Proceed with caution

Can we breathe out again yet? Business leaders could be forgiven for asking themselves that question. At the moment, the economic signals remain mixed. Even as the heart is lifted by one or two positive business stories on one page of the newspaper, turning the page can reveal much gloomier news. Some company bosses ? such as Sir Terry Leahy of Tesco ? have been happy to declare that the worst is behind us and that shoppers are back. Others ? in manufacturing and property professional services ? are not so sure.
As Lowell Bryan and Bill Hoffman from management consultants McKinsey reported earlier this autumn, there is global uncertainty about where we stand. In September, McKinsey canvassed more than 1,600 executives around the world for their views on possible recovery.
?Only 20 per cent believed a ?normal? recovery starting in late 2009 would be the most probable outcome,? Bryan and Hoffman said. ?Forty-two per cent thought 2010 would be a year of flat economic activity. About a third believes that an extended period of anaemic global economic growth [less than 1 per cent per annum] is likely for the next several years. The remaining 7 per cent felt something akin to a double-dip recession was probable.?
Everywhere, it seems, there is doubt. But do we risk submerging into self-perpetuating gloom as a result? Of course, many companies will have had a near-death (or at least pretty horrible) experience recently. As London Business School professors Rob Goffee and Gareth Jones have argued: ?There is a real concern that in this recession, with a focus on cost reduction and head count control, some organisations are becoming miserable places to be. Already, many businesses are experiencing low morale and growing anxiety as people worry about their job security. Yet research has repeatedly demonstrated that creativity and innovation are inextricably linked to energy, edge and fun, which organisational attrition is in danger of crushing.?
Perhaps remaining gripped by shock and anxiety will lead managers to miss out on emerging opportunities, being too risk averse to benefit from an economy that is bound to recover eventually.
The advice of experts is: not so fast. You wouldn?t get up from your sick bed to run a marathon the next morning, so why should a business be able to launch an aggressive new growth path so soon after struggling badly?
Graham Rusling, managing director for business support and recoveries at Barclays Commercial Bank, says that while some businesses will be able to recover and return to decent levels of growth, others, that did not take action early enough to stave off difficulties, may still be too weak to contemplate anything more than mere survival.
?Businesses fail, not because they can?t make a profit, but because they run out of cash,? he explains. He offers the example of two local plumbers. ?One comes round and does the work, and then eight weeks later you finally get an invoice. The other presents you with the bill the same day the work is completed. The first plumber is typical of the sort of business that has lost control of its cash position. They may not have the cash to pay wages at the end of the week or the end of the month.?
In recessions, some businesses remain in denial about their difficulties for too long. Only those that acted early to ensure survival will now be in a position to grow again, Rusling says.
But here, too, there are risks.
?Coming out of a recession can be as dangerous as going into one,? he argues. ?The chances are that businesses have not been able to invest much in recent times, and they may also be undercapitalised. Stock and inventory levels may be low. There is a danger that you will ?over-trade? in a hurry to try and get back to a healthier position too fast. But you will just recreate the same problems by doing that. You may not have enough cash to run the business in that sort of expansion mode.? Any recovery plan has to be realistic and deliverable, he adds.
The turnround specialist Anthony Holmes agrees that apparent economic recovery is a dangerous moment for many businesses. He identifies four phases in the business cycle: decline, early recovery, late recovery and growth. The trouble with early recovery ? where we now find ourselves ? is that opportunity is mixed with uncertainty. This could prove a ?lethal cocktail?, he says.
?After all that gloom and doom, managers may be fed up and just want to get back to investing. We have been here before. In the 1990s recession we did not have a V-shaped recovery, it was a W. But if you thought it was a V and invested at that point, you slid down again. They missed the true moment to grow by about six months. And healthy survivors became unhealthy ones,? says Holmes.
In the 1990s recession, corporate insolvencies tended to lag the recovery, he adds. This suggests that the early- and late-recovery phases are dangerous, especially for weak survivors. So 2010 and 2011 could in fact be ?periods of elevated risk? for some companies.
?You have to be 80 per cent through a recession before it is safer to invest again,? Holmes argues. ?If this recession takes a W shape, then there is danger in reacting too ambitiously to the first sign of growth (which is occurring at present) only to find that it is a false dawn and the conditions for a sustained recovery are not yet in place,? he says.
?A second, smaller economic contraction undermines the confidence in recovery and can leave healthy survivors disabled from their impetuosity,? he adds. ?The conclusion is that the pattern of exit from a recession remains unclear, below an acceptable level of confidence, until 80 per cent of the event has been endured. I suspect that we are only around 60 per cent of the way through this event.?
McKinsey also warns that we cannot be clear where the economy stands. In 2010, the massive fiscal and monetary stimulus provided by governments will come to an end. ?What will happen when the patient is taken off its medicine?? Bryan and Hoffman ask.
Companies should ?drop the pretence that they can predict the future?, they add. The pair suggest abandoning the fixed calendar and planning schedules typical of annual operating processes. ?This change will require a shift to monitoring macroeconomic indicators in real time, something akin to ?just-in-time? manufacturing approaches applied to decision-making. It also means building greater flexibility into strategic activity.?
Recovery is partly about getting business back on a sound financial footing, of course. But it is also about identifying a new direction, and following it. Advice on that score is beginning to emerge.
Caroline Firstbrook, managing director for strategy at Accenture in EMEA and Latin America, sees the current crisis as an opportunity for companies to make some of the more radical moves they have put off in easier times.
?The downturn has already precipitated major changes in buyer [customer] behaviour, industry structure and competitive dynamics,? she wrote in a recent Accenture strategy paper, ?and has opened a gap between winners and losers that is likely to grow substantially.
?Success in the eventual upturn will depend on leadership?s ability to anticipate and react to these and succeeding changes, and to make wise, often very difficult choices about how and where to invest, how to configure operations, and how to preserve and rebuild key skills once growth returns.?
You see? Simple.
So what should business leaders bear in mind as they try to head back to growth? Anthony Holmes says there is a danger of a ?false memory syndrome? setting in as companies pull away from disaster and turn their thoughts to recovery. ?People believe that because they have survived, they are well-equipped to lead on from here,? he says.
?But it is human nature to forget what we have learned in the bad times, or to imagine that things weren?t as bad as others say they were. We just get over the bad bits and move on. It would be better if people recorded what they were going through at the time of recession so they could read it again when the greatest danger has passed. You can?t deny your own honesty. But instead people think they can forget the past and carry on with their old business models. This is almost certainly wrong,? he says.
Barclays? Rusling adds that sometimes the existing management simply has to go. The people who got you into trouble are not the ones who can lead you out of it. Leading a turnround is a very different task to day-to-day management. Sometimes the management team may just be burnt out after the effort of struggling to survive.
There is one crumb of comfort. ?If you can get hold of debt finance right now, it would be a sensible thing to do, because it?s cheap,? Holmes says. ?It might run counter to your instincts, but if you can borrow for five years and deleverage after three, now is the time to talk to a bank.?