As an O&P practice owner, the decisions you make in the next couple of weeks may determine whether or not your business survives the next year or two. It is no secret that here in the United States we are experiencing record inflation. Inflation in and of itself is not necessarily a bad thing and the federal government has mechanisms to keep it in check. But the levers require a deft touch.
Most economists are predicting that the US will experience a recession, and some are arguing that we are in the beginning phases now. Beyond that, there are economists who believe the conditions are ripe for a repeat of the economic hardship of the 1970s. The next actions taken by the Federal Reserve will be critical to successfully managing the risk. At the same time, we are seeing a significant portion of our workforce not returning to work.
The Russian war in Ukraine and the sanctions we have imposed on Russia are creating a fresh systemic shock that has seen skyrocketing prices worldwide. The Biden administration’s domestic energy policy created a dependency on foreign oil that is now exacerbated by the war in Ukraine. We are seeing prices increase at the same time our economic growth is significantly slowing. Fifty years ago, this combination created a very difficult scenario called stagflation, which many attribute to the OPEC oil embargo and record high gas prices. Like then, the US now has little it can do in the short term to control its own energy needs.
On March 14, the Wall Street Journal warned us that Fed policies could send us into a recession. A recession is a significant decline in economic activity that lasts for months or even years. It is declared when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period. It is too early to have real GDP numbers, but leading indicators are strongly pointing toward recession. Without decisive action by the federal government the likelihood of course correction seems slim.
So what can you do?
Unfortunately, little research has been done on strategies that can help companies survive a recession. The most common advice is to get ahead during the good times, so you have the resources to weather the storm. According to Harvard Business Review (HBR), historically 17 percent of companies will go out of business during a recession. And only 9 percent were operating at or above their pre-recession levels three years after the recession ended.
HBR goes on to say, “Firms that cut costs faster and deeper than rivals don’t necessarily flourish. They have the lowest probability—21 percent—of pulling ahead of the competition when times get better.” Conversely, those that invested boldly only had a 26 percent chance of emerging victoriously. And about 85 percent of the leaders going into a recession were toppled during the bad times.
HBR’s researchers classified strategic responses to a recession:
- Prevention-focused companies make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.
- Promotion-focused companies invest more in offensive moves that provide upside benefits than their peers do.
- Pragmatic companies combine defensive and offensive moves.
There is a great deal of discussion we could have about each of those responses, and as you might expect, each of these approaches has some merit. I have listed them in order of how likely each of those responses is to produce a winning outcome, i.e., outperforming their rivals by 10 percent post-recession: 21 percent, 26 percent, and 29 percent, respectively.
There is a fourth approach that has a 37 percent chance of outperforming your rivals: HBR calls them Progressive companies. These companies deploy the optimal combination of defense and offense. The companies most likely to outperform their competitors after a recession have an “attitude of looking away from first things, principles, categories, supposed necessities; and of looking toward last things, fruits, consequences, facts.”
These companies understand that it is necessary to cut costs in order to survive a recession, but that investment is just as important to spur growth. These companies know that they must manage both at the same time if their companies are to emerge as post-recession leaders. They primarily slash costs by improving operational efficiency rather than cutting employees. Many of my blogs talk about identifying opportunities to improve your operational efficiency through the use of objective data. Now, more than ever, it is time to put your data to use.
These companies invest in their future in part by looking for new business opportunities. By focusing on the output, they develop creative ways to deliver that output (think quality patient care) in new, less costly ways. But they make these investments strategically, understanding that business strength comes not by cutting corners and being cheap about things, but rather investing in quality people who help create sound processes using robust tools and the powerful data to move forward.
Scott Williamson, CAE, MBA, is the president of Quality Outcomes and the executive director of the OPIE Choice Network. He shares his O&P business expertise as a regular contributor to EDGE Direct.