“It’s a universally acknowledged truth: The world will eventually experience another economic downturn. Equally as obvious: Companies that are well prepared for economic turbulence will fare the best when storm clouds gather on the horizon. But knowing these truisms and doing something about them are two different matters.”
So begins a new report from Russell Reynolds Associates that explores companies’ state of readiness to weather a recession. The firm surveyed 534 senior executives, but the report puts most of the focus on the 79 participating operations leaders — chief operating officers and chief supply chain officers.
Perhaps tellingly, only 3% of that smaller group said they believe an economic downturn is highly improbable in the next 18 months. And more than half (53%) of them opined that a downturn is either probable or certain.
Unfortunately, a paltry 8% of the operations leaders said they personally were well prepared to respond to an economic slump. Most of them (70%) said they were somewhat prepared, while 22% said they were poorly prepared or unprepared.
Despite the lack of solid preparedness, only 4% of the operations executives said their company would see no impact from a downturn. One in five said the negative impact would be “significant,” and 38% said it would have a “moderate negative impact.”
The operations leaders were more likely to expect an economic downturn than was the full survey base, and also more likely to believe it would have a negative impact on company performance.
“The increased complexities and interconnectedness in global supply chains bring more potential failure points and higher levels of risk,” the report noted. “Even if a downturn does not impact the organization directly, it may well impact the organization indirectly through a link in the supply chain, which is often not visible to those outside the supply chain function.”
Further, Russell Reynolds said, “senior supply chain leaders may be struggling to get this point across to the rest of the C-suite, as only 47% of supply chain and operations executives said their CEO or board required them to have a plan in place in case of a downturn.”
Yet, according to the report, during the recession that began in 2008, operations and supply chain functions were among the first to be affected.
The report cited Harvard Business Review findings that companies that have successfully weathered previous economic storms took three key steps.
First, they acted early. “Leaders may understandably be reluctant to take major actions until they see clear evidence that they are affected by economic headwinds. However, companies that proactively recognized the threat by discussing the possibility of a downturn were more likely to emerge as winners.”
Second, they took a long-term perspective. “Of course, leaders must attend to short-term issues during a downturn to make sure their business remains solvent. But substantial competitive opportunities await leaders who can also keep an eye on the bigger picture.”
Third, they focused on growth, not just cost-cutting. “Companies need a balanced approach to performance, not only by pursuing efficiencies and improving profit margins, but also by driving revenue growth.”
Russell Reynolds also cited research by Boston Consulting Group showing that over the last four U.S. recessions, 14% of companies managed to improve their sales growth and EBIT margin, while 44% of companies saw declines in both measures.