Technofile Europe: Survival Kit for Growth Companies in 12.5 Steps

We’ve seen a lot of advice flying around on how to prepare for a recession, but most of it is targeted either at large companies or at VC-backed businesses (eg, the now-notorious Sequoia presentation).

But most companies are neither. They are the thousands of growth companies that are profitable or close to it, and who are used to growing faster than their markets in any part of the cycle. For them, weathering the downturn is about striking the right balance -– planning for survival without sacrificing the growth opportunity.

Below is a summary of the 12 1/2 steps I'm working through with my portfolio companies and entrepreneurs I meet. It's based on our experience with past recessions and taking into account the particulars of this downturn. As always, your comments are welcome.

Your New Budget

1. Write a revenue budget for 2009 that aims for modest growth (20% if you’re used to 50%, 15% if 40%, etc), and a cost budget for 0% growth. This won’t be enough (see below), but it’s a start.

2. Cut personnel costs. Cut deep enough to remain cash-flow positive even if 2009 growth is anemic. If revenue growth turns out to be higher, you can start recruiting again mid-year and you’ll benefit from a better pool of candidates.

Caveat: Cutting deeply the first time you do it is the best way to preserve leadership credibility. Making multiple successive cuts destroys confidence in management and leads to departures of good employees. Many of you will have made one cut already, which wasn’t deep enough, so try to make the second the last, and say so.

3. Freeze general & administrative expenses, then go through them with a fine-tooth comb and cut some more. You can always travel less (or less comfortably), use Skype, postpone seminars, push back on lawyers’ fees, etc. This is is mostly symbolic if you’re already quite lean, but it puts everyone in cost-conscious mode, which is critical.

4. Cut discretionary marketing spend and re-focus on online lead generation and performance-based advertising – anything that drives immediate sales. Your brand will survive 6 months out of the limelight of TV ads. The hard part is working out which marketing activity to cut –- knowing your conversion metrics by channel is key.

5. Review variable pay schemes to make sure they are both realistic for the low-growth scenario AND still incentivise growth. You should still aim to outgrow your broader market, even in a downturn. Your best people need to be incentivised to achieve this.

However: Avoid an across-the-board reduction in executive pay. You may think this has powerful symbolic value in front of employees fearful of losing their jobs, but it makes resignations inevitable in an unpredictable way. Better to reduce aggregate executive pay by letting a few execs go and giving the remainder bigger jobs –- which can be highly motivating.

Business Strategy

6. Analyse the profitability of your business by product, by customer, and by business line. Eliminate those that are not contributing positively to your central overheads; consider eliminating the least profitable 10-20%. There is no room for marginal clients (but you all have them!).

Important: Continue investing in activities that improve your efficiency or increase sales, whether it’s technology development to automate the backoffice, or consultants that increase your sales productivity.

7. Pause or stop skunk works and other experiments with new product ideas or business lines. You can always revisit these later. Consider parking that expansion plan for China for a couple of quarters.

8. Reposition your product/service offering. Every pitch to your customers needs to be about saving them money, about solving their problems caused by the recession. Quantify the quick ROI. If you’re very sure of your ability to deliver cash value to clients, consider risk-sharing contracts where some of your fees are variable.

9. Increase your share of markets where your competition is weakest. Many companies will disappear in the coming year; try to predict which ones and focus on those territories or segments.

10. Focus, focus, focus – this is the time to be doubly ruthless in getting management to prioritise the projects and tasks that affect the business in the short to medium term.

Cash Management

11. Manage cash collection tightly. Your clients will stretch payments and your suppliers will push you hard to collect early. You have no choice but to do the same to them.

12. Look for creative financing options to improve your working capital: sale & leaseback of equipment or property, receivables financing, government grants, bank financing (to the extent available).

The Human Factor

12.5 Most important, talk openly and honestly to your managers and your employees! The most damaging effect we see in recessions is a demoralising split between senior management in crisis mode, and everyone else wondering what they’re up to. Well-run companies can pull through if everyone is motivated to do it, and if management appears to be in control. It is the CEO’s role to listen and to lead, in good times and bad.