ADAPTING TO THE NEW REALITY

by Paul Cormier, President, Cormier Strategy Advisors Inc.

May 2009

In January 2009, I wrote an article which I called “A Change is Gonna Come”. In it I talked about what caused the current economic crisis, what may change as a result and how companies will have to change going forward. I postulated that we were entering a period of slower economic growth caused by the excesses of the last decade and the public policy decisions that led to those excesses. I also noted that the same demographic trends that led us into the slowdown should begin to subside around the middle of the next decade. This view is becoming more widespread in the months since that article. For example, recently the US Congressional Budget Office noted that it did not expect the US economy to return to its full potential until 2015.

Of course, it is not written in stone that this is the way things will play out. Very wise public policy decisions could lead us to a faster pace of economic growth in a more rapid fashion. Government investment in transportation and energy infrastructure, incentives to promote health, scientific and technological breakthroughs, investment in education and training, and fundamental reforms to public and private health care administration could go a long way to increasing economic growth potential. Unfortunately it is a just a reality that short-term political considerations usually trump good long-term public policy so I don’t think we can count on fundamental change in many of these areas. The fact that the US economic stimulus package contained virtually no funds for infrastructure development was testimony to that.

In the January article, I noted that most organizations are facing a new long-term reality, a reality where top-line growth will become more difficult to achieve and this applies equally to competitive organizations as it does to regulated institutions and government bodies. The adjustments that need to be made today are not just temporary cyclical adjustments; they are long-term structural adjustments.

I noted that organizations would increasingly have to become creative and nimble, that they would have to attack bureaucracy and focus on productivity, efficiency and process improvement. You will generally see organizations get smaller and utilize outside specialists in their business model instead of building large corporate organizations.

Operating leverage will become more important as financial leverage becomes less prevalent. Organizations faced with diminished top-line growth prospects will seek margin expansion as the means to grow their bottom lines and cost control is the way to do that.

However, cost control must be looked at very strategically. Cost control has generally been looked at cyclically – projects are delayed, layoffs or hiring freezes are initiated, consulting dollars are reduced. The expectation is that six, twelve or eighteen months down the road things will return to normal. And most corporate managers have only ever seen this reality in their careers. But in the new reality, cost control will have to focus on long-term costs, on whether the very level of activity is appropriate and on whether the organization is resourced and organized to deliver. Many great organizations already make this a constant priority, but the practice will have to become more widespread. If organizations act like this is purely another economic cycle, they will be left in the dust as the world passes them by.

So how does one develop an approach to looking at organizational effectiveness at reasonable cost? I have found that one of the best methods is the functional or operational audit. The concept is to look at a particular company function (corporate communications, human resources, information technology, customer service, etc.), identify key goals, objectives and priorities, establish where there are strengths, weaknesses and gaps in delivery and determine a plan for the best approach going forward in terms of organizational effectiveness. Different quantitative and qualitative methodologies can be utilized, but common ones include interviews with management, review of performance reports, analysis of industry best practices, cost and performance benchmarking and opinion research.

By going through this systematic process organizations can establish whether their key priorities are realistic given their organizational depth, potential new approaches to deliver on their key priorities and how the organization can be structured to find the right balance between initiatives and costs. Consultants are often the best resources to undertake such studies as they can maintain the independence and objectivity required.

As a consultant, I have been involved in such audits several times. When I worked in communications consulting, we would regularly undertake communications audits on behalf of clients. I recently took a similar approach when looking at outsourcing management and internal governance issues. These projects can be very effective and often deliver high returns on investment and very short payback periods. And very importantly, they don’t look at costs in isolation from delivery of objectives. We need to look for the right balance and to drive maximum productivity and efficiency. This is not a short-term cost cutting exercise; it is a long-term effectiveness exercise.

The stock market is already rewarding companies who are undertaking efforts to reduce their long-term cost structures and improve efficiency. From the point that the S&P 500 hit bottom on March 9, 2009 to May 1, 2009, returns for companies who have committed to long-term cost reductions have been strong. Dow Chemical and Owen-Illinois have gained around 150%, International Paper around 200%, Starbucks almost 70% and NYSE Euronext 40%, compared to a gain of around 30% for the S&P 500.

It’s different this time. Organizations have to consider their structure for the next several years, not just look at ways to cut costs in the near term. Functional audits can help.

Paul Cormier is President of Cormier Strategy Advisors Inc., a firm which provides clients with strategic consulting, project management and short-term management services.