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Weathering the recession.

As some indicators reveal signs of improvement in the economy, many companies have yet to feel relief. They continue to struggle with cash flow problems, declines in quality, reduced workforces, and, often most damaging, low employee morale.

Is there a formula for being a good executive during bad times? Three financial, executives share the lessons they've learned from managing their finance departments through this latest economic lull. Their thoughts were adapted from a presentation to FEI's Baltimore Chapter.

Managing a finance function in these times is a good news/bad news story. The bad news is that companies, and therefore departments, are suffering from poor profits; the good news is we're reviewing the way we do business to help us improve.

Every company is different. If you're a bank in serious trouble, you try to focus on certain areas. You have to motivate the people in the finance department, without relying on profitability to drive anyone. And you have to reduce expenses. The company asks everybody in the firm to contribute to the effort. That means staff reductions, salary freezes, and benefit reductions, none of which helps with your first objective, to motivate.

We finance managers are asked to produce more information--at the same time we're asked to reduce our costs. After all, when things aren't going smoothly, people ask a lot more questions.

When I returned to MNC Financial in July of 1990, after a short stint consulting, it was a very decentralized, very line-driven, and somewhat undisciplined company. The finance organization was geographically dispersed throughout Baltimore and Washington, D.C., and it was very culturally diverse. The companies making up MNC had many different attitudes about how a function like finance ought to work.

How do you meet such challenges? First, you must maintain your professional standards. When you're going through a tough period, it's very easy to relax your standards to get the work done. The people in my organization have been working harder than ever, but that can't become an excuse for mediocrity. Maintain a set of expectations that people understand and can strive for.

Second, centralize your organization functionally, organizationally, and physically. MNC was scattered all over. In July of 1990, the company had at least five separate organizations, consisting of 250 people, headed by managers with the title of CFO or something comparable. Today, there is essentially one organization, which consists of about 150 people, including 15 or 20 employees in a new organization working on troubled real estate. So we're down about 100 people from some 15 months ago.

The challenge is substantial. So my third most important point about managing a function in that kind of environment is that you can't communicate with your people too much. I'll give you an example: American Security Bank, a bank in our consolidated group headquartered in Washington, had a finance function that consisted of about 30 people. Three months after I rejoined the company, we decided to consolidate all the finance and accounting organizations into a single facility headquartered in Baltimore. I went down to ASB to tell the employees exactly what we planned and when we planned to do it. I told them we were going to try to find jobs for anyone interested in coming to Baltimore but I was doubtful we'd be able to find jobs for everyone.

Over the next six months, I visited informally with these people on numerous occasions, sitting down and answering all their questions. At the end of that process, the employees--many of whom were being fired--were so pleased with the company's honesty and forthrightness that they expressed sincere appreciation in spite of the fact that they were losing their jobs. Why? Because we told them about the changes as early as possible, we kept them abreast of all our decisions on a day-to-day basis, and we were totally honest about the whole process from the start.

Fourth, you have to develop within your organization a culture that eliminates what we've come to call VDs, or value detractors. VDs can be poor attitudes or people who aren't going to be team players in any environment. These need to be weeded out of the organization. But make sure the people who are left are the people who want to be there, the people who will put out 120 percent, which is what we've asked of all our employees.

Interestingly, at MNC several very diverse cultures in the organization were thrown together on the fourth floor of the bank center building in Baltimore. We've had to overcome the old "us-and-them," corporate-versus-the-field conflicts. To meld the cultures, we try to socialize together frequently. For instance, we'll soon have a closing party to celebrate finishing the 10k, the call reports, the FY9s, the tax returns, and so on. And, because we're controlling our expenses, we have to fund many of the social activities ourselves. But we think they're successful. In short, the key is communication. Clear, open, honest communication. When companies are in trouble, the finance function is critical to the organization, and your people need to know that. They need to know they're players, that the company is relying on their skills. They need to feel needed. I spend more of my time on those functions than on anything else.

One final point: In the spirit of prevention being the best cure, remember that the time to strengthen balance sheets to see you through the rough times is during the good times. Had we had the foresight to predict the impact of the collapse of this region's real estate markets, we could have restructured the MNC balance sheet with some long-term debt, for instance, to help us weather the storm. We might have avoided the necessity of disposing of our credit card company, for example, and retained its earnings stream to hasten our recovery.

So look very hard at what you can do to strengthen your company's fundamental financial position during good times, and be aware that that's when management can be the most resistant to those very changes.

At Black Decker, we believe in the cut-and-build strategy. A cut-and-build strategy says that during a recession you should cut certain expenses but invest in others. Since 1945, the U.S. has faced eight recessions, and it has seen eight recoveries. We're in the ninth recession, and I believe we'll see the ninth recovery. If you trust that premise, then cut-and-build makes sense, and you realize you must invest now for that recovery.

Four areas are very important: total quality, communications, organization development, and product development.

An easy thing to cut during a recession is your investment in total quality. At Black & Decker, we've launched a program for total quality, not just product quality. We want to exceed the customer's expectations with excellence and continuous improvement in everything we do. If you call us for an order, we want the person answering the phone to provide more than you expect. If you come to us with a product problem, we want our service people to surprise you with the quality of service. We continue to make that long-term investment, because during a recession knee-jerk reactions are inappropriate. And we also focus on interdepartment quality. For instance, how does our tax department service the tax users within Black & Decker? How does our treasury group meet the requirements of the entire operation?

That leads to communications. It's easy to communicate during the good times; it's harder to communicate during the tough times. We go out of our way to communicate during recessionary periods, and you should, too. If you're making changes in your department, your employees should know exactly what you're doing. There should be no surprises. You absolutely have to communicate up front a head-count reduction or other potential problems. Don't let a morale problem develop because of rumors. It takes a long time to build your credibility, but you can lose it overnight.

The third area to invest in is organization development. Our philosophy is to promote from within where possible, and that's tough when you're in a recession. It's easier to bring in someone from outside, because, after staff cuts, finding an appropriate person within the organization can be difficult. But I'm convinced employee morale improves fivefold when you promote from within compared to when you hire from the outside.

On the other hand, we've had several operations that needed to reduce headcount. In one case, a general manager, who was trying to meet his budgets, dismissed more employees out of the financial control area than he should have. If he should have laid off five, he laid off ten. His philosophy? If a factory was closing and he needed to lay off a certain percentage of the entire staff, the finance organization should take a leadership role and eliminate a similar percentage of employees. After a couple of months, our internal auditing people realized we had lost control of that operation. We had laid off too many people. And the cost of reestablishing control was four to five times the savings accomplished by the layoffs.

How did that happen? We had a financial executive in the organization who didn't say to the general manager who was making the staff cuts, "We've got to stop here. The integrity of the financial controls and statements are at stake." The general manager called the shots, and the financial manager was not part of the team. He took the order instead of resisting it, and we lost control. In times like these, financial executives feel a lot of pressure, but the integrity of the financials is critical to this profession, and we're responsible for maintaining it.

And don't neglect your superstars, your fast-trackers. You have to spend more time with them now, personally assuring each that he doesn't have to worry about the layoffs that accompany the recession. This takes time, but these are the employees who will take you through the recovery, and you can't afford to lose them.

Finally, concentrate on product development. Black & Decker just launched the DeWalt product line of 33 new power tools. DeWalt is an old radial arm saw company we own. The new product line is a multimillion-dollar investment we've made over the past two years. The Black Decker name isn't even associated with the tools. But it's critical that you continue to make investments in new products because, again, there will be a recovery.

In short, financial management must be a key part of the operating structure and the decision-making process, especially during a recession. Unfortunately, general management sometimes finds it expeditious to make decisions without the appropriate financial input. Don't let that happen.

McCormick & Company has been able to weather this recession very successfully. Historically, the food industry has been relatively recession proof, and McCormick's diversification across the entire industry helps reduce our total business risk.

We were founded in 1889. Our cultural roots run deep, and we aren't given to quick changes in management style. When a recession hits, you may see subtle changes in emphasis in McCormick's management philosophy but not quick changes in direction.

Here's what I think is important for all companies now: The finance and accounting staff must share a clear vision of where the company and the function are going. This is always smart but, during a recession, the focus must be squarely in the cross hairs so everyone understands the objective. As a leader, you must demonstrate enthusiasm for and commitment to achieving the objectives.

In McCormick's 1991 annual report, our chairman and president wrote this to our shareholders: "How can we continue to perform so well in the current sluggish national economy? The answer comes from one industry analyst. He describes McCormick as |not very sophisticated.' He's right. We aren't. We still subscribe to three simple beliefs: one--serve the customer; two--offer quality products; and three--understand that employees make the difference.

"We agree that's not very sophisticated stuff, but when we combine all three elements into a corporate-wide culture, the results can be exceptional. By emphasizing our focus on customer needs, on product quality, and on the talent of our employees, we create a competitive advantage, especially important in today's complex global marketplace where there are no guarantees."

That's a very simple statement of who we are: The customer is number one, quality is our signature, and people make the difference.

Our financial objectives are simple, too: 10, 15, 20, 30, 40. Ten percent sales growth, 15 percent earnings growth, 20 percent return on equity, 30 percent dividend payout, and 40 percent debt-to-capital ratio. It's simple. It's easy to understand. And we make sure all of our employees know the numbers and know where we're going. Obviously, we're going to focus on some financial objectives more than others. Return on equity probably gets the most attention, with earnings growth a close second.

Remember, during a recession, anxiety levels are high. A lack of communication simply makes it worse. This is probably the most neglected management activity during tough times. Yet, motivating employees and convincing them to keep their minds on their work, rather than worrying about their jobs, is terribly important. You must remember it's part of your job.

I've been involved in four turnarounds and six downsizings, and I can testify to the importance of being open and candid with employees. Tell them what's going on as quickly as you can. Even if you haven't made a decision, meet with your employees to explain the problem and assure them you'll communicate the decision as soon as possible. Establish your credibility and enhance it during difficult times.

During a recessionary period, you'll also hear more about cost and expense controls. The role of the financial executive and the finance staff becomes critical. You must be forceful but fair and compassionate. You're in a unique position to alert management to trouble spots, help develop contingency plans, and help focus management's attention on the important issues.

In short, having good personal values, business values, and ethical values is terribly important during a recession. Certainly, the pressure is more intense, and sound values and common sense will carry you through difficult economic times.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Management Strategy
Publication:Financial Executive
Date:May 1, 1992
Previous Article:GIC strategies for the '90s.
Next Article:Meet FEI's 1992-93 chairman.

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