. 

Restrict

This is not necessarily the most pleasant side of the leader’s role in a company, but it’s one that you have to embrace in order to protect and preserve the future of your business. Here it’s all about reducing expenses in order to serve the Focus

This part of the methodology calls for strong, immediate, drastic, and significant decisions regarding spending, with the following underlying guidance: whatever spent is not dedicated to the Focus should be immediately cut until further notice. 

This R&D project looking at a product we might want to release in 2 years? Freeze it. Stop spending. Reallocate the resources on the Focus projects. 

These marketing expenses to try a new unproven acquisition channel? Cut them. 

The new hirings planned just last month? Cancel them. 

You will also have to go through all the approved budgets and revise them, with the view to trim the fat everywhere you can. 

As a natural reaction, your teams might argue that with less spending, you will yield less results. While this is a reasonable assumption, there are always ways to do more with less, but it will call for innovation, commitment, and outside-the-box thinking from all your teams. 

Like for everything else, this aspect of the methodology has to be executed with a healthy amount of common sense and good judgment. There is indeed a point where the funding is simply not sufficient anymore to properly conduct an activity. Dying a long death with a dripping bank account is no better than dying rapidly in a firework. Listen to your teams and the experts you have hired. They will tell you what can reasonably be done and expected with various budgets. It’s up to you to then make the call. 

In the same vein, you do not want to lower your standards or cut corners. Aji Abraham, CEO of Armia Systems Inc. and Forbes Technology Council Member, makes a very good point on this subject in February 2023: The ultimate cost of lowering standards can be more crippling than the immediate hardship faced by your company. Just look at the turmoil faced by Boeing after years of cost reductions applied drastically at the wrong places. Sure, the company survived. But at what cost to the U.S. taxpayers, the shareholders, the employees, and most of all to the brand itself? 

Lastly, avoid pettiness in the expense cuts. While some cuts have a symbolic meaning (stop touting free lunches, for instance, if that’s a thing in your company) – indicating a period of hardship – others are just meaningless and will be perceived as such by your staff. Remember that they are experiencing the same thing you are, and that they are not immune to the anxiety that is often associated with uncertain times. So be reasonable in not making their daily lives unpleasant to save a penny here and there. 

Now that saving is underway, it is essential to do more with less, which  is where optimization comes into play. 

Optimize

Optimizing, in the context of being Default Alive, is not an optional activity, but an essential one to ensure your company provides the expected services/products without decreasing customer satisfaction or your top line. 

By definition, optimizing involves measuring. But what? It all depends on which aspect of your business you are looking into. Of course, all aspects should be subject to this exercise, from sales to engineering and administration to support. You should consider that every department and every function can be evaluated  to identify and resolve inefficiencies. 

Let’s take engineering as an example, and more specifically software development. It’s a prime example, because more often than not software development is considered a black box where strange geniuses deploy some secret magic to make things happen. It is also one of the functions where efficiencies are considered difficult to uncover, because “there is so much a given developer can produce.” 

Although this last affirmation is very true, the problem of potential inefficiencies seldomly lies with the developers. On the contrary, they tend  to be the mitigating counterforces against inefficiencies, at the expense of the quality of their work at times, the overall throughput, and most importantly their personal well-being. 

Inefficiencies in this function often lie with the processes applied, which can be inadequate and result in time lost for no added value, or with a poor knowledge of the fundamental strengths and weaknesses of the team, leading to poor work scheduling (e.g., scoping of sprints), or lowered quality due to the absence of seniority or extreme pressure applied to the team. 

Whichever the issue, it is obvious that simple guesses and gut feelings will not reliably allow you to identify them. And you cannot optimize what you do not measure. 

This is where frameworks like the DORA metrics can help to identify areas of possible improvements. This is also where monitoring the Value Stream is essential. By monitoring your software development process, you will be able to provide fundamental optimization, leading to reduced waste and bottlenecks, and increased overall efficiency. 

A byproduct of achieving such optimization is an increase in the well-being and morale of your development team. It is quite common for developers (and usually great ones!) to leave a company because the feeling of “spending most of their time putting out fires” becomes too overwhelming. By rationalizing and optimizing your development cycle, you provide your teams with a smooth work environment, even in case of a crisis, and this is a win for both the short and long term. 

At this stage of the methodology, you have reset the overall direction of your company by focusing on the essentials. You have applied the brakes on expenses and ensured that only what truly matters is funded, with an acute assessment of the potential return on investment. You have also investigated how you can do more with less by optimizing all aspects of your business and implementing adequate measurement to track inefficiencies and measure progress. 

With your new company profile, it’s now time to look into gathering your allies around you to bounce back, ensure you have full support during the downturn, and emerge stronger when the global recovery phase begins. 

Gather

Remember that no matter how severe the downturn, it will not last forever. By the very nature of the economy, a low is as surely succeeded by a high as the reverse is true. 

The role of leaders during a downturn is dual: ensure the survival of the company and prepare for its future during the recovery phase. If you do not emerge in a strong position, your competitors will. During a recovery phase, the top spot usually goes to those companies that are able to aggressively re-attack the market, be it with appealing offers, new products, services, or expansion into previously unaddressed territories. 

Whichever the case, you do not want your company to find itself at the receiving end of such an aggressive strategy. You would rather be leading the charge in the front of the pack. 

But how can you attain the resources you need to get into such a position? It is difficult enough to fund the Default Alive position!

This is where your company’s network of supporters is crucial. I am here referring to your partners, customers, employees, and treasurers (bank, shareholders, venture capital firms). In a nutshell, everyone involved with your company. 

This is where you deepen your relationships with all these actors. With your partners and suppliers, you want to ensure that agreements are reviewed and reevaluated to ensure there is a fair, win-win situation in place. Doing business right means both parties win. If you congratulate yourself because you “crushed” another party in a transaction, you may want to reconsider your business approach and ethics. Because one thing is for sure: if you crush someone, it is almost certain that they will not join your support network when you need it. 

So be prepared to give a bit more to those that matter to you: your partners and suppliers. It does not have to be a financial increase, but it can take the form of joint promotions and sales activities, deeper integration in your supply chain, or vested interest in your financial success by way of (increased) commissions. Whichever way, at this stage you want to ensure that your success is their success, and that supporting you is the best strategic choice for them in these difficult times. 

You also want to ensure that your customers remain loyal to you. You may want to conduct heavier-than-usual customer surveys and interviews, to deepen your KYC (know your customer) and provide support where you can. Recently, for instance, when Silicon Valley Bank collapsed, a few companies decided to offer their customers an option to defer their payments until they could recover their money. This would have adversely impacted the cash flow of these providers, but their brand image, as well as their relationship with their customers, would unquestionably have found themselves strengthened. 

Last, but not least, this is a time where you talk to those who help finance your business – in particular your bankers and investors. Obviously at the very beginning of a downturn, you would just be one among the many to turn to those with large pockets for help. And you might win the day and replenish your coffers. But chances are that funding will have become scarce overnight. Your fears are their fears, and we have repeatedly seen that when an economic crisis hits, investors and bankers slam the brakes on investment and funding until they have a clearer view of the situation or worse until the crisis has passed. 

This is why rather than asking them for financial support being the first thing you do, it should be the last once you have completed every single step listed previously in this article. This way, when you present your request, it might be for less than you first thought (thanks to your reduced spending and optimization), and it will come with a clear plan (focus), associated with demonstrated tight control, thanks to measurement. 

You will also be able to showcase a strong, committed, and loyal network of supporters – in your supply chain and your customers portfolio. 

This all depicts a reassuring, strong, stable company, headed by reasonable, efficient, and competent leaders. Your chances of getting any sort of funding (loan or equity) increase many folds compared with companies not put in order. 

Gather your troops, your allies, and your funders. You’re not alone now – and with this army and a performing, efficient company, you have set your business up for success, not only to survive the downturn, but to emerge as a leader immediately after. 

Stabilize your ship

Going through all of this will give leaders in the company a hard time. Throughout this period, and particularly at the beginning of the crisis, emotions will run high. Though professionals, we are all human beings. 

A crisis is by definition unusual (which does not mean unexpected), unsettling, and potentially lethal. It is a change to the “normal.” And our first instinct is to reject change, especially when it is a potentially harmful one. 

That being said, it is crucial that the leadership remains as calm and focused as possible. The F.R.O.G. methodology should be applied within the executive leadership team (ELT) first. Not only because the ELT is not immune to inefficiencies and lack of focus, but also because it is always good to experience something before asking others to. 
Once done, the ELT will have to define and implement the new normal. Of course, the golden rule is to be reactive and adaptable, so whatever is put in place can – and most likely will – change in the near future. Although this is normal, it is crucial to try and provide as much stability as possible. For instance, when a course of action is defined, it is good to try and run with it for at least a quarter if not more before implementing significant changes in direction. Because those in the flight deck (the ELT) see the storm and trace a path. But those in the cabin (the employees) do not see it. Their concerns and even fears are increased by a lack of visibility of the greater picture. If they feel a strong turn every week, they will soon question the capacity of the leadership to steer the company through the storm. 

I am not saying that leaders should not take action, or pretend a crisis is not at hand. But rather that they should always try to pave a way with as much horizon as possible, to provide reassurance to their teams that the situation is assessed, understood, and addressed with a robust, coherent plan. 

This is crucial to ensure you still have a company both through and after the downturn. And a company relies principally and essentially on its employees to operate. They are your most valuable assets. So you want to do what you humanly can to retain them, and ensure that they do not find themselves too badly injured by the turbulence. 

Conclusion

Surviving an economic downturn is not for the fainthearted. As the saying goes, “it is when the going gets strong that the strong get going” – which is truer than ever in such circumstances. 

It is not a lone act to survive a downturn. It calls upon leaders to surround themselves more than ever with all the allies, assets, and resources that can help support the business. Clarity and stability must be the steadfast motto of leaders during this period of uncertainty. Implementing F.R.O.G. can help put the company in marching order. But ultimately, it is down to all involved with the company to take it to  heart and go the extra mile to pull through the storm. It has been done time and time again by many companies in the past (thankfully) and will be so in the future. Remember, it’s a bad time, but the night is never darker than just before dawn…

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