US corporate managers unprepared for slowdown

Economic downturns are always worrying but the one now hitting the US may be especially painful. An entire generation of managers has spent its professional life without passing through bad times and may be unprepared for a slowdown. This is the view of Mr Bruce Chew, a principal with the Monitor Group consultancy in Cambridge, Massachusetts. Mr Chew is concerned about managerial behaviour at US corporations. Younger managers have little or no experience of downturns and older managers may have forgotten what a slack economy is like.

"Change is needed, even if there is not a full-blown recession," he explains. "A number of things that work in a high-growth environment just don't when you move to slower growth."

While only a minority of economists predict a US recession this year, most agree that the eight-year-old expansion will slow substantially. Not everyone is convinced US corporations are on the wrong course. The chief executives at most big companies are experienced managers who have seen terrible economic times, says Mr Adrian Slywotzky, a popular management writer. Recession, he believes, can even be beneficial by creating opportunities for acquisition and expansion on the cheap - although that may require financial resources unavailable to many.

Yet Mr Chew believes decision-making processes in US corporations will need to be overhauled in the coming months. Labour relations, in particular, need to be rethought. In the economic boom, US managers struck a tacit agreement with workers: the future held so many opportunities that it made sense to work hard today.

Much has been said of corporate stock options but these are only part of the picture. The easiest way to keep employees happy is to provide rapid upward mobility, something that is threatened by an economic slowdown.

Mr Chew gives the example of a retail chain facing slackening growth: "Say people join that company because they want to be a store manager. When you're opening dozens of stores a year, that's a realistic near-term goal. But what if you stop opening stores or even start closing some? Those workers are no longer able to fulfil their goals."

A job comes with certain expectations about the future. Current compensation and benefits are important but employees are more likely to make compromises if they believe the future holds promise. What if workers become unhappy? Moving to a competitor, or another sector, becomes more difficult in a slowdown. "Even in a recession, most people keep their jobs," says Mr Chew. "However, if they become pessimistic, they may start cutting back on their hours or putting in less effort. At one dotcom I dealt with, workers began locking themselves in the conference (room) and dialling headhunters as soon as they heard the company was in trouble. From having dozens of highly productive workers, almost overnight the group had no productive workers. That can accelerate the death of an organisation."

Mr Chew advises a minerals company that for years has been setting new productivity records. As long as demand was growing everyone was happy. But now the output is piling up outside the mine. "The classic response would be to lay workers off - but what kind of message does that send to the community?" asks Mr Chew. "People don't like to lose their jobs because they've become more efficient." Other management decisions are also affected by a downturn. Technology investments, for instance, can look cheaper during boom times because they receive some of the credit for rising sales. When revenues flatten, the same investments can seem far more costly. Yet simply refusing to put money in technology may not be the right thing to do.

The economy also affects a company's decision whether to outsource more of its services. If an outsider can provide a service more cheaply, it makes sense to start farming out the function. Yet if a company suddenly has excess capacity, outsourcing becomes less attractive. "If you're looking at the cost of laying people off rather than adding new workers, you can arrive at a very different decision," says Mr Chew. With less to go around, supplier relations may show strain. Suppliers often sacrifice current compensation because of optimism about the future, just as workers do. Expansion and contraction require very different sets of skills. The manager who is best at being visionary may not be the best at closing plants. And yet corporations' success in dealing with cost-cutting over the next few months may well determine their medium-term success, says Mr Chew. "There is a tendency to close the smallest, the furthest away. That may be the wrong decision, though. A retailer may just be breaking into a great new geographic area. If the company closes those stores in favour of the slower-growing but larger base, it may be sacrificing future growth." When budgets tighten, every spending decision takes on added importance. During a slow-down, executives have less margin for error. US managers face a difficult time ahead.