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Focus, Not Across-the-Board Budget Cuts, the Key to Success During a Recession

Diamond Management & Technology Consultants' Analysis of 400 Large Companies' Pre- and Post-Recession Performance Reveals Ways to Thrive in a Downturn

10.13.2008

Download Don’t Waste a Crisis: Emerge a Winner by Applying Lessons from the Last Recession white paper (370 KB PDF)

CHICAGO, October 13, 2008--Every company cuts costs during a recession but only some companies actually improve their competitive position. Forty-eight percent of the companies who cut expenses across the board during the last major recession either lost ground or remained an also-ran, according to a new research report by Diamond Management & Technology Consultants, Inc. (NASDAQ: DTPI). However, more than half of the companies Diamond examined actually increased gross margins during the recession year of 2001, and by the end of the recession had improved margins by an average of 20 percent.

"Don't waste a crisis," said Adam Gutstein, Diamond's President and CEO. "Staying the course in times of uncertainty may seem like a safe option. But in fact, honestly assessing your company's performance during the last recession and building a roadmap to realize value from cost-cutting and investments during this downturn are the keys to emerging from a recession as a winner."

In a new report, "Don't Waste a Crisis: Lessons from the Last Recession," Diamond reports on its analysis of 400 companies with annual revenue of more than $100 million and their performance before, during, and after the recession of 2001. Performance was measured on a variety of financial indicators, including return on equity, return on invested capital, and EBITDA¹as a percentage of revenue. Then the consulting firm analyzed each company's investment and expenditure patterns over that same period.

"Our research reveals that at the very time when leaders are tempted to shorten their time horizon and make arbitrary across-the-board cuts, superior performers dig into the data about their company performance and outsmart the competition," said John Sviokla, Diamond's Managing Partner of Innovation and Research. "Everyone cuts costs, but doing so in a way that improves the design and performance of the business separates the winners from losers."

A complete copy of the report, "Don't Waste a Crisis: Lessons from the Last Recession," is available upon request to: recessionresearch@diamondconsultants.com.

Diamond found that companies fall into one of four categories, based on how they enter and how they emerge from an economic downturn. "Stalwarts" are consistently high performers, ranked within the top quartile among their industry peers before and after a recession. "Low idlers" did not show any significant difference in performance regardless of economic conditions.

Two other categories of companies experience significant swings of 10 percent or more when comparing their financial performance relative to their industry peers. "Disappointed Stars" suffer worse performance when a recession turns. However, companies identified as "Opportunists" rebound from a recession and improve their relative competitive position.

The financial performance of four in ten of the companies analyzed moved up or down in the period from 1998 through the post-recession period of 2003. In that time Stalwarts and Opportunists created more than $350 billion in market value. Low Idlers and Disappointed Stars destroyed over $200 billion.

"Our research shows that tough economic times mark a turning point for many companies," said Diamond partner Paul Blase. "Strong performance before a recession does not guarantee a higher tendency for success once the economy recovers. But a recession, as painful as it may be, is often an opportunity for growth and improved performance at companies willing to invest carefully."

Recent examples in the current downturn support that opinion. Diamond helped a leading credit card company rethink their approach to customer service, lowering costs and increasing customer satisfaction by improving customer self-service capabilities. At a large insurance broker that was planning an across-the-board cut of 10% on its technology budget, Diamond's analysis uncovered opportunities for even greater savings by standardizing processes across its new business development group. At the same time, the company increased its speed in setting up new businesses.

Having helped companies in many industries, Diamond has identified seven lessons to thrive in a downturn, while improving the fundamental design of the business.

1. Cut the right costs by getting at the root cause of expenses – Firms that performed more thoughtful reviews created more value. For example, a large HMO conducted a root cause analysis of the economics of customer transactions and interactions. Rather than across-the-board cuts that would have decreased customer service, the HMO introduced call-deflection tactics that generated $21 million in annual savings while keeping customer satisfaction high.

2. Automate, Automate, Automate – For leading competitors the cost-cutting mandate during a recession is an opportunity to take advantage of the rapid decrease in the cost of information technology. Southern Company, the huge, Atlanta-based utility, installed an automatic meter-reading system in 2008, yielding both cost savings and the opportunity to improve its business design by providing meaningful data about power usage.

3. Use Vendors to Create Lower, Variable Costs – Companies that nurture their in-house core competencies and carefully offload other functions to vendors often reduce near-terms costs. Furthermore, adding more variable costs to the design of the business gives management more freedom to respond to shifting economic conditions.

4. Identify the Customers to Grow On – Unprofitable and highly transactional customer relationships should be reassessed during a recession. Singapore Airlines remained profitable when East Asia suffered from a currency crisis in 1997 by cutting back on short-haul routes and investing $300 million to cater to business and first-class travelers.

5. Optimize the Marketing Mix – As every advertising agency knows, cutting the marketing budget is typical in a downturn. Leading companies analyze all their customer channels—advertising, the web, phone-based customer service, face-to-face—to match the optimal channel to the optimal interaction. For example, an investor services company has invested in a new Web capability that allows brokerage firms to host their own investor chat rooms and validate how many shares of stock a chat room participant has in a given security. By building a social media channel for its clients, this company is looking to increase financial transactions with minimal costs.

6. Invest When Others Can't – Stalwart companies keep investing in R&D when times are tough, the Diamond research revealed. Gillette, for example, launched its Sensor brand of shaving products in mid-recession in the early 1990's and by 1997, 49 percent of Gillette's sales came from new products introduced in the previous five years. Intel invested 14 percent of sales (a whopping 174 percent of 2001 profits) during the 2001 recession on production innovations to produce faster, cheaper, smaller computer chips. Intel then launched new products months ahead of schedule and reported its highest growth rate since 1996.

7. Focus on Your Core – Across-the-board investments don't work any better than across-the-board cuts during a recession. Leaders succeed by focusing new investments in core strengths or developing their next core strength. During the 2001 recession Microsoft bet on the launch of one product: the Xbox game console. One of the most successful launches in videogame history, Microsoft sold 1.5 million Xboxes in the first two months.

"Managing risks in times of uncertainty is paramount," said Gutstein. "That's why it's important for management to ask hard questions. How did we perform during the last recession? How well prepared are we this time? Did we learn the right lessons? And have we done the analysis and plotted the course to emerge stronger this time?

"Leaders that follow these principles and execute a structured plan can proceed with confidence and emerge stronger when the market turns."

About Diamond

Diamond (NASDAQ: DTPI) is a management and technology consulting firm. Recognizing that information and technology shape market dynamics, Diamond's small teams of experts work across functional and organizational boundaries to develop new strategies, improve operations, and deliver results. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. To learn more visit www.diamondconsultants.com.

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