Making the Most of a Slowdown
As economists debate the possibility of a slowdown over the next 24 months, business leaders are considering the best way to position their companies after a long expansionary period. While a downturn can be an unnerving prospect, for some companies it can be a time to thrive. They can streamline operations, knock out weaker rivals and lay the groundwork for future expansion.
“It’s quite common for us to see our clients come out on the other side of an economic downturn better than they were going in because they pick up good people and good customers,” says Joe Markey, regional sales executive, Commercial Banking for KeyBank.
This isn’t by chance. Companies that succeed during a slowdown match their long-term outlook with short-term tactics that translate into opportunities.
“Companies should always be planning for a slowdown as much if not more than they should be for growth,” says Stephen Hughes, managing director and Industrial and Business Services practice leader for KeyBanc Capital Markets.
Get Close to Customers
Downturn-ready companies understand the fundamental drivers of their business and stay close to their customers so they can gauge when business conditions appear to be changing.
For example, Hughes says, a company that provides facilities services to the hospitality industry might keep close tabs on how hotel occupancy and consumer travel patterns are trending. In this way, companies can identify changing conditions, while fortifying their relationships with customers.
Being in sync with customer needs becomes even more crucial during a slowdown. Markey says, “In addition to the normal client experiences, it’s important to communicate to clients that you’re here for them for the long term—particularly the most important clients. Don’t wait for them to raise questions or doubt you.”
He points to one company that had traditionally relied on short-term contracts with customers to maximize pricing. With the possibility of a downturn approaching, the company began offering customers five- to seven-year contracts at appealing rates. “It was a deliberate tactic to compromise short-term profitability for long-term stability,” Markey says. “It stabilized them during the downturn that ensued, while a similar company that did not take such steps ended up being acquired.”
Balance the Long and Short Term
Downturn-ready companies will take interim tactical steps, like jettisoning unprofitable operations, while keeping an eye on the future. Hughes cites a company that had both union and non-union employees. The union employees were guaranteed a certain number of hours. As part of a forward-looking strategy, the company decided to provide the same guarantee of hours to its non-union employees.
“They realized it might cost them a little more in the short run, but the non-union workers were highly skilled,” Hughes says. “The company realized that in an upmarket, these guys could potentially be lost to their competitors. So by taking the bold step of guaranteeing them a certain number of hours, the company instead became the employer of choice in their industry.” This positioned the business to expand operations when the economy improved.
Along the same lines, downturn-ready companies see an economic upheaval as a time to make acquisitions or scoop up employees who have been let go by competitors. In contrast, companies that react defensively by raising prices or renegotiating master contracts can damage customer relationships.
“Short-term reactionary decisions can have negative intermediate to long-term effects on your business if not managed properly,” Hughes says.
Fortify Your Cash Position
The ability to take advantage of opportunities during a downturn often depends on having a strong cash position. There, too, downturn-ready companies prepare well in advance. During good times, they explore funding mechanisms, including, but not limited to, bank loans, public/private equity investment and/or bond market issuances.
“Savvy business owners/executives should raise capital in good markets and under the most favorable terms—in other words, when it’s optimally available. Doing so when it’s most needed, on the other hand, may occur during downturns and/or when it’s punitive to the company to do so, if available at all,” Hughes says.
Markey adds that KeyBank often works with clients to improve their cash flow efficiently, leveraging cash flow technology. This makes a significant difference during a downturn, as does providing ongoing advice and counsel.
“As bankers, one of the things we do is provide our clients with insights where we think the economy is heading,” Markey says. “We deal with lots of different companies in a variety of industries, and we’re constantly asking for their feedback. Our clients appreciate that we’re asking the right questions. Sharing good information in uncertain times can help solidify the relationship.”