BUSINESS INSIDER

Real recession is becoming a distant memory in Australia — and that could spell trouble, even in the good times
Paul Colgan · Feb 11, 1:45 PM
Here’s something to try at work today. A thought experiment.

Look around at the people you work with. Consider the experience of the people across the company and think about how many of those people have, in their working lives, ever managed a business during a recession.

For many Australian workplaces, particularly young companies, there answer will be zero.

After more than 25 years of continuous economic growth, anyone who is under 45 hasn’t worked through a full-blown contraction in the economy.

And consider: Matt Comyn, the new CEO of Australia’s biggest financial institution, the Commonwealth Bank, is 42.

Now Comyn has seen many brutal economic episodes in his career, from the dot-com bust and the period after September 11, and of course the period around the global financial crisis which resulted in severe cutbacks in Australia’s banking system, to the Eurozone crisis of 2011. Locally, he’s seen the impacts of the mining downturn on the affected parts of the economy, the pressures experienced by the tourism sector when the Australian dollar soared, and the decline of the manufacturing sector. There’s plenty of experience, both institutionally for the bank and in sector-specific terms for Comyn himself.

But this knowledge and experience is not as well baked into to the hundreds of thousands of other businesses that have formed in the past two and a half decades.

Localised contractions such as those in the car industry, the media sector, and that in finance after the GFC are ugly and painful for the people involved, but different from the all-consuming nature of a nationwide downturn characterised by soaring unemployment, business closures, and bankruptcies.

A downturn would create a sudden demand for a broad and deep pool of expertise in managing this kind of problem and the reality is that pool in Australia is small and shrinking. Also, the tools for dealing with a modern recession — data-driven decisions, offshoring, managing millennials — are vastly different from the last time Australia had a proper crunch. We’ll come back to that.

The Australian economy is the strongest it has been in years. Growth looks relatively balanced, job creation is solid, house prices have stabilised or are falling slowly, and it looks like the disinflationary pressures of recent years are abating. Around the world, the global economy is gathering pace, offering further support to Australia’s trade-reliant economy.

But there is a small but ever-present risk of a severe external shock plunging the country into a recession it can do nothing about. The biggest of those risks remains some kind of hard landing in China, but times like last week when global markets were in a tailspin, do invite questions about whether Australia’s business leaders would know what to do in an economic crisis visited on the nation from abroad.

Cost-cutting in this environment can’t be limited to stopping the flower deliveries for reception and stocking the kitchen with home brand tea.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, said: “The main danger for business leaders after a long period of continuous overall economic growth is that a degree of complacency sets in resulting in excessive risk taking – which could take the form of taking on too much debt or overinvestment.”

That said, one thing Australian executives have proved themselves very adept at is managing costs. Although the economy has seen a record-making run of expansion, risk-averse, conservative strategy has been at the core of Australian corporate behaviour for years, restraining the “animal spirits” that the RBA so desperately wanted to see in the non-mining economy when it was slashing rates after the end of the investment boom.

As a result, Oliver said, there was little evidence of risky levels of exuberance among executives, “maybe because various industries have had their own tough times (like manufacturing and tourism when the Australian dollar was sky high, mining only recently and of course retailing) and a constant run of scares globally (like the GFC and the 2011-12 Eurozone and US debt crises) have kept CEOs level headed – mostly.

“But it could change as the global growth rebound gathers pace and that benefits Australia.”

At the same time, the helpful restraint that has characterised much of corporate Australia could work against some companies in the event of a downturn, not just because businesses may not be as healthy as they might otherwise be, but because leaders may be incapable of seizing opportunities to rebuild and reform.

Gregory Robinson, managing partner at Blenheim Partners, an executive search and board advisory firm in Sydney, says that cost management has been “almost a DNA requirement to be a senior executive in Australia”.

However, he says: “There are a couple of concerns with this. Firstly, why is management still focusing on cost cutting in arguably solid economic conditions? Secondly, how much fat is left in the organisation to cut before they hit bone? And finally, is leadership equipped to seize opportunity if there is a significant downturn?

“The big question to ask is: does Australian management have the appetite to take risk in tough economic circumstances when tightening the belt would be seen as the safer bet and the expected norm? Based on our recent studies, Australian business leadership throughout years of economic growth consistently takes the more conservative approach. Therefore if the recession comes, that conservatism could ramp up, only perpetuating the situation.”

‘Zombification’
Business Insider spoke to an independent consultant who has helped organisations deliver efficiencies when faced with challenging economic conditions, both in the UK and more recently in Australia. He asked to remain anonymous because of the sensitive nature of his work.

One problem he identified in corporates from operating in long periods of expansion was “the reluctance to have tough performance management conversations in times of high profit margins, resulting in a long term ‘zombification’ of departments.”

This is the “fat and happy” problem: companies avoid the smaller tough decisions because departments are making money while slowly becoming an organisational albatross.

“If you take that thought a step further, it’s actually really unfair to the individuals concerned that they are not told that their performance is sub-par, only to find out when it’s far too late and a redundancy cheque is handed to them. There will be a lot of people who are very confused as to why they got the chop,” the consultant said.

He outlined some of the management skills that are indispensable in a downturn, which are summarised below in full, because it’s quite a list.

Mental toughness: You’re going to have to make some hard decisions and very quickly which will impact a lot of families.
Leadership: The remaining workforce will need to be led out of the change into a future they all buy in to. I once worked for a UK company that fired around 500 people in November. The CEO gave a speech at the Christmas Ball that didn’t even mention this. Weak.
Analytical skills: Pareto [the 80:20 rule that 80% of results come from 20% of the causes] is your friend coupled with a good understanding of which spend is realistically addressable; there’s no point looking at a software licence agreement as an opportunity to cut costs, no matter how large it is, if you’ve only recently renewed it and you’ve got no best alternative that’s palatable.
Data capability: If you’re not measuring the right metrics today, how will you know which parts of the business to prune and which to feed? Feelings?
The ability to deploy rapid tactical digitisation and automation: Everyone has a strategic plan for this but, what if you could fastrack the initiatives that reduce staff numbers and improve customer experience? Do those first and much, much quicker than you’d planned.
Culture: Are you working in an organisation where the size of your organisation chart is directly proportional to your perceived value rather than outcomes delivered? You’ve got deep-rooted issues to address if so as everyone will be fighting tooth and nail to stop the cuts from hitting their teams.
To go back to the start, it might be worth asking if these are capabilities that would be at hand in a crisis.

The global economy is in excellent shape and Australia will reap the benefits of this for some time. As my colleague Jim Edwards at Business Insider UK recently noted, we are living something of a golden age.

“Or, to put it more sharply,” he wrote, “‘we are approaching the end of a Golden Age’” – because no one I talked to thinks this is going to last.”

So as the pool of people who have worked, managed, traded and coped through Australian recessions before continues to shrink, now might a good time to think about how to be ready for the downturn that will, at some point, hit.

Robinson, whose work in executive placement gives him an insight into the skills bases of Australian leaders and what boards are looking for in bosses, said: “As a nation we have not experienced adversity for a long time. The GFC was mild in Australia compared to many other parts of the world. We may be better served now, during a time of economic stability, to encourage boards and business leaders to depart away from the ‘cost cutting our way to success’ philosophy to a more concerted growth strategy.

“This may require a change in organisational culture to inspire a growth agenda… Alternatively , if we choose to follow the traditional cost cutting path we need to question if we have the capacity to actually save ourselves through a prolonged downturn and are we missing an ideal opportunity for growth now?”

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BUSINESS INSIDER
Real recession is becoming a distant memory in Australia — and that could spell trouble, even in the good times
Paul Colgan · Feb 11, 1:45 PM
Here’s something to try at work today. A thought experiment.

Look around at the people you work with. Consider the experience of the people across the company and think about how many of those people have, in their working lives, ever managed a business during a recession.

For many Australian workplaces, particularly young companies, there answer will be zero.

After more than 25 years of continuous economic growth, anyone who is under 45 hasn’t worked through a full-blown contraction in the economy.

And consider: Matt Comyn, the new CEO of Australia’s biggest financial institution, the Commonwealth Bank, is 42.

Now Comyn has seen many brutal economic episodes in his career, from the dot-com bust and the period after September 11, and of course the period around the global financial crisis which resulted in severe cutbacks in Australia’s banking system, to the Eurozone crisis of 2011. Locally, he’s seen the impacts of the mining downturn on the affected parts of the economy, the pressures experienced by the tourism sector when the Australian dollar soared, and the decline of the manufacturing sector. There’s plenty of experience, both institutionally for the bank and in sector-specific terms for Comyn himself.

But this knowledge and experience is not as well baked into to the hundreds of thousands of other businesses that have formed in the past two and a half decades.

Localised contractions such as those in the car industry, the media sector, and that in finance after the GFC are ugly and painful for the people involved, but different from the all-consuming nature of a nationwide downturn characterised by soaring unemployment, business closures, and bankruptcies.

A downturn would create a sudden demand for a broad and deep pool of expertise in managing this kind of problem and the reality is that pool in Australia is small and shrinking. Also, the tools for dealing with a modern recession — data-driven decisions, offshoring, managing millennials — are vastly different from the last time Australia had a proper crunch. We’ll come back to that.

The Australian economy is the strongest it has been in years. Growth looks relatively balanced, job creation is solid, house prices have stabilised or are falling slowly, and it looks like the disinflationary pressures of recent years are abating. Around the world, the global economy is gathering pace, offering further support to Australia’s trade-reliant economy.

But there is a small but ever-present risk of a severe external shock plunging the country into a recession it can do nothing about. The biggest of those risks remains some kind of hard landing in China, but times like last week when global markets were in a tailspin, do invite questions about whether Australia’s business leaders would know what to do in an economic crisis visited on the nation from abroad.

Cost-cutting in this environment can’t be limited to stopping the flower deliveries for reception and stocking the kitchen with home brand tea.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, said: “The main danger for business leaders after a long period of continuous overall economic growth is that a degree of complacency sets in resulting in excessive risk taking – which could take the form of taking on too much debt or overinvestment.”

That said, one thing Australian executives have proved themselves very adept at is managing costs. Although the economy has seen a record-making run of expansion, risk-averse, conservative strategy has been at the core of Australian corporate behaviour for years, restraining the “animal spirits” that the RBA so desperately wanted to see in the non-mining economy when it was slashing rates after the end of the investment boom.

As a result, Oliver said, there was little evidence of risky levels of exuberance among executives, “maybe because various industries have had their own tough times (like manufacturing and tourism when the Australian dollar was sky high, mining only recently and of course retailing) and a constant run of scares globally (like the GFC and the 2011-12 Eurozone and US debt crises) have kept CEOs level headed – mostly.

“But it could change as the global growth rebound gathers pace and that benefits Australia.”

At the same time, the helpful restraint that has characterised much of corporate Australia could work against some companies in the event of a downturn, not just because businesses may not be as healthy as they might otherwise be, but because leaders may be incapable of seizing opportunities to rebuild and reform.

Gregory Robinson, managing partner at Blenheim Partners, an executive search and board advisory firm in Sydney, says that cost management has been “almost a DNA requirement to be a senior executive in Australia”.

However, he says: “There are a couple of concerns with this. Firstly, why is management still focusing on cost cutting in arguably solid economic conditions? Secondly, how much fat is left in the organisation to cut before they hit bone? And finally, is leadership equipped to seize opportunity if there is a significant downturn?

“The big question to ask is: does Australian management have the appetite to take risk in tough economic circumstances when tightening the belt would be seen as the safer bet and the expected norm? Based on our recent studies, Australian business leadership throughout years of economic growth consistently takes the more conservative approach. Therefore if the recession comes, that conservatism could ramp up, only perpetuating the situation.”

‘Zombification’
Business Insider spoke to an independent consultant who has helped organisations deliver efficiencies when faced with challenging economic conditions, both in the UK and more recently in Australia. He asked to remain anonymous because of the sensitive nature of his work.

One problem he identified in corporates from operating in long periods of expansion was “the reluctance to have tough performance management conversations in times of high profit margins, resulting in a long term ‘zombification’ of departments.”

This is the “fat and happy” problem: companies avoid the smaller tough decisions because departments are making money while slowly becoming an organisational albatross.

“If you take that thought a step further, it’s actually really unfair to the individuals concerned that they are not told that their performance is sub-par, only to find out when it’s far too late and a redundancy cheque is handed to them. There will be a lot of people who are very confused as to why they got the chop,” the consultant said.

He outlined some of the management skills that are indispensable in a downturn, which are summarised below in full, because it’s quite a list.

Mental toughness: You’re going to have to make some hard decisions and very quickly which will impact a lot of families.
Leadership: The remaining workforce will need to be led out of the change into a future they all buy in to. I once worked for a UK company that fired around 500 people in November. The CEO gave a speech at the Christmas Ball that didn’t even mention this. Weak.
Analytical skills: Pareto [the 80:20 rule that 80% of results come from 20% of the causes] is your friend coupled with a good understanding of which spend is realistically addressable; there’s no point looking at a software licence agreement as an opportunity to cut costs, no matter how large it is, if you’ve only recently renewed it and you’ve got no best alternative that’s palatable.
Data capability: If you’re not measuring the right metrics today, how will you know which parts of the business to prune and which to feed? Feelings?
The ability to deploy rapid tactical digitisation and automation: Everyone has a strategic plan for this but, what if you could fastrack the initiatives that reduce staff numbers and improve customer experience? Do those first and much, much quicker than you’d planned.
Culture: Are you working in an organisation where the size of your organisation chart is directly proportional to your perceived value rather than outcomes delivered? You’ve got deep-rooted issues to address if so as everyone will be fighting tooth and nail to stop the cuts from hitting their teams.
To go back to the start, it might be worth asking if these are capabilities that would be at hand in a crisis.

The global economy is in excellent shape and Australia will reap the benefits of this for some time. As my colleague Jim Edwards at Business Insider UK recently noted, we are living something of a golden age.

“Or, to put it more sharply,” he wrote, “‘we are approaching the end of a Golden Age’” – because no one I talked to thinks this is going to last.”

So as the pool of people who have worked, managed, traded and coped through Australian recessions before continues to shrink, now might a good time to think about how to be ready for the downturn that will, at some point, hit.

Robinson, whose work in executive placement gives him an insight into the skills bases of Australian leaders and what boards are looking for in bosses, said: “As a nation we have not experienced adversity for a long time. The GFC was mild in Australia compared to many other parts of the world. We may be better served now, during a time of economic stability, to encourage boards and business leaders to depart away from the ‘cost cutting our way to success’ philosophy to a more concerted growth strategy.

“This may require a change in organisational culture to inspire a growth agenda… Alternatively , if we choose to follow the traditional cost cutting path we need to question if we have the capacity to actually save ourselves through a prolonged downturn and are we missing an ideal opportunity for growth now?”

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