Stephen H Baum Leadership

The cliff is not only in sight, it is here. What to do?

If you have been reading this blog for awhile, you know that each member of my group of business owners and chief executives made contingency plans and took precautionary measures in September 2007 for the storm they saw coming. At year end of 2007, it was not easy to lay off people they had come to know, in whom they had invested in terms of training. Especially in those firms with no prior history of layoffs. It was not easy to slash budgets for all but the most urgent expenditures. But owners were driven by at least one thought: don’t let earnings and cash flow fall so low as to break bank covenants.

In the past two months, even with additional and effective capacity in prospecting and retention, there is not enough success to keep profits and cash flow from dropping to low levels. Accordingly, business owners are now cutting into muscle: reducing capacity by laying off the bottom performers in operating units on which current revenues and profits depend, eliminating entire units that are keys to company growth (e.g., recruiters, some in product development), laying off selected members of the senior team (functions not essential to keeping the doors open as well as underperformers), accepting higher interest rates or fees from re-negociated bank covenants, deferring start-up of overseas units to which operating capacity can be outsourced.

And now: “Deferring my dream,” said one of them as he reluctantly ceased investing in a new product scheduled to come to market in Q1 of 2008. After years of investing and nurturing this product and building a powerhouse development team. “Survival means having to give up on highly prized projects, saying goodbye to some of the best of recent hires.”

No matter what optimism about a turnaround in a year may be reported in the media (and there isn’t much), these highly networked leaders are listening to bankers and lawyers and others reciting how many businesses are going under, observing the struggles of their suppliers and customers and going with their gut.

In one business where one’s word has been one’s bond — an essential for high speed, high value transactions — the industry is in un-chartered waters as written, legal contracts are being broken. Extracting compensating penalties (by lawsuits or otherwise) is both unattractive and ineffective. My friend, the CEO, is on a world tour to examine each situation and look for solutions that work for both sides. Then another sit-down with institutional investors.

Not it is not that there isn’t some opportunity in calamity. One owner is buying a cash-generating business with cash that will handsomely payback in short order. Another is offering cost reduction services that have tremendous and immediate appeal. But these are rare and small recompense.

Now is the time for new thinking, creative sharing of the pain with commitments to share the gain in the future and re-thinking of business models together. That is the path for all but the largest businesses in America who are lining up to re-organize to get bailout money from the taxpayer.

That’s my view. What’s yours?