Recession planning: how COOs can prepare for a downturn
Economists believe there’s a 50-50 chance of a recession in the next 18 months. Past financial crises showed us that acting fast and preparing is key, but what steps can chief operating officers take today to protect their businesses tomorrow?
The world economy is close to entering a recession, perhaps as soon as this year. And to avoid taking too much of a financial hit, businesses – specifically COOs – will need to prepare.
The economic forecast
Last month, Citigroup forecasted a near 50% probability of a recession occurring within the next 18 months, with the investment bank pointing to rising inflation and interest rates as the main drivers of the economic downturn.
The economic outlook in the UK is more complex than in other developed nations. While it, too, has been battling the toxic mix of external economic headwinds – including the war in Ukraine – the UK is also grappling with the dual challenge of higher import costs and a weaker pound because of Brexit.
The Bank of England governor, Andrew Bailey, warned last month that the UK is heading towards a far steeper downturn than other major economies. Meanwhile, the National Institute of Economic and Social Research predicted in May that Britain will enter a technical recession by the second half of this year.
“The likelihood of seeing a recession in major economies like the US, the Euro area, and the UK by the end of 2022 or in 2023 has increased significantly,” says Tommaso Aquilante, associate director of economic research at Dun & Bradstreet.
“Inflation has spread across the different sectors of the UK economy more than elsewhere - and high energy prices, rising interest rates and fast-moving exchange rates will continue to impact firms’ bottom lines for the rest of the year and beyond,” he adds.
Even if the definition of a recession is not met in the next 18 months, the UK still faces a lengthy period of economic downturn. Rising inflation is expected to grind growth to a halt next year, with only Russia’s economy predicted to perform worse than the UK among the G20.
Why COOs are best placed to prepare
For COOs, however, estimating the timing and length of a recession isn’t a current priority. Given the economic environment, a recession appears inevitable – and for the chief operating officer, the focus now is on getting ahead of the curve so they can avoid having to make hasty business decisions in the middle of a financial crisis.
While the role of the COO lacks a single agreed-upon description, they are typically responsible for all areas of business operations, including marketing and sales, production, and research and development. And an effective COO knows how the company functions on a strategic, operational and tactical level to deliver its products.
Danni Rush, COO at Virgin Experience Days, Virgin Experience Gifts and Virgin Incentives, agrees with this view, noting that the oversight of operations – and, in turn, the business’s internal and external pressure points – puts COOs in the best position to prepare their companies for a recession.
“A robust COO will always have their ear to the ground to ensure the economic landscape is factored into their decisions, and envisage the impact on their customers and teams.”
She adds that, during a recession, COOs must closely monitor customer behaviour and bake flexibility into the business operations so they can quickly adapt to the changeable economic landscape.
“A recession may impact your customers before it impacts your business. Be prepared to double down on what’s working, pivot your business, or find innovative ways to grow or create a difference for your customers and teams.”
The value of diversifying your client base
Recessions never impact consumers or sectors equally – and some businesses are already starting to broaden their client base to prepare for the expected economic downturn later this year.
“We are looking to mitigate business risks through the development of a diverse client portfolio,” says Christiane Jauch, COO at digital consultancy OMMAX.
“This means diversifying the range of industries we work with, broadening our scope of activities and work packages, and being open to greater variety in contract types and work lengths.”
A 2019 study by Bain on how businesses reacted to The Great Recession of 2007 to 2009 highlights the importance of diversifying your client base. After analysing nearly 3,900 companies, Bain found that the businesses that stagnated in the aftermath of The Great Recession did not have a contingency plan in place when the financial crash happened. As a result, they switched to a survival mode when the downturn hit, forcing them to make deep cuts to their staff and business outputs.
By contrast, the businesses that grew during the recession adopted a strategic mindset, which included diversifying their client base and embracing emerging digital technologies, in the months leading up to the recession, making them far more resilient to the economic shock.
Adopt a strategic mindset
Joshua Zerkel is head of global engagement marketing at Asana. He believes COOs will need to adopt a similar strategic mindset if their business is to weather the incoming recession.
“This is not the time to throw spaghetti at the wall. You can’t do everything. This is the time to think strategically and focus your efforts on activities you’re certain will move the needle.”
Zerkel continues: “COOs have a direct role in this. To create more productivity during a recession, they need to encourage the managers they work with to revisit their workload. If there’s anything they are doing that isn’t directly connected to the actual goals of the company, then the COO needs to step in and tell them to stop. This is the time to focus solely on things that actually matter.”
Talk to the wider team
But communicating this strategic mindset to your wider team is easier said than done. Recessions – and times of economic instability – are anxious periods for most people, regardless of their pay grade. And as inflation rises and warnings about the perilous state of the UK’s economy continue, it’s likely that without clear communication, employees will panic and question if their job is secure.
Zerkel believes that this questioning will lead employees to focus on mundane tasks that add little real value to the business in an attempt to prove their worth and show how busy they are to their employer.
“When we feel anxious we tend to focus more on busy work just to feel we’re doing something, rather than the more strategic and purposeful work. We find ourselves essentially doing the digital equivalent of shuffling papers around our desks.”
Research from Asana found that the average worker spends about 60% of their time on mundane duties, including responding to emails and searching for documents, rather than focusing on meaningful activities that fit into the overarching strategy set by the COO and chief executive.
Zerkel expects this figure to rise if fears about a recession come to fruition. But tackling the rise of pointless work and refocusing all employees on activities that deliver strategic value will require COOs to talk openly about the possibilities of a recession and what the business is doing to prepare, something they can be reticent about.
“COOs should be honest and say, ‘yes we are in a time of uncertainty and there are things beyond our control but here is what we are going to do to address it’,” says Zerkel.
“People want clarity, and COOs should explain the strategy they and other C-suite leaders have set, and how everyone, from the CEO to the intern, has a part to play.”
Rush agrees, adding that the success of a COO’s strategy for combating a recession hinges on how it is communicated to the wider team: “Business leaders need to be open with their employees and external partners. Make time to see people face to face and encourage Q&A sessions among your key groups.”
She adds that having a solid communication strategy in place is also crucial “so there are no surprises and you’re fully transparent, and work together to come out stronger”.
Invest in tech
Clearer communication is just one part of the overarching strategy COOs must adopt to manage their business through an incoming recession.
Incorporating digital technologies into business operations should also be prioritised. Typically during a recession, most companies implement aggressive cost-reduction measures to counteract the economic disruption. These measures often involve across-the-board pay cuts and some employee layoffs but can also extend to a reduction in technology investment.
However, such reductions overlook the fact that the businesses that advanced rather than receded during The Great Recession upped their investment in technology in the lead-up and during the financial crisis.
The benefits of upping technology investment during a recession are twofold. First, incorporating digital technologies – such as automation and data-driven decision making – can help COOs cut costs within their business, enabling them to gain an edge over their competitors by reducing the price of their products.
Second – and most importantly – the adoption of digital and advanced analytics makes businesses more flexible by improving the amount of data and insights they have access to. They can help COOs understand how the recession is impacting their business and where to change their operational performance.
Jauch is improving the digital capabilities of her business, OMMAX, in anticipation of a recession in the near future.
“We have always been a growth-focused company but are now also focusing more on costs and efficiency of processes with cost development.”
There should, she says, be “continuous investment in digitisation” with a focus on driving efficiency and automation of processes in areas such as reporting, data transparency, finance, capacity planning, staffing, technology and culture management.
Boosting your digital capabilities – much like improving communication within a business and diversifying your clients – are steps best taken before the start of a recession.
Based on the research, it’s clear that COOs who are proactive in preparing their business for a recession fare considerably better than those who adopt a reactive approach.
Chief executives and chief operating officers have one of the closest and most critical relationships in the business world. While most jobs are defined by the structure of the organisation or by the work an individual does, the scope of a COO’s role is often decided by the wants and needs of the CEO.
In this sense, the existence of the COO role is a nod to the complexities and the sheer number of commitments placed on CEOs today. Although most CEOs still set their company’s overarching strategy and tactical direction, the truth is that few have the time to bring these strategies to life.
Organisational and project management skills are essential as COOs look to turn the CEO’s vision into a reality. Frequently, this involves the COO acting as a change champion within a business by taking on the responsibility for delivering results on a day-to-day and quarterly basis.
Danni Rush, COO at Virgin Experience Days, Virgin Incentives and Virgin Experience Gifts, agrees with this view.
“A COO needs to fully align themselves with the CEOs’ visions,” she says. “In our business, we create the vision as a team and ensure we are all on board. Being able to communicate clearly and help people buy in and be excited by the business vision should be the number one goal.”
The single element most critical to the success of a CEO-COO pairing is the quality of communication between the two individuals. Without a clear line of communication, COOs may struggle to develop and implement the chief executive’s strategy.
The need for effective communication between CEO and COO takes on extra significance during a recession when both C-suite leaders face additional pressures within and outside their business.
During periods of slower growth, such as a recession, investors may look for reassurances that the senior management team has a strategy in place to weather the economic storm. Similarly, COOs may face challenges to the operational output and culture of the business as employees begin to worry about their job security.
Christiane Jauch, chief operating officer at digital consultancy OMMAX, believes CEOs and COOs can counteract these twin challenges by meeting and communicating regularly.
“A recession means more daily interactions, with the CEO working in a closer partnership. There’s also a greater level of short-term planning and an emphasis on flexible business operations.”
The relationship between a CEO and COO will be tested during a recession. But by increasing levels of communication and agreeing on an effective strategy, they can prepare their business to overcome any challenges caused by the economic disruption.