Recessions | SmallBiz.com - What your small business needs to incorporate, form an LLC or corporation!

How to Be a Good Leader in a Bad Economy

smallbizincorp — Tue, 29 Nov 2022 13:05:57 +0000

“My days are full of turnabouts. I have to go back on promises, reshuffle priorities, and I second-guess too much. It’s wearing on me, and I feel like I am spending hard-earned goodwill,” a member of an executive leadership team told me in one of our sessions. “I want to pause for a moment and talk about how I can be a good leader in a bad economy.”

On paper, this person was being a good leader by enacting tried-and-tested strategies to prepare for an economic downturn: becoming more hands-on and moving closer to their team, setting a faster pace, and asking people to handle bigger workloads. But instead of releasing energy and instilling confidence, these moves were wearing the leader down — and their employees, too. In their effort to build a fortress, they felt like they were about to burn down the house.

This feeling may be familiar to executives and managers who are anticipating a recession on top of the aftershocks of the pandemic. The common thinking is that each crisis makes people stronger and more able to cope. But this is not the reality. Compounding crises tend to make people more vulnerable — and more shaky.

This shakiness poses a formidable challenge. It means that some of the normal crisis responses people turn to won’t work as intended. Indeed, if leaders use the standard playbook as-written, much like our executive at the beginning of this article, they actually risk setting off a destructive spiral and making the crisis worse.

To succeed as a leader in this moment, I suggest three key balances people need to get right: moving closer without suffocating others; moving faster without turning frantic; and taking on or assigning a bigger workload without sacrificing relationships.

Moving Closer Without Suffocating Others

When there are rumblings of an economic downturn, the first response from leaders is often to move closer. More meetings are called, more reporting is required, more detail goes into every conversation. This is quite natural — leaders want to understand what is going on. They want to help find answers. They want to make sure their teams are on track and doing what they can to fix the situation.

Psychologically, however, the impetus to move closer is often a need to feel in control. Moving closer is a risky maneuver and a double-edged sword. On the back of the pandemic, where teams have learned to operate independently and with less oversight, a boss looking over their shoulder can feel like outright distrust and disenfranchisement. It also draws their attention away from doing their job and on to “managing upwards.” The outcome may be stifling instead of stimulating.

Further, if leaders move too close, they clog up their own bandwidth with details and micro-management. The worst-case scenario is when a leader formally takes over their subordinates’ role because they believe they can do better. At a financial institution I was observing, for example, a top leader was so frustrated about the prospect of losing a large client that he marched into a meeting his team was having with them and interrupted the dialogue. He was short of breath, sweating, and agitated, and stood behind his employees to watch and ask questions. He later explained that he was only there to “secure that you do your job right” and to “fire up the crew.” It didn’t work; the company lost the client, citing “a hostile, immature and frantic environment that made them uncomfortable.” The team eventually dissolved, and good people quit their jobs.

To be sure, there are some legitimate reasons to move closer, like when leaders want to ground their judgment in first-hand experience or signal support by showing up on the frontlines. But they must remember that the point of moving closer is to motivate, energize, and support; not control, disengage, or sow doubt. A balanced approach is “touch and go,” engaging with teams on the issues they face, but also not taking the weight off their shoulders and onto your own. A good test is to make sure you don’t end up with a laundry list of things you need to fix for the team, but rather that your team knows their laundry list and understand that they now have control of the steering wheel again.

Move closer — but don’t hover — and have a clear exit strategy. Once you have seen enough, give the power back to your employees.

Moving Faster Without Turning Frantic

The second typical response is a healthy bias for action. In times of crisis, leaders cannot sit on their hands; time is of the essence. You can almost feel it in the jittery pace of meetings, as well as in a leader’s tone of voice or restless demeanor.

However, there is a fine line between urgent and frantic. Leaders must remember that the pandemic has made many people more brittle, not more resilient. Stress and mental health issues have skyrocketed. As a result, while most people understand the need of speed in a crisis, their tolerance for “pushy” leadership is much lower than it might have been prior to 2020.

To address this, leaders should examine the psychological traps they tend to fall into when economic times get tough. One common one is that people think they have less time than they actually do, so they come up with imaginary and self-imposed deadlines. “We need a solution by the end of the month” may create urgency, but if the better solution is another few months away, imaginary deadlines can sacrifice value in exchange for the illusion of speed.

Add to this the fact that leaders often exhibit less tolerance for dissent when things get difficult. They tend to become more ego-centric, so when others object to an idea or proposal, it’s quickly interpreted as resistance and obstruction, not as reflection or constructive feedback. Sooner or later, this pattern of behavior will lead to disengagement from the team and a sense of “false consensus” on ideas. While this might result in faster decisions, it can also hamper independent thinking and prevent better solutions from coming to the fore.

A balanced approach is to create a deliberate delay between ideas, decisions, and actions. Think of it as impulse control by design: Create structures and processes where you allow others (the board, external advisors, peers, or good colleagues) to vet and question your plans. You don’t have time or patience for endless bureaucracy, so design these processes to be fast and informal. Sometimes they can be as short as a quick phone call where you spell out what you want to do and test the immediate reaction of someone you trust.

Increasing Workloads Without Sacrificing Relationships

The third typical response to economic downturns is that leaders become more task-oriented and less mindful of relationships. Just like the frustrated executive earlier in this article, many leaders will ask their teams to take on a bigger workload. To-do list gets longer and longer because “more” feels better and “more” feels like responsible leadership. You might also hear versions of the statement, “We need to fix problems now, not coddle people.” As a result, off-sites are canceled, talent programs are put on hold, perks are cut, and courteousness and empathy go down the drain.

However, relationship work is not coddling; it is hard-core performance management. We have learned from the aftermath of the pandemic that good people rarely quit or “quiet quit” because their job becomes more difficult or because times turn harder. They quit because they lose faith in their leaders, their colleagues, or the future of the company. They withdraw because they feel unfairly treated or neglected. Yes, people go to work to complete the mission and finish their tasks, but more than anything they go to work because of the connection and community they feel they have with their colleagues. So, continue to invest in relationship-building. Maybe downgrade on the luxury, but still spend the time investing in creating connections. Go for five-star content, impact, and interaction, but in a three-star setting.

Part of doing this involves maintaining a balanced approach around relationship and task priorities. Be transparent with your team: What’s the nature and quality of work relationships you expect to see during a tough period? What kind of challenges and supports do you expect of each other? What kind of relationship compromises are you not willing to make, even if they would deliver short-term results? Ultimately, if you find yourself in an extended downturn, take a step back with the team and redefine what success looks like – and not only for the work tasks themselves.

. . .

Being a good leader in a bad economy has always been challenging. This time around is even more so because the usual burden of a bad economy may be compounded by the emotional disruptions of the pandemic. This means that leaders must turn the pages of the standard crisis playbook with care and moderation.

Leaders cannot stand still in the face of an economic downturn, but their bias for action and their instinctive responses — moving closer, moving faster, and increasing workload — must be harnessed. If these natural and legitimate leadership moves are not made in a balanced way, leaders may actually amplify the crisis.

5 Ways Startups Can Prepare for a Recession

smallbizincorp — Thu, 10 Nov 2022 13:15:22 +0000

Startups face a unique challenges during economic downturns. They typically aren’t yet profitable and so are reliant on outside funding—and therefore are especially exposed when macroeconomic conditions change. To make it through a recession, startup CEOs should hit the road and talk to customers. They should also focus on preserving their company culture and retaining top employees. And they need to do whatever they can to extend their runways—including taking on a line of credit.

With stocks down 20% from their highs, we are officially in a bear market. Many economists predict we will enter a recession in the next few quarters if we’re not in one already. What strategies and tactics should startup CEOs use to prepare for and survive a recession?

I’ve spent the last three decades in the software industry, including three stints as CEO as well as serving on the boards of 10 private companies and as an advisor to many others. I’ve led or advised companies through the dotcom bubble bursting, the 2008 financial crisis, and the Covid recession. While every downturn is different, in my experience there are some essential steps that startups should take when the economic environment deteriorates.

Take steps to extend your runway. Now.

When a recession hits, it gets a lot harder to raise capital. You need to extend your runway or your “cash out date,” so plan to survive on the capital you have. Only spend money to make to your product or service better or to drive new sales. No more “nice to have” expenses: Scale back on new initiatives, prioritizing only those that have a near-term chance of success.

In recessions “cash is king,” so you need to make sure you have enough to get through to the eventual expansion. Take on a line of credit to augment your equity capital. Interest rates are still reasonable and cheaper than new equity funding, even with rates rising.

Proactively embrace your best customers.

A recession is a perfect opportunity for you as CEO to strengthen your relationships with your biggest and most important customers. Remember they are feeling the threat of recession as well. Customers always want to meet the CEO of the company they have purchased from so this is an opportunity for you to hit the road, visit customers, and spend time with your salespeople. If you cannot have an in-person meeting, meet on Zoom. If you are uncomfortable selling, get over it. I recently spoke to a founder/CEO with a technical background who told me he “learned to appreciate sales” even though he was uncomfortable selling at first. If you’ve historically thought your time was best spent on product, it’s time to reconsider: In a downturn, your best use of time is talking to customers and making sales.

Remember that it is easier and cheaper to sell more to existing customers than to land new customers. This is especially true in a recession as everyone is taking a second look at all expenses. If you are in a B2B business, visiting customers also gives you real insight into how happy your customers are and whether you are at risk of customer churn. If you run a B2C business, invest in rewards programs and other initiatives to make sure your best customers feel appreciated. Churn risk increases during recessions as companies prioritize their spending and pull back on new initiatives. High churn rates have a direct impact on company valuations. As a CEO you are in the unique position to lead by example and your employees will recognize your effort.

Stay close to your venture investors.

2020 and 2021 were frothy years for venture capital and many venture firms bid up start up valuations to unsustainable levels. Those same investors must now decide which of their portfolio companies to prioritize and support as the economy slows. Investors will need to reserve capital for subsequent fund-raising rounds for portfolio companies to see them through to success.

In 2022 down rounds are becoming more common. As a CEO, admitting that your company has a lower valuation can be very difficult. It’s important for you to communicate often with your venture investors to make sure they see your long-term potential.

Embrace your best employees.

Recessions force employees to re-think their career choices. If employees start to doubt the viability of the company, they will take the calls from larger firms in the market — regardless of their equity upside — that can pay more in current income, bonuses, and benefits.

Get ahead of this. Spend time with your best employees making sure you understand their mindset. Employees always assume their equity stake is based on the last round of funding, so down rounds create employee angst. Losing top talent will have a very negative impact on your company. Managing and maintaining your momentum is critical both in terms of retaining your top talent as well as recruiting new talent.

Several times in my career I got ahead of this issue by offering additional stock option grants to top employees to make sure they did not even take the recruitment calls. It works. It’s far easier to get ahead of retaining top talent than it is to try to counter-offer once your employees are entertaining other options.

Emphasize and rally around your unique culture.

In my experience as a CEO, culture was by far the most important determinant of employee retention. Employees know their market value, and most stay with you if they are compensated and happy and feel they are making a difference. Focus on culture and communicate your company’s uniqueness and value proposition.

At Black Duck Software, an enterprise security startup, we created an equity and learning culture. Every employee was a shareholder and viewed the company as their own. We created learning and education opportunities and employees felt they continued to learn and grow by being part of the company.

Unique and identifiable culture is critical to motivate your entire team ready to fight through adversity. It may seem counterintuitive to both reduce expenses and focus on culture. It’s possible because funding unique cultural events is not expensive. It really is the thought behind the gatherings that count and that have an impact on employee morale. At Black Duck we held a Star Wars lego building competition for our software developers. The event was widely popular as the developers were able to publicly display their creativity and have and fun, and did not cost much to pull off.

Every company’s culture is different, but now is the time to double down on it. A good culture will help retain talent and ensure that you’re able to make it through tough times.

. . .

Recessions are a natural part of the business cycles and companies of all sizes must weather them or wither. Startups face a unique challenge because until they become profitable, they rely on outside capital to fund their growth and evolution to maturity. To make it through and emerge even stronger, conserve cash, and pay close attention to your customers, investors, employees, and culture.

3 Ways to Innovate in a Downturn

Scott D. Anthony — Thu, 28 Jul 2022 12:15:10 +0000

Recessions offer major opportunities for innovators. They can be a good time to introduce game-changing offerings or simple, affordable solutions or make bold, strategic moves. The resource scarcity that typically accompanies recessions forces innovators to do things they should have been doing already: prune prudently, re-feature to cut costs, master smart strategic experiments, and manage the risks of innovating by sharing them with others.

The sense that a recession is coming is growing. If it does, will it cause innovation to slow? Not necessarily. History shows that recessions create three specific opportunities for innovators.

1. Game-Changing Offerings

Startups with radical products or services that “reverb” off of the big event driving the recession can take off. For example, Airbnb, an online marketplace for “places to stay and things to do,” was founded during the height of the recession in 2008. Its service appealed to thrifty millennials looking for a cheap way to travel, as did Uber’s car-sharing model.

Lingering distrust in traditional finance providers after the global financial crisis helped to spur novel payments providers. For example, Jack Dorsey founded Square (later named Block), the financial services startup known for its square-shaped white credit card reader, in 2009. “There is no better time to start a new company or a new idea than a depression or recession,” Dorsey, who also helped to found Twitter, reflected. “There [are] a lot of people who need to get really creative to create something new.” Wind back the clock further. Walt Disney founded his eponymous company in 1923, a time where the world desperately needed hope. It’s reasonable to expect the need for alternative energy sources to combat climate change and reduce dependence on autocracies, greater food safety, and more dependable supply chains to attract today’s entrepreneurial energy.

2. Simple, Affordable Solutions

Downturns can be great times to introduce offerings that connect with consumers who have tighter purse strings or are naturally frugal given continued uncertainty.

There was a recession on the heels of World War II, in 1948–1949, before the post-war boom. In 1948, the McDonald brothers fired all their carhops, closed their flagship store, installed new equipment, and reopened three months later with a novel approach for preparing food. Instead of having a single skilled cook who would custom-make orders, McDonald’s simplified the menu so that less-skilled people could prepare the same thing over and over again. All McDonald’s menu items could be eaten one-handed while consumers were driving.

It was Henry Ford’s assembly-line approach applied to food service. The brothers called the model the “Speedee Service System.” It made it much easier to hire and fire cooks and allowed McDonald’s to lower prices and prepare food faster. The new business model began to take off. In 1953, the company started franchising its stores to other entrepreneurs. Franchise owner Ray Kroc bought out the brothers in 1954 and scaled McDonald’s into today’s global powerhouse.

3. Bold Strategic Moves

Downturns can be great times for established companies to make dramatic changes. Shantanu Narayan took over as the CEO of Adobe in late 2007. The 25-year-old company seemed stuck, with products such as Photoshop and PageMaker stagnating. Nimble software-as-a-service (SaaS) competitors were emerging. And the onslaught of the global financial crises would challenge even the strongest incumbent companies.

In the face of these challenges, Narayen and his team undertook a bold transformation strategy. In 2008, they tested a software-delivered model of Photoshop. A few years later Adobe “burned the boats,” stopped producing packaged software and went to a fully SaaS model. In 2009, Adobe purchased Omniture for approximately $1.8 billion, a price 40% lower than its pre-crisis peak (but 2.5 times above its mid-crisis trough!). That acquisition served as the cornerstone of Adobe’s efforts to build a new growth business related to advertising services and analytics. From 2009 to 2019 Adobe’s revenues tripled, and its stock price rose 29% a year, making it one of the decade’s top transformers.

These three avenues for growth emerged from research recounted in my 2009 book The Silver Lining. The book’s title didn’t just refer to these kinds of opportunities; it referred to the fact that the resource scarcity that typically accompanies recessions forces innovators to do things they should have been doing already:

Prune Prudently

Take a hard look at what is in your innovation portfolio. Cut at least 50% of it. Your resources need to be focused on places where they can have the greatest impact. Many of the projects that you cut are likely to be “zombies” that shuffle along, sucking the innovation life out of your organization. Kill the zombies. It is an absolute no-regret thing to do — you should have done it already, you need to do it now.

Re-feature to Cut Costs

Customer-centricity should be a core component of cost-cutting efforts. After all, you can’t do more with less until you can define what more means. That means figuring out the job to be done of the customer (employee, stakeholder, channel partner).

Master Smart Strategic Experiments

It never has been easier to experiment, which makes it even more important to do it with the proper discipline. Like a good scientist, start with a hypothesis. Design an experiment with clear objectives. Make a prediction about what you think will happen. Test in a way in which you can measure and assess your prediction. You never know for sure, so remember the acronym HOPE (hypothesis, objective, prediction, execution plan).

Share the Innovation Load

People think successful entrepreneurs seek out risk. That’s not right. Successful entrepreneurs smartly manage risk by sharing it as widely as they can. Now more than ever, companies should embrace open innovation and find smart ways to collaborate.

In the onslaught of never-ending change, it’s easy for leaders to freeze and focus on survival. Don’t freeze. Seize the silver lining and find unique opportunity to turn today’s ambiguity into tomorrow’s opportunity.