How to prepare for a recession

Many businesses will face tough economic conditions this year. The chance that major economies will slip into recession is higher now than at any time since the 2008 global financial crisis. Rising interest rates and inflation are likely to reduce business spending in the months ahead, leading to reductions in sales and revenue for many companies.

This possibility has turned business leaders’ thoughts to recession planning and cost reduction. But approaching this situation with conventional strategies could leave organizations more vulnerable. This time round is different and short-term planning alone may not be enough.

What is a recession?

A recession is a significant downturn in economic activity, usually defined as two consecutive quarters of negative growth in gross domestic product (GDP). Recession is caused by many factors, including economic shocks such the COVID-19 pandemic, excessive debt, rising interest rates, and high inflation.

Recession may also see rising unemployment, falling consumer sales, lower income and contraction in manufacturing for a prolonged period of time. It’s usually a sign that the economy is doing badly.

Four steps to prepare for a recession

If the last few years have shown us anything, it’s that constant uncertainty and disruption are here to stay. Planning for the long term as well as taking short-term measures is how businesses can come out of the downturn in a stronger position than before.

Alongside immediate actions, there are four things your business can do to prepare for a recession and come out better in the long run:

• Understand your organizational structure and ability to adapt at speed

  Before making any sweeping changes, you should assess your organization’s current state. Being able to quickly analyze your business using an organizational design approach will put you in a position of strength when it comes to making decisions.

  Take our one-minute organizational design self-assessment to discover what you do well and where your limitations are.

• Reduce costs with caution

  Making cuts to slow cash burn is an early and essential step in responding to a downturn. Cash reserves protect the business from a fall in revenue and buy leaders time to change direction. Aside from efficiency measures, one of the big considerations is a reduction of force.

  At a time when the war for talent is fierce, this should be a last resort. But if it’s unavoidable, you should take care not to make cuts that could undermine your business’ future. Making workforce reductions based on work and skills, not just headcount, is better termed workforce optimization. This is the process of ‘rightsizing’ your workforce for the challenges ahead, rather than downsizing with an emphasis on numbers. You want to have the right people, doing the right work at the right time, to create efficiency and not lose any more people than you need to.

  To learn more about workforce optimization, sign up for our two-hour online workshop

• Make decisions based on data

  Having good organizational data at your fingertips is the foundation for modeling a prosperous future. Having a single source of truth that draws on numerous datasets enables business leaders to make fast, confident decisions about the future of the organization.

  Data insight can be the difference between thriving in a recession and just surviving it. Making rash, uninformed decisions could backfire in the long term. Orgvue’s CEO Oliver Shaw discusses data-driven decision making in his article on recession planning.

• Review and update your business continuity plan

  Recessions can bring unexpected changes at a moment’s notice, so it’s important to have a plan in place to mitigate risks and keep your business running.

  For example, do you have contingency and a continuity plan if your supply chain was disrupted? Most businesses during the pandemic didn’t and many are still suffering today. Organizations should review their continuity plans frequently to include new threats and how they will respond to them.

  As well as having contingencies in place to keep business operations running in the event of disruption, organizations should also continually stress test their business strategy, so they’re not blindsided by market shifts.

For other views on how to prepare for a recession with the long term in mind, read this article from Harvard Business Review or this one from the Society of Human Resources Management. For more information on the steps businesses can take in the short term, this article concentrates on the financials.

Workforce optimization

Optimize your workforce to survive and thrive through market uncertainty. Manage cost and optimize headcount in the immediate term, while building resilience and agility for the future.