Leadership in the Era of Economic Uncertainty

Up to the minute

It is still early in 2009, yet here is Ram Charan already producing a book on how to handle the financial and economic crisis. By its references to recent events it is evident that it must have been written in November 2008 and rushed into print. Yet it is obvious that Charan has been doing a lot of thinking about how to survive and even progress in the current situation. He is Harvard educated and a well respected consultant in the US, who has never lost sight of his Indian roots, where he learnt the essence of business management in the family village shoe store.

The book is easy to read, but it has lessons for all levels of management. It is fairly directive in view of the urgency of the times. I liked the way in which from the very beginning he faces up to the seriousness of the crisis. There is no attempt to minimize it as a temporary blip which will come alright in a matter of a year or two. He acknowledges that we stand at the crossroads and that it is unlikely that things will ever be the same again. So we need to take his words seriously.

The challenges are unprecedented. “Cash and credit are dwindling; sales forecasts are dismal, and morale is sinking.” Demand is reduced on every side as cash short customers forgo or stretch out purchases? Charan steers the reader through the minefield of contracting markets, cash shortages and continuing uncertainty. His aim is to help you to make sure that your business will ultimately emerge stronger, if leaner, and ahead of the competition. He sees opportunity as well as danger.


He exhorts us to give urgent priority to cash flow and to use cash efficiently, to ensure a flow of intelligence throughout the organization, never lose sight of your customers, re-evaluate strategies for pricing, cost cutting and capital expenditure.

Former Honeywell CEO Larry Bossidy writes the foreword under the heading “The Economic Cyclone continues to rage...........and nobody knows when it will end.” He speaks of the absolute need for candor and frequent communication in these times of uncertainty.

The book introduces the theme with the CEO of DuPont at an early stage of the crisis calling his senior people together and asking them; how bad is it now? how bad could it get? How low would our breakeven point have to sink to meet the worst case scenario? What would be the effects on debt repayment? Alarming answers rolled in, particularly that credit was disappearing and with it the ability for companies to finance their operations. A crisis contingency plan was set in motion, involving all employees, who were asked to identify three things they could each do to conserve cash and reduce costs. Travel and unnecessary meetings were reappraised; outside contractors were cut back, need for speedy implementation was emphasized. Yet the longer term needs of the company were kept in mind, so that opportunities for better days would be preserved. Leadership meant pulling people together and decisive action.

Worst case scenarios

Ram Charan never lets you forget that the whole global economic system has been seriously wounded and will not recover by default. This means that you have to face up to the worst possible scenario and develop plans to meet it. False optimism can be as great a threat as excessive pessimism. If you don’t prepare for the worst, everything can be put at risk. Simple thought, but however, often disregarded. To ask: “What would we do if we lost half our customers?” may not be an absurd question. Previously, earnings per share and growing market share may have been your prime concerns, but in times like the present your first challenge must be protecting your cash flow. There must be a concentration on the cash implications of everything everybody in the company does. You need to know the cash position every day.

All three of the sources of earnings must be relentlessly pursued – operational earnings, working capital (inventory and receivables) and the sale of assets; what cash will they generate and how much will they consume? And how soon will they bring in the cash? The automobile industry has been brought to its knees by lack of liquidity. Even mighty GE had to get external capital at exorbitant rates in September 2008.

Growth must be pursued only if it is profitable and cash efficient. Greater market share is not an objective if it consumes a disproportionate amount of cash in more inventory, extended duration of accounts receivable or increased complexity. It may be the right thing to reduce overall market share, cut product lines, prune the customer base and seek market share in cash efficient and profitable segments. You may have to face up to the fact that your company will be smaller two years from now as compared with today. You will have to narrow your focus and concentrate on the core of the business. If you follow this shrinking process you may have “fewer customers, fewer products, fewer facilities, fewer people, fewer suppliers – and a stronger company”.

Management intensity

Charan encourages the following of what he calls “management intensity – a deep immersion in the operational details of the business and the outside world, combined with hands-on involvement and follow through.” To feed this requires a ready flow of information, detailed, up to date, unfiltered, obtained quickly from all parts of the organization. Charan calls this “ground-level intelligence”. It includes getting to know how other customers, consumers and competitors are reacting to the situation and not just from standard quarterly reports. Never was customer relationship management more important. Surprises need to be pre-empted; replacement strategies need to be in place to compensate for lost customers. People need to be synchronized as a company-wide team, making and executing decisions faster.

Goals and key performance indicators have to be reconsidered frequently. Some targets may need to be revisited on a weekly basis. Business models must not be regarded as sacrosanct; turbulent times can make them obsolete. Approaches to budgeting have to be compressed. The annual budget may be out of date before it’s off the computer. It may become meaningless before the third quarter is reached or sooner. You may need to ditch it and re-evaluate at high speed if you are going to survive another six months.

Yet in all this, Charan calls upon us not to forget about the more distant future and to be ready to make the most of the opportunities that may then arise. We need to stay abreast of trends and to spot them early so that we can take advantage of early warning. We must believe that eventually we will emerge victorious from the world economic tsunami with a shared legacy of having waged a terrible war, not only survived it, but ready to take the company to a new level in a much better future, which we never lost sight of in the darkest days. (This reviewer remembers how in the lowest ebb of the Second World War people like Beveridge, Butler, Churchill and Roosevelt were finding time and energy to plan for better days.)

Leadership characteristics

Charan concludes his opening chapters with six characteristics of a good leader, managing in this “downturn of downturns”:

  • Honesty and credibility
  • The ability to inspire
  • Real-time connection with reality
  • Realism tempered with optimism
  • Managing with intensity
  • Boldness in building for the future.

The mood of the book is thus established. What follows in eight succinct chapters looks at the meaning of these principles from the perspective of the people at the helm, especially the CEO, moving on to sales and marketing, finance, operations, research and development, the supply chain, staff functions and the Board of Directors.

The Chief Executive Officer

This chapter also concerns the unit and country managers of diversified companies.

The book is so up date that it is able to discuss by name the leaders who have come through and those who have failed. Even Sir Frederick Goodwin gets a mention, along with the leaders of companies such as Lehman Brothers and Bear Stearns. CEOs who in good times were aggressive, optimistic and oriented towards ever increasing profits and revenue growth may be at sea when the conditions change to the extent of the present situation. Charan suggests that they may have a tendency to behave as arrogant know-it-alls. They may spend all their time in making speeches and in TV interviews, or in doing risk taking deals, when they need to reprioritize their allocation of time, with emphasis on being a visible presence within the company, constantly repeating the essential message and inspiring and motivating people to look beyond the present to a believable future, while avoiding: “This will end soon and we can then get back to normal”, the nitty gritty of doing business successfully in a tough and unpredictable environment.

CEOs must avoid fear as well as complacency. They must be clear that the company will look different from what it ever has before and see this in a positive light. (Charan concentrates on the financial and economic crisis. But it is essential to recognize that other crises exist side by side with it, which of themselves are critical: climate change, energy shortage, poverty in the developing world, world population, sustainable use of the planet’s resources, disruption of the earth’s eco balance, the future of forests and fisheries and so on. Things won’t go back to business as usual; the challenge is to build innovative and creative mindsets in our companies which will develop out of unfavorable situations a way of life for everyone which will be qualitatively acceptable and which will deploy market forces constructively. There will be no need to go back to living in caves.)

The skill of the CEO lies in impressing on everyone that there is a serious crisis, yet without depressing them with a sense of a hopeless future. Boldness is called for, where incremental changes will not be enough. An opportunity, which may be someone else’s misfortune, must be seized without dilly dallying, while explaining the reason for the decision. Opportunities to take on board talented people must not be lost, even if some people are allowed to go as less suited to the needs of the present. Yet even here there is the need to safeguard the future and not to lose the very people who will revive the company in better days. And, says the author, although you may terminate some initiatives, those that will be valuable in the long run should be maintained. New initiatives may also be part of the process of staying in business and ultimate success.

Then there is a core of assets, people, customers and programs which are the raison’d’etre of the company. This must not be dissipated. Again in this chapter, Charan emphasizes the necessity for the CEO to know the daily numbers and manage for cash, which is quite different from managing for accounting profits or revenues. He again stresses the need to be resolute about working in harmony with the lowest breakeven point and ensuring that it cannot be breached, setting shorter term milestones. This may involve downsizing, paring customer and supplier bases. It certainly means knowing what customers will respond to.

Sales and marketing

Ram Charan is able to convey the discomfort that sales people may feel in the changed approach they have to adopt. Often their main object has been to capture as many customers as possible and make the maximum number of sales, irrespective of margins or the ultimate value of the customer. Now they have to become more truly marketers, who gain and share intelligence which can become the basis of business decisions. They have to become more analytical and more conversant with financial and particularly cash implications of their activities as they seek to understand and position customers. Equally in some cases there may be ways of helping a customer through their own anxieties, without giving money away. As one author has expressed it, for example, in business to business marketing, the aim is to help your customer make more money and thus make some yourself.

The salesperson, turned marketer, has to know how much customers cost. Some cost more than they are worth and it can be to the advantage of the company to drop them, though this may go against the salesperson’s grain.

It has often been said, but it is essential that sales and marketing functions dig into the ultimate wants and needs of customers, rather than specific requests that they might make. (One remembers the old story of the cosmetic firm that sold confidence.)

This chapter considers the need to make advertising and promotions really hit the target. Pricing requires carefully handling, particularly if the proceeds have to carry a larger element of fixed costs because of a reduction in the size of the firm. Face to face contact with customers is more than ever essential to maintain relationships beyond the bad times into the future good ones. Internal links with operations and R&D are more than ever important and some top interest in what is being done will encourage sound activity.

The Chief Finance Officer

This role is the key to the chapter on finance. The author identifies two principal psychologies in the post holders in this role.

  1. Investment CFO - relationships with investors, debt ratings, price/earnings ratios, and the financing and refinancing necessary to keep the appropriate debt structure
  2. Operational CFOs – partnering the CEO in the management of financial performance, portfolio composition, restructuring, including acquisitions and divestitures. Deploying capital for efficient and profitable growth

The second approaches may be more in demand in the crisis situation. Managing cash sources will be significant, but staying within the bounds of debt covenants and the scotching of adverse rumors are important to keeping investors happy. The CFO has a role in educating people throughout the company to understand liquidity and the financial implications of all their activities. He or she has to present the impact of various possible scenarios on the financial health of the company so that everyone can do their bit. The CFO has an important part to play in guiding everyone on the deployment and redeployment of resources in the company. In some cases the CFO is the company’s chief risk officer. In the current situation the reshaping of the budget more frequently is a major task of the CFO. Advice about compensation, measures of performance, guarding against customer and supplier defaults, training management about the balance sheet, and keeping the board informed are all part of the job, which is an immense one, requiring some well equipped support staff.


“Operations is the heart of any company” – where the work gets done, says Charan. He mentions priorities of operations in current situations. He considers the number one task is “to lower your cash breakeven point ahead of falling revenues”. This applies especially in manufacturing, but in principle is relevant everywhere. It is important in making changes in this regard to ensure that total system thinking is employed and the repercussion of action in one area upon other areas is taken into account.

Capital expenditure needs careful watching; some plans may have to be put on hold, but also there are activities, such as maintenance, which cannot be neglected. Use can also be made of the way in which depreciation can allow the spending of some money without any real cost. Investing in innovation may be essential to keep the edge over competitors. Product or service simplification can be applied in a way which offers a more user friendly outcome to customers and clients. Outsourcing can in appropriate cases, where the company taking on your work has economies of scale to offer, save money and simplify effort. But don’t outsource your future.

Capacity utilization is discussed with interesting implications for service companies. In such organizations people are your machinery and capacity utilization refers to how usefully busy they are. Usefully busy means that you don’t keep staffing levels for particular activities at a traditional level, but you ask how many people are needed here in the changed circumstances; and you utilize the excess in other needed activities. Airlines sometimes kept the same level of cabin staff for first class sections which were half empty due to the recession.

Motivation is important in all businesses and the changes in operational activity may be used to widen the scope of people’s jobs with some added excitement and enhanced experience.

Research and development

This function may need refocusing on meeting the real needs of customers and potential customers in the crisis situation. Planned research programs appropriate in better days may have to be re-jigged so that effort is going into re-evaluating immediate needs, yet not losing sight of the need to prepare for better days, so as to be ready to take up opportunities. (All companies could well benefit from redefining the aims of their R&D activity. The world is going to get through its wide tranche of problems from climate change to planetary resource shortage, only with some real innovatory study and bold asking of questions previously thought of as inadmissible.)

R&D budgets are likely to suffer, but the cuts must not extend into the heart of what the business is about. The remote and the more esoteric pursuits of knowledge may have to be deferred, but in ways that don’t dry up the kind of initiative and creativity characteristic of good researchers, or which fail to uncover ways which may position the company ahead of competitors when opportunities arise. The merely academic and surveys of a past which may have become irrelevant, may have to give place to the search for practical ideas which will make a difference to how the company operates and how it impacts on customers, especially when it helps them to see a way through their particular problems brought about by any or all of the various crises. Bear in mind, too, that the word Development expresses what Research should lead to.

This all means that R&D may need to be the subject of some zero-based budgeting, where everything is “up for grabs” and nothing taken for granted. But any changes which arise in this process need then to be put into action as a matter of urgency, with the researchers convinced of the value of their changed remits. To quote Charan “take a fresh look at all projects currently under development and evaluate how the changing economic landscape affects the expected value of each one”. Another quote: “R&D resources largely consist of people with ideas. You have to do some hard thinking about how best to deploy them”. If there is a question of reducing the number of staff in R&D, the author insists you must seek to keep those who keep pace with the changing world and who understand current technological possibilities.

The supply chain

The whole chain needs to be looked at - those who supply you and those whom you supply from beginning to end. Where ever your footprint is found – in supplies, inventories or shipments improved routes must be sought with “just in time” methods wherever appropriate. The leanness brought about by the crisis may be the very leanness needed in the company’s activities in any case. And the best use of IT is essential, not ever more sophistication but practical utilization that will give timely and effective information. There may be scope for economies of scale in the supply chain, to everyone’s advantage, by a greater degree of cooperation – even a kind of partnership with suppliers and customers. This will be different from the way in which in hard times the more powerful often bear down upon their suppliers until it becomes difficult for them to make a living. The current crises will have borne good fruit if there is a move to “win/win” approaches.

A requisite in any company is that everyone in the company should understand the whole value chain and their own part in developing it.

Staff functions

These must not be underestimated. Human Resources, accounting, legal, and IT – all have their critical parts to play and once clear on the direction of the company must be capable of being trusted to get on with it, without excessive control. They must, more than ever, avoid mere procedures and the bureaucratic mindset and see the real implications of what they do and how it in the end affects the cash flow and profitability of the company.

There has to be an examination of the fixed cost element in these staff activities, so that wherever possible it is switched into becoming variable. For example the use of external trainers, as and when needed, can reduce this fixed element. You use them as you need them.

Human Resources have a large part to play in the administration of getting employee levels right for the situation, but their work must go beyond mere head count and arbitrary reductions. The preservation of talent must be paramount, though in a period of wide unemployment there may be an additional amount of talent waiting to be picked up. HR need to look at the recommendations they will make on a highly individual, rather than on a mere numbers basis, even if a worst case scenario is being faced.

As well as sensitivity from line managers, the HR work needs to be sensitively carried out in a way that does not destroy people’s self belief. A contrasting example is of given of someone in a Wall Street firm, who, without warning, was denied entry to his office by a security guard, and was sent to an outer office to collect his cards. Charan uses the word “cruel”, especially as the colleague, with whom he had arrived, was allowed in.

When eliminating jobs, there must be a sense of strict equity, with the reasons for any action absolutely clear. Tough decisions may have to be reached and innovative methods employed such as giving redundant people specific contracts to do a job as associates.

Changes to the reward system may be necessary and bonuses may have assumed the sense of entitlements, but on the whole it is likely that most people would rather lose some benefits than their jobs. Internal training (or outsourced training) should not be neglected in a time of crisis, but it needs to be relevant – not a matter of standard power point presentations that look at abstract situations rather than the one in which we find ourselves. Needless to say, I was pleased with the recommendation Charan makes: “You need to encourage people to read books and journals on their own to pick up additional management expertise.”

The Board of Directors

Charan emphasizes that the Board of Directors is “ultimately responsible for ensuring that their companies survive the turmoil as the global economic crisis plays itself out”. They can modify excessive optimism by a CEO who is blind to a worst case scenario and encourage the overly pessimistic to move beyond doom and gloom and take offensive action.

The Directors should not be satisfied with a general broad approach to a few simple ratios. They need to be deeply concerned about how realistic the goals of the company really are. “Revenues, margins, cash, overhead, capital expenditure and capital structure will all be under stress and must reflect the trade-offs necessary to operate through the storm and emerge stronger when it ends.” New targets may need to be added and no director can ignore the facts that cash and the breakeven point are the essential ingredients in measuring how the company is managing in the adverse conditions.

The Board is responsible for watching risk. Involved in this is ensuring that all the senior mangers have imagined the worst problems that could arise and have made preparations to cope with them They have to make the fine balance between the company cutting back too sharply and on the other hand being reluctant to cut back sufficiently.

In quoted companies the Board will be much involved in what steps are least likely to make shareholders unhappy or even which steps might increase their confidence. What dividends should be paid? And how well are such decisions explained so that investors can feel that their real interests are being addressed? Reward policies are a concern of the Board, with recognition that the past can give little guidance and that whatever decisions are made are so obvious that they will be preferred by staff to being unemployed. The Board also has the responsibility for ensuring the right leadership of the company. It must carry out this duty without fear or favor, being ready with a succession plan should the current CEO decide to move on. Here hesitation can be disastrous, but also old school tie affiliations may be an impediment.

Overall, Charan is proposing a much more well informed and proactive Board of Directors than is sometimes the case, although they should eschew the temptation to meddle with the responsibilities of senior managers. The right people must be left to manage.


You may be doing most of the right things in pursuing your role, but failure to give due attention to just one of the issues may be fatal. Charan therefore provides a corrective, by his stark, yet reasonable, facing up to the needs of the current crises.

His emphasis on cash, born in his Indian village days is worth taking on board. If cash goes, everything goes. Income or profit and loss statements don’t tell you whether your customer invoices are being paid. Many years ago my first attendance at a finance course was a Damascus like experience, when I understood how a company showing a good profit could, nevertheless go bankrupt. Charan makes sure that everyone in the company is cash aware.

Perhaps the other most significant emphasis in the book is that management must not neglect the possibility of a worst case scenario. One must not allow it to depress thought and action, but unless it is faced long before it seems really likely, if it should come it will be too late.

In spite of its realism, the book is not a depressing read. It stimulates to action and it doesn’t deny a future for the company or the world. It encourages you while doing what you must in the difficult present never to lose sight that there can be a future for the company - a future more likely to be achieved if you have always believed in it and made provision to seize opportunities as they arise or as you can make them arise.