Downturn Readiness: A Snapshot from Europe
By our partner h&z Management Consulting
An economic storm is coming—are you ready?
Business leaders in Europe are getting nervous: dark clouds are gathering on the economic horizon and the threat of a severe crisis now looks possible after years of economic upswing. The good news is that at least we can see this coming, unlike the devastating crash of 2008. Nevertheless, the risk of a new crisis poses some questions that really ought to be answered. For example, is your company prepared for an economic downturn after years of healthy growth? And what actions must business leaders take now in order to defy a downturn? To find out, we interviewed representatives from more than 30 companies and gained some valuable insights, some of them disturbing.
We found out that more than half (55 percent) of the company leaders we spoke to openly discuss the potential of a downturn among their top management. This is good but not good enough. We fear that leaders may be reluctant to take actions until they see clear evidence, which is too late.
We also found out that less than one third of the companies use indices or scenario simulations to anticipate the impacts of a downturn. In addition, two thirds of all companies still feel safe in the current economic environment, despite the clouds on the horizon. We feel that this is a false sense of security due to full order books and good utilisation of capacity.
Life insurance for companies: Early warning systems and stress tests
Overall, the results of our survey on crisis preparation reveal worrying results and point towards a certain level of carelessness in the management of many companies. We consider this to be very dangerous and are convinced that more can and should be done to mitigate the threat posed by a potential downturn. At the very least, a good early warning system is needed, including relevant industry-specific indices, intense communication with your customers and structured feedback loops. Additionally, a stress test will help you to identify the effects of a downturn on your company’s EBIT margins, working capital and financial reserves. Armed with this data, you would be in a far better position to foresee the impacts of a crisis and to put preventative measures in place.
Preparation is the name of the game
The recommendations stemming from our survey can be summed up in two words: be prepared! Those who are prepared and act early will become stronger through the downturn. Below is our 10-point preparation plan:
1. Install early warning systems that aggregate market indices and customer feedback.
2. Examine simulations and different scenario calculations.
3. Develop contingency plans for sales and earnings slumps, liquidity and existential crises.
4. Review the value chain and where possible streamline operations, processes and organisational setup.
5. Consolidate your company’s footprint and search for best-cost alternatives.
6. Re-define your business model, leverage service businesses when feasible and look for new growth opportunities.
7. Define procurement commitments, volumes, prices, and exit clauses with existing suppliers.
8. Unleash your company’s financial reserves that may currently be tied up in working capital and assets.
9. Terminate and re-allocate financial investments and raise new capital as a financial reserve.
10. Negotiate employee agreements with the joint aims of becoming more flexible and reducing overtime.
Are you flexible? (enough)
Irrespective of the threat or not of a downturn, it is generally wise to make your company more flexible. When asked about measures to secure their future viability, 70 percent of the companies we spoke to mentioned digitisation and the development of new business models. Only 40 percent recognised the inevitable increase in agility as a pre-condition to secure their future. Where do you stand?