Panic as a Management Folly in a Recession

Nothing more clearly exposes the ineptitude, insecurity, incompetence and dishonesty of many corporate management groups than a good old fashioned recession. Although usually slow to recognize and act in an economic hick-down, when corporate management does do so it often turns to its bag of tricks and pulls out the only anti-recession tool it seems to have – panic!

Emergency management meetings are called to deal with the crisis. Questions are asked: “What are we going to do?” Answers are given: “Cut costs, reduce capacity, downsize and lay off workers.” Pleased with the originality and creativity of their solutions to countering the looming recession, management touts its decisiveness while attempting to mollify workers with, “We didn’t want to do this, but in these times it was the only action we could take.”

Other management groups, being the peer group copycats they are, see their brethren in panic and do the same. Soon these actions cause the economic downturn to worsen, allowing management to applaud itself for its ability to foresee the coming recession.

What a crock!

Of course we should not be surprised. If American industry is losing its ability to compete worldwide during good times, how can we expect any better from management during bad times?

There is a fundamental problem here: Most management groups plan and act on the assumption of good times forever. Of course the flaw in this philosophy is that good times are not forever. Economic times move in cycles – good and bad. That means that when bad times arrive – as they always will – then management is ill-equipped to deal with them and panic ensues.

There is another problem that panic can cause. If knee-jerk, short-term decisions are made to meet the current downturn, then the very core and capability of the company can be destroyed and the company will be ill-equipped to respond when times turn better.

My philosophy is different.

Corporate structure and capabilities should be based on the ability to survive in the worst of times. If this philosophy is followed by management then a company will be prepared to cope with the bad times and the good times will take care of themselves. I believe it was former UCLA basketball legend John Wooden who once said that the best athletes are those who don’t get too high when things are going well and not too low when faced with adversity. It is a lesson business management would do well to learn.

This is not just Pollyanna wishful thinking – it is reality. I was CEO of three major corporations over a 25-year span and I am proud to say that during all that time – in good times and bad – I never once had to downsize, reduce capacity, lay off workers or go on a cost-cutting safari. This was accomplished by being optimistic about the future but practical about the present.

(In the interests of full disclosure it should be noted that when my company LifeUSA was acquired and merged into Allianz Life we did exit some Allianz Life business segments and layoff a number of employees. However, this was mandated by poor decisions of the previous management and the bloated nature of the Allianz Life organization.)

If expenses are constantly managed for the work at hand and not allowed to become bloated by good times or the assumption of anticipated good times, then they become much more manageable in bad times.

Staffing was based on business in house, not what was in the mail. Capacity to produce business was designed to be strained at existing levels. It is much easier to increase capacity on demand than it is to reduce it in slack times. The bottom line is that if you don’t allow yourself to get fat you don’t have to worry about losing weight.

That does not mean that down times were not difficult to deal with, but it did mean that more options were available. There was no panic that led to knee-jerk actions. Sure, there were times when a hiring-freeze was in place and staffs were reduced by attrition. (The company actually operated on a constant hiring-freeze in that new staff was not added unless there was more business than could be handled.) There were times when raises were postponed and when bonuses vanished, but these were manageable events that did not disrupt the culture, morale or structural core of the organization. The real benefit to this approach was that when times again turned good the company was better prepared to immediately take advantage of them.

Of course, there are some exceptions to the rule and there are sometimes events beyond anyone’s control, but as we plod our way through this recession, take time to observe the panic actions by the management of many companies. It is a sure sign of weak management. By definition a well-run company is one that will run well in bad times as well as good times.

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One response to “Panic as a Management Folly in a Recession

  1. Since insurance companies make money from assets under management the panic cutting of costs makes even less sense from a business perspective. It’s like p***ing on a forest fire. Apparently it’s easier for some management to offer up these meager savings to the altar of the Gods of bureaucracy in the name of keeping their jobs rather than stick their necks out to recommend what will really be best for their companies in the long run. But without any innovative solutions at least they can say they did something. I guess it’s safer to stay part of the pack..it’s just not as profitable or rewarding.

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