The LETTER:
Official Report Of The L Group

Here We Go Again: Leading in Tough Times
by Lee J. Colan, Ph.D.

Truism: No trend goes on forever. This truism prevents complacency during good times and instills hope during tough times. I wrote this article in 2001 to address how to lead in an economic downturn. Well, 2008 seems to be singing the same song to leaders. I hope you find some timely and timeless leadership nuggets in this reprised report...

Have you been wishing for the good old days lately? Or at least to rewind the economic clock 12 months? Leading a company during a slowing economy has plenty of challenges:
What should you change, stop or continue doing?

No graph goes up (or down) forever. The path to sustained growth is like a roller coaster ride. Your personal assumptions about change and tough times will dictate how your company will experience the roller coaster ride. In fact, the greatest opportunity for your company to create a sustainable competitive advantage is during a tough economy.

Let's focus on how your leadership behavior can affect two of these quadrants. Quadrant 2 illustrates that it is easy to be a good leader during good times - high revenue growth forgives many sins. It is harder to create a sustainable advantage because if an economy is forgiving, anyone can ride that wave, even companies with less effective leadership. In Quadrant 1, effective leadership and poor economic times offer the best opportunity for you to create sustainable distinction in the marketplace.

There are three common responses to change with corresponding effective responses for each one:

1. Survival vs. Opportunity
2. Control vs. Involvement
3. Panic vs. Focus

The survival response uses as its operating assumption, "We just need to stay afloat." The resulting leadership behaviors include: reducing headcount, decreasing employee development and controlling expenses. The organizational impacts of these leadership behaviors are employee cynicism and sacrificing the company's long-term capacity to sustain growth.

These are fear-based, defensive responses that reflect the "change = loss" paradigm. It is true that cash is king during bad times (and good times!) but avoid "majoring on the minors" by eliminating important rituals, reducing training or saving paper clips.

The more effective alternative to the survival response is the opportunity response. The assumption that underlies the opportunity response is, "Here is an opportunity to improve our business". This results in leadership behavior like upgrading the workforce and strategic cost cutting. Greater employee commitment and a strengthened ability to sustain growth are the outcomes.

The realities of your business may require you to reduce headcount. If so, make sure that you do the right thing - from a legal, employee relations and market perception standpoint. Resist the convenience of an across-the-board cut and use this opportunity to get rid of your 'C' and 'D' performers. Even if you are closing a location, try to re-deploy your best performers elsewhere.

The best run companies always behave like they are losing money. All of your employees should understand the most basic unit of profitability (e.g., the airlines use revenue/passenger mile). If your employees understand the drivers of your cost and revenues they can act more like owners of the business. During tough times, shift your focus from the top line to the bottom line with a close eye on inventory control, receivables and cash flow.

The second common response to tough times is control. This response assumes "We know what is best for employees. They will just worry". Resulting behaviors include leaders work in the business rather than on the business and TLM (tight-lipped management). These create distrust in company leadership and an expanded organizational blind spot (weaknesses that everyone, except you, are aware of).

Many companies that have previously grown over the past several years, are now responding with control. Controlling management practices set them back to old ways of managing when they were a smaller company. When the leader shifts back to working in the business rather than on the business it predictably squelches any type of ownership behavior by employees.

Studies on organizational change show that most employees do not resist change itself; rather, they resist that unknown place between where we are now and where we will be - the Abyss.

The effective alternative to control is involvement. The involvement response assumes, "We must harness all of our ideas to manage these conditions most effectively". Leaders who take this more effective approach work on the business and solicit employee input for solutions. Naturally, these behaviors result in greater ownership behavior (what every leader wants more of) and a reduced organizational blind spot.

It is important to not just make employees feel like they are involved - a common, mechanical substitute for real involvement. Remember, those who underestimate their employee's intelligence overestimate their own.

Analysis of cumulative employee attitude research shows that the biggest concern for employees is communication. However, leaders are continually frustrated that their communication efforts do not improve employees' perceptions of company communication. Further analysis of these historical data reveal what employees want to know. It boils down to four simple questions leaders must address:

1. Where are we going? (Strategy)
2. What are we doing to get there? (Plans)
3. How can I contribute? (Roles)
4. What's in it for me? (Rewards)

The third and final common response to tough times is panic. The panic response assumes that "We better do something different to get through this". This assumptions leads to a continuous eye on the next deal and an obsession with creating new initiatives. This results in eroding customer service and the "ship is adrift" syndrome.

This is a classic entrepreneurial response. Look for a new deal or create another business model. The problem is that it's five times more expensive to obtain business for a new customer than it is from an existing customer. Also, employees really want clear direction, not a plethora of new initiatives, during tough times.

Focus is the effective alternative to panic. Focus assumes, "Let's keep doing what we do best".

Leaders that respond with focus reinforce customer service and existing customer relationships, and they sustain their marketing efforts. This results in improved perception of market position and stronger, more profitable customer relationships (again, what every leader wants more of). Put your resources where you are strongest (core competency). It is tempting to try to shore up your weak areas during tough times. However, unless those areas are strategic, you will just be throwing good money after bad. Think about this - since some approximation of the 80/20 Rule exists in almost all systems, we can safely infer that it also exists in your business. This means that the most profitable 1/5 of your company is 16 times more profitable than the remaining 4/5. Needless to say, you should regularly look at your most/least profitable sales people, products, service lines, divisions etc.

Many of the leadership practices that we suggest under "Effective Responses" should be done all of the time. For example, watching your expenses is like cleaning your house - you always have to do it. Regardless of where your company is on the economic roller coaster, you should consider the organizational impact of your own personal assumptions and leadership behavior.

We led our way out of the 2001 downturn, and we will do it again. First, let's get to work!

Here is a table that summarizes each personal response to change.

Copyright © 2006-2008 by Lee J. Colan and The L Group, Inc.

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