Singaporean

Recession 101: How S'pore Firms Can Survive And Thrive During This Economic Downturn

The Monetary Authority of Singapore (MAS) has confirmed that Singapore will enter a recession this year.

In the recent Fortitude Budget speech, DPM Heng Swee Keat said that the Ministry of Trade and Industry has further downgraded Singapore’s GDP growth forecast from “-4% to -1%” to “-7% to -4%”.

The road ahead is fraught with uncertainties, he noted. This is why the Government has dedicated S$33 billion in the latest supplementary Budget to help support workers and businesses, as well as households and the community.

Together with the previous Unity, Resilience and Solidarity Budgets, the Government has set aside close to S$100 billion to support Singaporeans in the battle against Covid-19.

Despite the Government’s unprecedented support measures, economists warn of severe job losses, as exports are hit by falling global demand, companies struggle to stay afloat and consumers cut back on discretionary purchases.

With the recession looming, how can Singapore firms mitigate the damage so that they can survive and thrive when it happens?

There are four key areas they need to look at: debt, decision-making, workforce management, and digital transformation.

1. Deleverage Before A Downturn

Rebecca Henderson of Harvard Business School likes to remind her students: “Rule one is: Don’t crash the company.”

That means, first and foremost, don’t run out of money. A recession usually brings lower sales and therefore less cash to fund operations, so surviving a downturn requires deft financial management.

Take Amazon as an example. If it hadn’t raised all that money prior to the dot-com bust, its options would have been much more limited. Instead, it was able to absorb losses in its investments in other startups and also launch Amazon Marketplace, its platform for third-party sellers, later that year.

It further expanded during and after the recession into new segments (kitchens, travel, and apparel) and markets (Canada).

Companies with high levels of debt are especially vulnerable during a recession.

The more debt you have, the more cash you need to make your interest and principal payment.

– Holger Mueller of NYU’s Stern School of Business

When a recession hits and less cash is coming in the door, “it puts you at the risk of defaulting.”

To keep up with payments, companies with more debt are forced to cut costs more aggressively, often through layoffs. These deep cuts can impair their productivity and ability to fund new investments.

Although there’s no magic number, research shows that modest levels of debt aren’t necessarily a problem. Mueller suggests that if a company thinks a recession is coming, it should consider deleveraging.

When it comes to deleveraging, it helps to start early. That means reducing debt levels before it’s clear the economy is in recession. You need to take a hard look at your portfolio, because shedding assets can be a way to reduce leverage without necessarily cutting core aspects of operations.

2. Focus On Decision-Making

A 2017 study revealed that organisational structure affects a company’s ability to navigate downturns.

While the need to make tough decisions may favour centralised firms, decentralised firms may be better positioned to weather ‘macro shocks’.

According to the study, decentralisation was associated with relatively better performance for firms or establishments facing the toughest environment during the crisis.

It was also found that the benefits of decentralisation faded as economic conditions improved — a sign that delegation has particular value during uncertain times.

So why did decentralisation help? There’s a lot of uncertainty and turbulence during a recession. Since decentralised firms delegated decision-making further down the hierarchy, they were better able to adapt to changing conditions.

For example, they were more aggressive in adjusting their product offerings in response to changes in demand.

One advice would be [to] really think carefully about your organisational structure because that’s one way you cope with uncertainty. What decentralisation does is match decisions with expertise.

– Raffaella Sadun of Harvard Business School

She added that companies can fall into the trap of hoarding decisions rights during a downturn. However, the uncertainty of a recession necessitates experimentation, which requires that decisions be made throughout the organisation.

Even if companies decide to decentralise, they can try to do a better job of gathering input from employees at all levels when making key decisions. After all, recessions offer opportunities for change.

3. Look Beyond Layoffs

In the last recession that happened as a consequence of the 2008/2009 financial crisis, Singapore faced retrenchments amid a slowing economy.

Some companies which intended to retrench workers were persuaded by NTUC’s then Secretary-General Lim Swee Say to use the downtime to retrain workers instead.

Cut costs to save jobs, not cut jobs to save costs.

– NTUC’s former Secretary-General Lim Swee Say

Layoffs aren’t just harmful to workers; they’re costly for companies too. Hiring and training are expensive, so companies prefer not to have to rehire when the economy picks up, particularly if they think the downturn will be brief.

Layoffs can also hurt morale, dampening productivity at a time when companies cannot afford it.

Fortunately, layoffs aren’t the only way to cut labour costs. Companies should consider hour reductions, furloughs and performance pay.

One appealing thing about both furloughs and short-time work is that, as with layoffs, companies have discretion over which workers are affected.

By contrast, across-the-board pay cuts or hiring freezes that fail to consider employee productivity can backfire, damaging morale and driving away the most productive employees. Similarly, hiring freezes affect every department indiscriminately, without weighing the value of various potential hires.

4. Invest In Technology

It’s tempting to think of a recession as a time to take it down a notch and play it safe. However, downturns actually appear to encourage the adoption of new technologies.

A 2018 study revealed that there’s a greater demand for higher-order skills like computer-related skills during a recession. This boost in demand was partly due to employers’ taking advantage of higher employment to be choosier.

However, companies weren’t only being more picky — they were becoming more digital too as companies ramped up their investment in information technology, driving the surge in IT skill requirements in their job postings.

Why do companies invest in technology during a recession when money is tight? Economists theorise that it’s because their opportunity cost is lower than it would be in good times.

When the economy is in great shape, a company has every incentive to produce as much as it can — if it diverts resources to invest in new technologies, it may be leaving money on the table.

But when fewer people are willing to buy what you’re selling, operations need not be kept humming at maximum capacity, which frees up operating budget to fund IT initiatives without dampening sales. For that reason, adopting technology costs less, in a sense, during a recession.

Technology can also make your business more transparent, more flexible, and more efficient.

The first reason to prioritise digital transformation ahead of or during a downturn is that improved analytics can help management better understand the business, how the recession is affecting it, and where there’s potential for operational improvements.

The second reason is that digital technology can help cut costs. Companies should prioritise “self-funding” transformation projects that pay off quickly, such as automating tasks or adopting data-driven decision making.

The third reason is that IT investments make companies more agile and therefore better able to handle the uncertainty and rapid change that come with a recession. Digital technologies create much more flexibility around product changes, volume changes, as well as around the movement of your supply chain around the world.

That is one way the next recession might be different from past ones. Companies that have already made an investment in digital technology, analytics, and agile business practices may be better able to understand the threat they face and respond more quickly. As we’ve seen, recessions can create wide and long-standing performance gaps between companies.

Research has found that digital technology can do the same. Companies that have neglected digital transformation may find that the next recession makes those gaps insurmountable.

Start Future-Proofing Now

Image Credit: Ministry of Manpower

Recessions are a high-pressure exercise in change management, and to navigate one successfully, a company needs to be flexible and ready to adjust.

To future-proof ourselves, businesses have to find ways to enhance competitiveness through innovation, productivity growth and internationalisation — and there’s no better time than now.

Now is also a good time to cut back on company spending, while shoring up more cash in your emergency fund. The over-leveraged are the ones who will feel the most pain during a recession, so don’t be one of them.

COVID-19 has spared no country, race or religion — and it definitely won’t spare any businesses too.

Even if we can’t control the economy, we can surely control our individual efforts to brace ourselves for the impact and put in place plans to emerge from this stronger than before.

Featured Image Credit: Fstoppers

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