The last couple of weeks have been quite eventful around the world. There’s a lot of uncertainty and even panic regarding the coronavirus, its current and potential impact on our economy, and of course, its effects on people all around the world.
As a result, we’re seeing more and more action being taken to mitigate the spread of the virus. Businesses are preparing for the tough times that might be ahead, should the disease continue spreading and actions to mitigate it become even more common.
While it’s obviously smart to prepare for a potential downturn by setting priorities, focusing on the essentials and then cutting back on the rest, we’re also unfortunately seeing a number of organisations ramp down innovation until a “better time” emerges in the future. That is, however, quite shortsighted. Regardless of how dire the situation might be, innovation really shouldn’t be one of the things that gets cut when you spot trouble on the horizon.
Let’s look at why that is the case. If you’re one of the innovators who’ve had to start defending your work, hopefully this post can provide you with ammunition for the fight.
Downturns are prime territory for disruption
No matter how bad the economy, there are always companies that thrive during tough times. But who are these companies? In essence, it’s primarily the companies that offer more value for less. That of course means that businesses like discount retailers are likely to triumph over department stores. But, more importantly for us, economic downturns are always a great time for disruptive innovation.
Disruptive innovation usually starts from the low-end of the of market, which means that these innovators are uniquely positioned for tough times.
It’s much easier for these disruptors to gain business since both consumers and businesses are actively looking for ways to meet their needs with new, more affordable solutions. They’re also willing to be more flexible regarding some of the other aspects of the product or service, which would have previously tipped the scales in favour of the incumbent.
For example, during the 2008-09 financial crisis, most companies cut their technology budgets by 20-30%. That obviously meant quite a bit of trouble for most technology companies. However, during the same timeframe even the worst quarter of revenue growth for Salesforce.com was above 20%, thanks to their then uniquely flexible Software as a Service (SaaS) business model with very limited up-front costs.
Smart entrepreneurs and business leaders know the opportunity these situations represent for them, which means that we’re going to see many new, smarter low-cost alternatives that will use new technology and business models to undercut and disrupt the incumbents in a wide range of markets.
What makes the situation worse for the incumbents is that they often reduce or cut their investments in improving their own products and services to try to cope with the situation, which allows the entrants to actually catch up even faster than they would’ve otherwise done.
Innovation is a great tool for cutting costs – the right way
When companies spot trouble in the horizon, they naturally try to prepare for it, as they rightly should, which typically means building up cash reserves, cutting operational costs and reducing future investments in areas like increasing production capacity.
However, what you don’t want to do is to cut down on costs in a way that actually ends up hurting you in the long-term.
In Finland, this kind of shortsighted behavior is often referred to as “peeing in your pants to keep warm in the winter”, and that’s exactly what dropping innovation during tough times is. You might feel cozy for a couple of quarters but if the downturn lasts longer, you’ll just end up getting into more trouble.
Even if you survive until the end of the downturn, you have nothing left to build your future growth upon and you’re going to be left standing there with the competition soaring past you from all sides as you try to scramble together your response to the new products, services and business models that the competitors have been perfecting for quite some time.
Having said that, there are many ways to cut down on costs that make sense both in the short and long term. Let’s use a simple matrix to look at what these kinds of cost cuts are like.
Quick wins can serve as the first-aid kit for your business. These are areas where you can see results right away. These are usually the things everyone knows are costly and not really delivering results, but that have been kept around for one reason or the other – often sunk cost fallacy. Maybe it’s an agency partner that hasn’t been able to deliver on their promises, or an advertising campaign that hasn’t really seemed to work.
In general, offloading significant unnecessary or unproductive expenditures and moving future purchases to business models with less up-front expenses and more flexibility, such as SaaS, are examples of moves you can make here to increase cash flow and minimize risks.
Frivolities are basically the things that are plain unnecessary, or just nice to have things that no one’s really bothered to think about during the good times. Individually these don’t really have much of an effect, but when you combine hundreds or thousands of them, these can actually end up making a difference financially.
Frivolities can be anything from unnecessary travel to an extravagant assortment of snacks, or overly expensive company events.
I recently heard of a large organisation that managed to save huge amounts of money simply by switching to a less expensive brand of toilet paper in all of their hundreds of locations. However, some of these seemingly unnecessary frivolities might still be beloved by employees, so ask around before you proceed to cut all of them.
Even though restructuring is always painful, the sooner you do it, the better off you’ll generally be. For example, if a business unit hasn’t grown in years and still continues to bleed red, you might want to consider selling such a business off in preparation of tough times that might be ahead for the business.
Even if it’s not the best time to sell such assets, divesting could still be a good idea since this would both save capital going forward and provide an immediately noticeable increase in cash reserves. You’d also do well to remember that great businesses come out of a recession strong, and the bad ones are simply likely to die. Thus, time likely won’t help make these assets more valuable.
Productivity improvements help you do more with less, which means that they obviously should be at the heart of every cost cutting program. Productivity improvements often take some time to implement, which means that if the situation is dire, you might need to take some of the above measures to increase cash reserves before the impact of increased productivity starts to really kick in.
However, the beauty of productivity improvements is that their effects aren’t limited to just a short-term impact on the bottom line. Their effects will stick around for a long time and can even become a clear competitive advantage for the business going forward. The interesting thing is that, by definition, you need innovation to achieve improvements in productivity. Process automation and innovation are probably the most obvious examples of these kinds of improvements.
As you can see, these four areas cover a lot of ground and provide you with plenty of options for cutting costs. At least in my experience, it’s very rare for a healthy business to actually get to a position where they have no option but to cut down on innovation investments to stay in business, even when times are tough.
Tough times provide new opportunities for innovation
So, now that we’ve established that there are plenty of ways to improve your cash position and cash flow going forward without decreasing investments in innovation, let’s look at why you might actually want to invest more in it during a downturn!
As I’m sure most people who read this already understand, without innovation the future will be exactly the same as today, and that simply won’t be enough to be competitive.
”Investing in innovation is not a nice-to-have, it’s a necessity to just stay in the game.”
If the situation is dire, you should, of course, focus your innovation efforts on improving productivity and efficiency first to find ways to survive and make your core business more competitive going forward. However, as mentioned, a downturn is a great time to introduce new low-end innovations to the market since even though there’s less demand overall, there will likely be more demand and willingness to try new services and products that offer more for less.
The positive here is that when demand for your more expensive offerings is nonexistent or significantly down, there’s naturally less downside from cannibalization. It’s also much easier to uncover new problems that people weren’t previously aware of, or at least didn’t consider to be a priority. Together these factors provide you with many, likely untapped, opportunities that consumers and businesses would be willing to pay for. These innovations can be the drivers of your future growth.
In addition, a downturn is a great time to invest in innovation largely because many of your competitors likely aren’t doing so! This means that by focusing your efforts in innovation, you can build a solid head start over the competition that is just looking to survive and come out strong once demand picks up again. What’s more, talent is always a key driver of innovation and if others aren’t investing in acquiring fresh talent, it will be much easier and more affordable for you to do so.
Last but not least, tough times can help you create a strong sense of urgency, which is usually needed to make change happen in large organisations, and that’s certainly true for innovation as well. Thus, take advantage of the crisis and try to get people across the organisation to stand behind innovation to help you build a better tomorrow together.
So, to sum up, when tough times are ahead, don’t cut back on innovation. Double down on it! Here’s a quick overview of the steps you might want to consider taking when you see trouble on the horizon:
- Use the crisis to create a sense of urgency
- If needed, find ways to use innovation to cut down on costs to provide the cash flow needed for future investments
- Proceed to take advantage of the opportunities provided by the rapidly changing landscape, typically with adjacent or breakthrough innovation focused on the low-end of the market.
And remember that speed is of the essence.
To get started, you can run an idea challenge for all of your employees. This can help you kickstart the process and focus the cuts on where it hurts the least. Idea challenges are a great way to build a sense of community and urgency so that everyone can help do their part to turn things around.
The themes of this challenge could, for example, be either one of the topics below.
From the top-down, it’s often hard to know which processes are efficient and which aren’t, but the employees that face it day-to-day, know that without a doubt. Employees often also have very good ideas on how to actually fix these processes as well. A well-organised pool of ideas also helps you to better evaluate the opportunities and choose which areas to focus on.
Thus, asking your employees for ideas on how to improve productivity certainly makes sense!
When it comes to making cost cuts from above, there are two fundamental challenges:
- There are often plenty of opportunities for saving on costs that are impossible to spot from the top down
- There are many areas where cost cuts can face a lot of resistance from employees and damage morale and culture
By making the process of choosing targets for cost savings transparent and bidirectional, you’ll address both of these issues. You can spot areas that you otherwise wouldn’t and you will also be able to see beforehand which cuts will face the most resistance from employees.
Often the ideas of front-line employees have actually ended up saving the company much more than management initially thought possible.
And, in general, when you communicate that you “need to prepare for the tough times ahead so that you can behave responsibly and keep as many employees as possible, but that to do that, you need to work together to find ways to do this”, you’ll have a great opportunity to get the team to stand together and put up a fight as opposed to everyone just covering their own bases.
You’d do well to remember that no recession has ever lasted for more than a few years, so keep investing in innovation to build the future of your organisation and you can come out of any possible recession stronger than before.