The U.S. Federal Reserve estimates there is a 38% chance of an economic recession occurring in August 2020, a stark increase from 15% a year earlier. Though precisely when an economic downturn will hit is anyone's guess, the next recession is likely inevitable. Preparing your business for economic uncertainty now is key to minimizing the downsides of budget cuts and other recession impacts in the future.
Most businesses react to economic downturns after they begin. This makes sense: Economists seldom provide accurate predictions for when a recession will start, instead notifying us once it's already happening. According to Gartner research (available to clients), businesses make similar, predictable reactionary budget cuts in response to economic decline. Resource tightening on short notice in response to an economic recession is often most easily achieved in the same ways for many organizations:
Travel spending is curtailed
Hiring is reduced or suspended
New investment is put on hold
Unfortunately, relying on reactionary budget cuts to survive a recession can lead to long-term problems as the economy recovers. Below we explain how advanced preparation can help businesses avoid the consequences of knee-jerk reactions to economic decline.
Businesses that abruptly cut back or eliminate travel spending risk negatively impacting sales, as deals in certain industries can be more difficult to close without face-to-face interactions. Additionally, restrictive travel spending policies can increase employee dissatisfaction and turnover.
Approach reductions in travel spending strategically by looking for ways to increase efficiencies today, lessening the requirements for curtailed spending during a recession. Travel management software can help with implementing incentive programs that give employees material rewards for reducing how much they spend on business travel.
While keeping staff size restricted or not filling open positions curbs spending in the short-term, there are potential consequences worth considering:
Customer experience may deteriorate as existing staff struggles to keep up with customer expectations.
Vacant positions may require spending on freelancers, consultants, and other labor that could be more expensive than regular employees.
Skilled employees may be poached by competitors as opportunity at your organization stagnates. Once the economy rebounds ramping up recruiting will take time—potentially extending the hiring freeze longer than intended.
Product competitiveness can suffer if investments in new innovation is stalled. This can be exacerbated if competitors that planned in advance for a recession manage to continue innovating despite economic decline. Keep in mind that any new technology investments your business has recently made could be impacted by a hiring freeze. For example, the investment return on martech tools could go unrealized without sufficient staff qualified to make use of the technology.
Hasty budget reductions in response to an economic downturn elongates the recovery period after a recession compared to a more coordinated approach. Planning for economic uncertainty involves defining the conditions for predetermined scenarios that will trigger a proactive approach to budget restraints. A few key considerations should be taken into account when creating a plan for navigating economic headwinds:
Understand the indicators that signal the economic environment has begun shifting in a way that is likely to impact your business financially. Some metrics for monitoring economic macro trends are explained here, but also consider consumer perspective and the competitive landscape in your industry. Some indicators for industry shifts include:
Decreased ad spending
Consider how changes in customer purchasing patterns, overall business performance, and external macroeconomic factors will impact the resources at your company's disposal. How likely are consumers or businesses to reduce spending on your product or service in the event of an economic downturn? If it's likely, you should use relevant indicators to plan for specific scenarios where budget cuts are increasingly severe, triggered by fluctuations in change-signaling metrics
Every business will face different budget scenarios during economic downturn, but one challenge remains the same: Determining which cost categories are flexible enough to be used in contingency budget planning. Once identified, take steps to either prevent or dampen the necessity of budget cuts when the economy contracts. For example, if labor expenditures are flexible enough to include in contingency budget plans, consider ways to proactively avoid layoffs or a hiring freeze before a recession.
Shift existing employees from lower revenue generating positions to higher ones.
Create an incentive plan to reward workers for increased productivity.
Prioritize bringing new hires into high growth areas of your business.
Despite thorough advanced planning, a hiring freeze or layoffs may be required during turbulent economic times. Prepare contingency budget plans for sustaining operations with increasingly limited resources. For labor costs, this means planning for a future where head count increases, head count remains constant, and head count declines—depending on predetermined metrics that trigger contingency budgets (e.g. customer spend and acquisition range thresholds).
When deciding where specifically budgets will be cut to accommodate contingency planning, the spend elements that do not change are the core components of each business function under consideration. For example, if your sales force is essential to maintaining revenue, this isn't an area where your business can cut labor costs during an economic downturn.
Separate Gartner research found that 70% of managers, spanning all functions, do not know how to prepare their own department for upcoming business declines. Coordinate with your peers, superiors and/or direct reports to ensure recession plans are understood and align with the wider company strategy for surviving a recession.
Discussing future problems before they arise will help with maintaining order and direction amid economic turmoil. Employees want more insight into how leaders plan to prevail amid economic declines, with 70% reporting to want more information about "economic challenges and planned initiatives helping the organization win."
Confront the next recession head on by planning for it in advance. This will foster employee confidence in your company's strategy and future outlook, as well as help with maintaining a clear focus regardless of unfavorable economic conditions.
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