When the going gets tough, the tough get smart

Tough times needn’t always be bad for your business. Have you spotted the opportunity in the downturn?

Executive ReportSeptember 2011

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How to downturn-proof your business

Soaring fiscal deficits and unmanageable debt make for an economic Molotov cocktail. That’s precisely why the dreaded ‘R’ word has gone from being mentioned in hushed tones to loud laments.The US may have staved off debt apocalypse, but is it in for a double-dip recession? More importantly, what lies in store for India? After all, it’s a truism that when the US sneezes the world catches a cold. So, at a time when it seems as if the US is about to catch pneumonia, the world can hardly be blamed for shivering away.

India, which is still growing at 7%, isn’t looking at a gloom-and-doom scenario but its boat has been rocked. This is apparent in the stock market volatility and the cautious hiring approach that India Inc has adopted.

How would a further downturn in the US or global economy impact India? And what should we do to guard against it and ensure our growth is not impaired?

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Is India exposed to another global downturn?

» Several Indian companies have major outsourcing deals in the US. India’s exports to the US have also grown substantially over the years. These companies would be affected.

» If there is a recession, the Indian economy could lose 1-2% of GDP growth.

» Indian companies that deal with the US could see profit margins shrinking. IT and IT-enabled services, textiles, jewellery, handicrafts and leather industries would face heavy losses.

» The IT sector will be the worst hit as 75% of its revenues come from the US.

» The BPO and automotive components sectors will be hit as US companies cut spending.

» Manufacturing and financial institutions would be somewhat vulnerable.

» If the rupee strengthens, exporters would get hit. This may, however, mean that more foreign money would come to Indian markets as markets abroad tank. Some corporations may suffer due to volatility in foreign exchange rates.

» Domestic and Asian demand would partly counter the drop in US demand,

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but things could get rough anyway. Don’t forget, the US accounts for 30% of the world’s GDP.

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What about India’s job market?

» The service industry – BPOs, KPOs, IT, ITeS – will be worst hit. Services account for 52% of India’s GDP growth.

» There may not be as much of a threat to skilled people. According to NASSCOM (National Association of Software & Service Companies), India has a shortage of about 5 million skilled people in IT/ITeS. So, there might even be opportunities.

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What Indian firms should do

» Change your business strategy. Some IT and BPO firms have started looking at other markets such as Europe and China, and even the domestic market, to spread risk and reduce the impact of the rising rupee. Infosys, for instance, set up an India-centric team a few years ago.

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» Diversify export markets, improve internal efficiencies to maintain cost competitiveness, move your product portfolio up the value chain.

» Continue investing, but smartly, so that you are ahead of the competition when the US economy recovers.

» You’ll have to spend more on developing markets and supply chains in alternative hunting grounds like Asia and Europe.

» Are you export-dependent? Re-focus on local demand and income from non-dollar economies. Europe, West Asia and Africa could offer viable short-term alternatives. In West Africa, for instance, goods at departmental stores are sold at 5 times the Indian price. Indian goods are not exported to several countries in West Africa. This could be a great opportunity.

» Don’t be afraid to renegotiate and fix appropriate (read: lower) prices for your services.

» You’ll find markets within India, but be prepared for smaller deal sizes.

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What will work for you?

Here are a few best practices that experts recommend to help your business navigate a downturn.

Customer focusCustomers are the reason you are in business.

Make him/her the centre of your universe; let every decision be based on some simple questions: How does it affect my customer? Would it make his/her life better?

These simple yardsticks would help you take meaningful decisions. It might also help to talk to customers to understand how you could help them during tough times.

IT major Satyam helped clients transform their businesses during the last downturn by forming innovation ecosystems. Satyam seeded its ecosystem from the inside-out, by unleashing the entrepreneurial talent of its 50,000 employees.

Satyam’s ‘intrapreneurship’ was part of a larger corporate experiment to empower its business units and support functions to operate as independent enterprises. At one stage, Satyam boasted of a loosely-coupled federation of 2,000 intrapreneurs – ranging from alliance managers to client engagement teams to HR execs. These intrapreneurs were trained to facilitate innovation and adopt best practices from other business units within Satyam as

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well as from outside. They were also trained to drive process innovation, in addition to creating new products and services.

Having done this, Satyam engaged its customers into its innovation ecosystem to drive value co-creation.

80/20 Rule First, focus on your core business; remain focused on the products and services that are making you the most money. This is where the 80/20 principle has to be strictly applied; 80% of your income comes from 20% of your customers. Similarly, 80% of your wastage comes from 20% of your products.

Focus on your customers first and waste second. Identify the 80% and 20% factors so that you can plan your cost-cutting strategy.

A bird in hand… Your existing customer provides an opportunity to sell more without incurring the cost of finding a new customer. Offer discounts, something more or different than the competition. This helps in maintaining loyalty and prevents competitors from wresting away your customers. Use the downturn to your advantage Lasting relationships are built in tough times; the downturn is a good time to strengthen bonds with customers. Help them in difficult times, and they will show their appreciation once the good times return.

Reset priorities When a company’s world view changes, everything else does too. And it can be traumatic. In good times, the priorities may be getting into new markets, hiring enough and growing earnings. Suddenly changing direction may seem drastic, but do what needs to be done.

After the last downturn, Indian IT firms such as Wipro set up dedicated business units to penetrate emerging Indian and Middle Eastern markets. Others like Infosys tried to lessen their exposure to the financial services sector by foraying into other sectors, such as manufacturing.

Keep investing, focus on your forteRemember, the downturn will end some day. When it does, will your business be more competitive or less? The most successful companies never stop funding their most critical competencies such as product innovation, customer service, etc.

Also, diversification is not just about adding new products/services. The key is to drop the extras and focus on what you do best.

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example, increased employee incentives based on sales by 30% during the last downturn.

Communicate like crazyIn bad times, all of a company’s constituencies are nervous: employees are worried that they’ll be fired, suppliers fear they won’t be paid, customers are concerned that quality will decline and investors wonder if the stock will tank. Your silence only makes them worry more.

Make marketing expenditure workEvery company has customers that cost more than they add to the bottomline. Identify them, evaluate how to make them profitable, and if that’s not possible, politely hand them over to your competition.

Make sure you’re not spending money selling to folks who aren’t buying. You could do better than running ads on MySpace when your target demographic is 34-50 year olds.

New problems, new solutions Customers need change with the business climate changes. That might open new doors for you. For instance, in the days following the dot-com bust of 2001, the founders of online auction site Baazee.com started a reverse auction business and took on consulting projects for companies that yielded a few million dollars. In 2004, founders Suvir Sujan and Avnish Bajaj sold the company to eBay for $50 million.

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Invest in talent Your employees can make or break your business. For virtually all companies, a critical part of the core is the continuous development of employees. Yet, it’s remarkable how many businesses cut training and development in a downturn. By training your best employees, you make them more effective. This will go a long way in retaining the best once the downturn ends.

But re-evaluate people too!Most employees look like excellent performers in a booming economy. Now is when you identify the impostors. If you need to lay people off, choose wisely.

If salaries or bonuses need to get slashed, you may be tempted to reduce them equally across the board to show that we’re all in this together. But think of what this tells your best performers; they’ll feel they’re being punished rather than rewarded for their great work.

Instead of spreading the pain, reward your best workers even during a downturn. Then scout for competitors that are sharing the misery equally and approach their best performers.

One way to increase efficiency and cut costs is to link performance to pay. You could offer chunkier employee stock options in lieu of pay hikes or increase the portion of variable pay based on, say, sales. Bangalore-based mobile advertising company, Gingersoft Media, for

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Don’t rush to cut prices Sure, everyone likes to pay less, especially when times are bad. But the dangers of price slashing are greater than you may realise. A McKinsey study found that a price cut of 5% would have to generate increased sales of 19% in order to pay for itself. That almost never happens. Holding prices steady may cause sales to decline a bit, but it may still be the wiser course to take.

What you could do is list key operational expenses and find ways to minimise them. Retail apparel chain The Loot (India) Pvt Ltd listed out its top 10 expenses, which

include manpower, rentals, taxes, advertising, stationery, printing, maintenance and logistics. “We encourage employees to avoid paper wastage while printing by giving out a set number of papers to each department,” founder Jay Gupta was quoted as saying.

Stay committed to your brand In an attempt to generate short-term sales, marketing budgets are often diverted away from long-term brand building activities. Retain a portion of the budget for long-term brand building. If not, once the problems pass, you may find yourself with an irrelevant brand abandoned by core customers.

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Push and pullPush marketing consists of direct mail, email marketing, etc. Pull marketing is pulling visitors in from directories, search engine listings and paid advertising. By finding a media partner that already has your target audience captive, you can piggyback on their success by advertising with them.

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• In 1937, the US economy unexpectedly

fell, lasting through most of 1938.

Production declined sharply, as did

profits and employment.

• The US saw a recession during 1982-83

due to a tight monetary policy to control

inflation and sharp correction to the

overproduction of the previous decade.

• Black Monday followed in October 1987,

when a stock market collapse saw the

Dow Jones Industrial Average plunge by

22.6% affecting millions.

• The early 1990s saw a collapse of junk

bonds and a financial crisis.

• The US suffered one of its biggest

recessions in 2001, ending 10 years of

growth, the longest expansion on record.

The dot-com bust hit the US economy

and many developing countries. The

economy also suffered after the 9/11

attacks.

Have any Indian companies bucked the trend during a US recession?

• TCS, Infosy, Wipro, HCL and Cognizant

were listed in a Forrester Research report

said that these IT companies actually

showed signs of profitability during the

2008-09 turbulence. Other sectors that

showed positive signs of growth in that

period were food and food processing,

cell phones, railways, PSU banks,

education, healthcare, luxury goods and

mergers and acquisitions.

FAQs

What is a recession? • Negative GDP growth for two or

more consecutive quarters is called a

recession. As such, even though GDP

growth slowed, India is not experiencing

a recession and continues to grow at

roughly 7%.

What causes a recession? • All economies slow as part of the

normal economic cycle. Typically, an

economy expands for 6-10 years and

then slows for six months to 2 years.

• A recession normally occurs when

consumers lose confidence in the

economy and spend less. This leads

to a decreased demand for goods

and services, which in turn leads to a

decrease in production, lay-offs and a

sharp rise in unemployment.

• Investors spend less as they fear stock

values will fall.

How does it affect stock markets? • The economy and the stock markets are

closely related. Stock markets reflect

the economy’s buoyancy. In bad times,

they reflect its listless nature.

What turbulence has the US economy faced in the past? • The US has suffered 10 recessions since

World War 2.

• The Great Depression was a slowdown

from 1930 to 1939. It was a time of high

unemployment, low profits, low prices

and high poverty. This affected global

markets too.

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