Time to Plan For the Next Recession

By Geoff Colvin
Tuesday, September 29, 2009

If ever you were entitled to start breathing easier, now would seem to be the moment. So why am I telling you not to? The end of the recession seems so close that you can almost smell it. The stock market is surging, China and India are firing on all cylinders again, and no one would be surprised if in the next quarter the U.S. economy shows signs of growth, too.

Yet this is exactly the wrong moment to let up on the mean and lean strategies you've adopted. In fact, it's time to go further and develop a new, even tougher mind-set: managing for -- yes -- the next recession.

Downturns are only a small part of the economic cycle, but they are the moments when the pecking order shifts -- and when entire sectors change in ways that last for years. Think of how the landscape shifted among investment banks (Goldman Sachs stronger than ever, Lehman Brothers and Bear Stearns gone for good) and automakers (Chrysler bankrupt and bought, Toyota roaring past General Motors). The primary factor in determining which companies won and which lost was the way they were managed during the boom. So now that the next expansion is about to start, it's time for businesses to make sure not only that they grow and succeed, but also that they position themselves to prevail in the inevitable next recession. Three imperatives:

-- Make friends now with the people you'll need later. At a meeting of leading chief executives this spring, a top Obama administration official (speaking to me on the condition that he not be named) told the corporate chiefs bluntly that they had done a lousy job of making friends in Washington. When the government needed businesspeople to serve on task forces, he said, companies sent functionaries. But when a company wanted to lobby officials on a potential tax or regulatory change that would benefit them, the chief executive showed up and had plenty of time. Such behavior isn't forgotten, the official said, when a company suddenly appears, asking for help.

-- Listen to unconventional wisdom. For unsuccessful companies, risk is a hot topic in the depths of a recession. For great companies, it's a hot topic at the height of a boom. In the previous expansion, contrarians such as Yale professor Robert Shiller, New York University professor Nouriel Roubini and fund manager Jeremy Grantham were saying what no one wanted to hear -- that real estate and other asset prices had become insane bubbles. Well, Grantham is still here, while many fund managers are not.

When the good times return, make it a priority to find the thinkers who stand apart. Check out economists Emmanuel Saez of the University of California at Berkeley and Susan Athey of Harvard, the two most recent winners of the John Bates Clark Medal for America's best young economist. Saez is an expert on tax policy -- an important topic as federal rules are being rewritten. Athey studies investor behavior and market structure, another key subject. And always be alert for others. You can't know if they'll be right, but considering their views will make you wiser.

-- Don't go soft on evaluations. Expansions make it easier for everyone to look like a star, leading undisciplined managers to believe that somehow everyone just got better. The best companies, including Procter & Gamble and McKinsey, are as rigorous in evaluating people during good times as bad. Otherwise, they'd find themselves with a roster of C players when the next downturn arrives.

This whole way of thinking may seem backward. Good times seen merely as preparation for the bad? But managing intelligently during the next expansion will be much more than a chance to clobber competitors. At least as important will be preparing the organization for the make-or-break environment of the next recession.

Geoff Colvin is a senior editor at large for Fortune magazine.

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