The phrase “a rising tide lifts all boats” often implies that it’s easy to make money during a bull stock market, but the phrase also applies to research and business leadership. It’s (relatively) easy to work a research and business development plan in a booming market. The growth of volumes and profits tend to loosen budgets, allowing firms more resources and flexibility to address short-, mid-, and long-term objectives. But when the tide moves out, reversing growth and compressing margins, resource constraints tighten, forcing cuts and difficult decisions on how to spend the remaining budget. The way this is handled says a lot about a company and its leadership.
The US has been in a 10-year bull market, so the rising tide has limited the number of tough decisions that needed to be made. 2019 data indicate a slowing global growth hinting at a potential recession. No one can precisely predict the future of the US economy, but the discussion of a slow-down should cause us to strategize how we will react should one occur. Below are five tips for how to successfully navigate a downturn in a way that may keep you positioned for the eventual return to growth.
- Resist the urge to save your way to profitability. If your portfolio of development projects made sense before, it will probably continue to make sense in the future, so do not simply use the development budget as a cut that can assist the bottom line. Doing so eliminates projects that were, until recently, considered important for the future of your business. Cutting the projects now means that you will need to restart them later, possibly without resources, momentum, and the experienced people trained to conduct these projects. You may also lose connections with partners on these projects, and should you try to hire new staff to restart the projects in the future, the best candidates may think twice about joining your business after the previous group on the project was let go. If you must reduce budgets because of a downturn, do so judiciously by trimming fat from the budget, reducing discretionary spending, and possibly extending the timeline.
- Cutting off capital on a set date is a bad idea. When a decree comes down that capital expenses will be frozen in one month, behavior becomes predictable. Plants immediately begin to spend available capital on projects that can be done within that time limit. If the top projects can’t spend quickly enough, then a few new projects are started with key criteria of how quickly the money can be spent rather than the future value of the projects. If such capital expense cut-off dates happen each year, it teaches people that spending early in the year is more important than spending wisely on the best projects. Instead of arbitrarily setting a cut-off date, allow capital to be spent as originally allocated, but only on the most important projects that were already slated to receive funding.
- Implementing a large-scale travel freeze is also a bad idea. Nearly every year, some companies will freeze travel spending during 3Q or 4Q to ‘make-the-numbers.’ Often the research and marketing groups are hit the hardest by these freezes. Keeping these employees from traveling may prevent them from seeing customers, trade groups, regulatory agencies, and engaging in other interactions and relationships that are essential to best performing their jobs. It also stops them from participating in training sessions that expand their capabilities on the job. Basically, eliminating travel for research and marketing stops these groups from doing their jobs well. Since some travel cuts may be needed, they should be done surgically, cutting only the travel that is ‘nice-to-have.’ For example, some (but not all) customer visits can be switched to tele- or video-conference. A big-ticket off-site sales and marketing meeting can be reduced in size, brought in-house, or delayed to the following year. Don’t forget some obvious tips of spending your travel budget wisely. People may not like coach travel for long trips, but a coach flight to Asia may save several thousands of dollars per trip. When done from the top down, it sets the example that everyone should budget wisely during travel.
- If you must reduce development spending, don’t lose sight of your strategy. If your business lives and dies by innovation and new products, then cutting the research or marketing budget for those projects should fall toward the bottom of the list for where to reduce spending. Similarly, if quality is the basis for your business, do not save money by reducing QA or other quality programs. Each business will have its own drivers for what makes them unique and keeps them in business. Any reductions to spending must be done in light of their effect on those critical drivers of your business.
- Consider rebalancing your research and business development portfolio, but do not simply replace it with a cost-saving plan. When margins become compressed, some leaders reallocate all resources to projects to reduce costs in an attempt to regain their lost margin. Even if the approach succeeds in temporarily regaining some of the margin, it will seldom last, and it will have negative consequences of stopping or delaying the differentiation or growth projects that would have been valuable for the company’s future. Instead of moving all resources to cost-savings projects, be selective about how you reallocate resources. If you have some outstanding cost reduction projects, you should absolutely plan for how they can be accomplished to quickly help the business, but smaller or non-sustainable cost-save projects should be shelved, just as you would stop a low-return innovation project. Key projects (innovation, new product, process, etc.,depending on what drives your business) need to be maintained, albeit with a potentially smaller set of resources. Eliminating them, or putting them on hold for a year, can have disastrous consequences for their future viability.
Since no two companies are the same, no one solution will work for every business. These tips are intended to help business leaders plan for how to respond should the markets for their products hit a soft patch. The experts at Innov8 chem collectively have several decades of experience in chemicals, plastics, adhesives and other materials in many different sectors such as automotive, aerospace, construction, consumer products and green energy. We have helped companies survive and even thrive during down periods. Contact us at 267-503-3692 or robert.wanat@innov8chem.com to learn how we can help with your business development, consulting, or other research issues.
