CEO Strategies: Neil Smith

Don't Waste What's Left of This Crisis


Hidden behind the latest woeful unemployment figures is a little good news: Some companies are at last beginning to grow. From the green shoots at Farmers' Insurance (ZURN) to sprouting sales at Scott's Miracle Grow (SMG), companies are rehiring managers laid off at this time last year. While growth is likely to come slowly and unemployment will likely remain high for some time, many chief executives are quietly confident that the corner has been turned.

The CEO of a growing food manufacturer with which I'm working has a surprising short-term focus—his cost base. He understands that before the crisis ends, there is a near-term opportunity to reposition his business for the future. He and other CEOs of well-run companies see this time, when we are poised between the depth of recession and an economic rebound, as a chance to get an important jump on their competitors.

Most companies have already cut back significantly during the recession, so why would the CEOs of excellent and growing companies focus anew on strategically reviewing costs, whether they need to or not? The answer is simple: Now is the perfect time to do so. They want to take a final, systematic, comprehensive look at all remaining costs in the company. As the chief executive of a major headhunting firm recently noted at a CEO breakfast roundtable, his organization currently accepts drastic change "without a peep." Such acceptance will not last for long.

Additionally, much of the recent crisis-driven cost-cutting was not done strategically. Little forethought was featured when companies looked to quickly reduce costs. Cutting done in crisis mode usually leaves fat and takes too much muscle. This is the time to pause and do it right. We see very few companies that are truly lean—although they may in fact be smaller. They will have to get leaner and meaner in the highly competitive economic environment of the future.

time to update compensation systems

Forward-looking CEOs are also contemplating further advantages generated by the crisis, but which are unlikely to last long. Now is a unique time for senior managers to kill pet projects that divert time and resources and are likely to yield little in the way of results. In normal times, a good manager may feel the need to allow marginal ventures to flourish so as to promote entrepreneurialism and independence. This is the last opportunity in the business cycle to rein them in. One CEO of a Midwest financial services company with whom I worked had been living for four years with his chief operating officer's pet project, an expansion into the middle market. The venture is still considered a startup and has yet to make a profit. Today's economy has provided the chief executive the opportunity to dismantle the venture without damaging his relationship with his COO.

Another example of change waiting to happen can be found in outdated compensation systems that reward nonperformance. Changing the way bonuses are paid is always risky, but the crisis provides an opportunity to do just that. On the other side of the crisis, a company will need to have in place a new compensation system that rewards over time for real, sustainable, value increases—not results tied to the vagaries and whims of the market.

There is also short-term opportunity for CEOs to strengthen company management teams by hiring great people at relatively little cost. In the recent difficult times, key employees shifted focus from maximum compensation to maximum security. Never has the message that a company is growing carried more weight. That "star" who could not be bought a year ago may now be lured away with a smaller compensation package. He or she may already be looking. This option, too, will disappear as growth in the economy takes hold.

fix discretionary revenue "leakage"

As we pull out of recession, some wise company executives are already beginning to build capacity before they need it, even at the expense of short-term efficiency. As the market picks up, there is likely to be rapid demand for skilled employees. This could lead to wage inflation and a shortage of resources needed for growth. Some CEOs are planning for this now. One transportation company is paying virtually 100% of its current profits in retainers to employees. While this may seem at odds with promoting an efficient environment, it really isn't. The company is lean and has stopped all unnecessary activity. It is consciously investing for the future.

Finally, a company that uses this unique time to focus more than ever on its customers and their needs will win loyalty well into the future. A customer who is supported in difficult times is a customer who is likely to remember, in competitive times ahead, the help they were given. This does not mean companies should forego revenue. In fact, there are many creative ways to increase it. In good times, a sales force will typically have some discretion over discounts, waivers, and extended credit terms. Revenues can be increased by focusing and tightening up on discretionary revenue "leakage." One midsized auto insurer I recently met with was waiving 90% of late fees. Now the company is collecting 90% of those fees, with no adverse customer reaction.

Forward-thinking CEOs will also use the current environment to completely review pricing. They will be clear as to which features of a product or a service their customers truly value. Often a premium can be charged for time-based services. Now is the moment to start collecting that premium. Amid crisis, even the most loyal customers will respect a company's decision to collect for the true value it provides.

The past couple of years have been the most challenging in living memory for most companies. As the survival phase passes and growth again beckons, allow a little time for forward planning. It would be a shame to waste the crisis and not get a step ahead on the highly competitive environment to come.

Neil_smith
Neil Smith is the CEO of Promontory Growth and Innovation, a New York consulting firm that helps clients increase revenues and reduce costs in innovative ways.

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