A hard line in ’09

by 15 Dec 2008

Cutting costs and focusing on leadership are some of the survival tactics advised for companies entering a year when nobody is sure what will happen. Sarah O’Carroll reports

Although there are no certainties, experts are tipping 2009 to be an economic bumpy ride.

“There is a decent risk that the first two quarters of growth in 2009 could be negative” says Westpac’s global head of economics, Bill Evans. Dr Chris Caton, chief economist at BT Financial Group, also believes there is a high chance Australia will enter into a reces sion in 2009.

“We haven’t had one in 17 years and there is no question that we will have another one some day - so if the current conditions aren’t going to put us in, what the heck will? ” Caton asks.

The recent OECD economic outlook report revealed, however, that the forecast is not as grim for Australia as for the other big economies of the world – with 21 of the 30 member economies of the OECD predicted to go through a protracted recession of a magnitude not seen since the early 1980s.

Every economic outlook, however, is built on uncertainties, so governments, economists, organi sations, HR department and individuals can only look at what has happened in the past to predict what will happen next – and how best to deal with it.

Drawing to the end of 2008, nobody seems overly confident in predicting what will happen and com panies are treading uncertain water. But there is a definite consensus that next year will present some interesting challenges for companies across the coun try. Firstly, declining commodity prices will take the gloss of the Western Australia story next year but will really hit home in 2010. “Commercial construction and mining investment will support growth in 2009 as work continues on current projects but approvals for new projects are falling sharply under the weight of plummeting business confidence and limited credit availability,” says Evans. “The brunt of the mining and construction downturn will be borne in 2010 although plant and equipment investment which is much more closely attuned to consumer spending will weaken through 2009.”

Other challenges facing companies include rising unemployment, a weak Australian dollar which will put pressure on importers, and challenging funding costs due to the cost and access to credit.

According to Caton, the industries that will be most affected will be those that are traditionally cycli cal (housing etc) and anything that is related to dis cretionary spending either by consumers or business, for example motor vehicles.

Paradox of thrift

How can organisations prepare themselves for an expected slowdown, and such volatility?

The danger is according to Caton, when every organisation tries to safeguard themselves from cer tain effects, they ultimately make the situation worse – creating a situation described as the paradox of thrift. (see box)

However there is nothing any one individual can do to avoid that economic paradox, he says, and organisations will still have to react to the wider knock-on economic effects in order to survive. Cut ting costs and devising ways to deal with flat and reduced revenues will be one of the key strategies for most companies.

“Pull the horns in, be very cautious and cut your cost base,” says Caton.

HR will be very much part of the survival strate gies for companies in the year ahead, with a focus on leadership and communication.

Daljit Singh, director of global talent management for Baker and McKenzie, outlines some of the responses he expects companies to focus on in the year ahead.

• A review of hiring needs, although do not expect entry level (graduates) etc to be affected much.

• More focus on rigorous performance management and on productivity measures.

• Encouraging staff to take leave, including sab baticals, undertaking study etc.

• Encouraging some job sharing

• A drop in bonuses and smaller salary increases

• A cut in training expenditure that involves travel and accommodation, with more training at local locations, and using technology to involve dif ferent locations.

Never has there been a more important time for leadership than now. Singh believes, as does lead ership expert Professor Rob Goffee (see box, A note from the UK), that there will a strong focus on leadership and communication in trying to main tain the morale and spirit of the workforce and keeping focus on key goals and objectives.

“The organisations that will come out of this in a better shape will focus on this and ensure that any costs reductions they make will not demoralise, and they will be thinking longer term – eg encouraging people to undertake more devel opment when productivity is lower than expected,” says Singh.

While Caton says that the pace of redundancies is likely to increase, Singh believes that making redundancies should be a last resort for companies.

“They (successful companies) will also only reduce headcount when it’s absolutely essential and, if needed, will do it in a humane, supportive and trans parent way, in accordance with espoused values,” says Singh.

Unemployment a certainty

A rise in unemployment is a certainty, say economists. Caton explains that his tory suggests that when the unemployment rate in Australia goes up, it either goes up only a little bit or it goes up a lot.

“If unemployment goes to 6 per cent, which is predicted, with any velocity it might not stop until it reaches 8 or 9 per cent,” he says. “How much it will go up is not a certainty, but we can be certain it will go up.”

This suggests that the next upturn in the unemployment cycle will peak around August or September 2010 and will probably be about 6.5 per cent.

“It is no guesswork that the OECD has also forecast unemployment peak ing in late 2010,” says Steve Hinch of Roy Morgan Research. “If unemployment peaks at 6.5 per cent, another 230,553 people will lose their jobs between now and the last quarter of 2010.”

This, he says, will have a flow-on effect for firms that are not pricing their products competitively and maintaining their brand preference.

“We already see firms freezing marketing expenditure,” says Hinch, “which is a great way to lose market share quickly. And, according to our research, even 230,000 people losing their jobs would mean a loss of around $288 mil lion each week based on the medium weekly income of $1250 – and it is con sumers that drive the economy.”.