How to save a drowning business

This post, short as it is, has been in development for a while.  I’ve been concerned that it will appear merely populist, almost socialist, in its call against needless “downsizing.”  It isn’t socialist.  It’s about the creative enterprise that business can be.  I want this to be understood by a generation of executives who’ve lost sight of the organism of business.

We are in a terrible time, economically speaking.  This is not news.  But there is a sharp division between broken markets and the actual economic and productive engine of society.  There are indicators that productivity need not be as harmed as the equity markets have been.  This is because of different motivations.  Shareholders, typically, want to make money.  Some also want to have their hands in the pies of growing industry, but even so, money is a key motivator.  There are two ways of making money from corporate equity:  one is from equity growth – the growth in the value of a corporation; the other is from dividends – a shareholder’s proportion of the company’s profits.

Executives are responsible to the shareholders.  But there are two ways in which they can address shareholder demands:  one is equitable growth, which happens when a company builds and grows.  The other is from profit, which happens two ways:  either from growth in revenue that outstrips growth in expenses, or from cuts to expenses that exceed the drop in revenue.  The first is positive, and the second is negative.  More importantly, profit will usually follow a constructive plan, while equitable growth will never (unless there is a profitable acquisition) follow massive downsizing that is done merely to create profit bubbles and golden parachutes.

(What do I mean by a profit bubble?  Decrease client satisfaction at great savings to expenses, and exploit the lag before the revenues drop from clients pulling out.)

Now on to my cherished month-old metaphor:

People drown in very cold water. The cold causes the body to restrict blood flow to the extremities, in order to conserve energy for vital organs. The oxygen-starved and frozen extremities become numb and useless. The person can no longer swim, because the appendages that keep the body afloat – we’re not buoyant enough to float unless completely horizontal – are no longer working for the body. The vital organs, sustained an extra moment on the oxygen of the appendages, find themselves alive and sinking. This is an evolutionary reflex, and hard to reprogram.

In a state of economic decline – the cold water – companies will shed their appendages to keep whatever oxygen remains for the vital organs. Like the human body, this results in drowning, as without those extremities, the company can no longer manoeuver in the water. Unlike the human body, this relfex is not hard to reprogram. By trimming the oxygen needs of the vital organs, the extremities can be kept functioning until the water warms.

This metaphor demonstrates how executives with vision and a drive to grow a business will re-engineer the business to remain generally healthy through rough times, without decreasing survivability, or creating golden parachutes for themselves.

An executive who boasts profit increases without matching revenue growth is simply a hatchet-man.  We’re seeing a lot of them these days, and a major drop in visionaries who try to find a way to grow their companies so that something will be left in 2011 or 2012 or whenever we see real recovery.  The problem is that companies are drowning, and they don’t need to.  This is not advocating socialist ideals, and certainly not union bullies.  They bankrupt companies just as quickly, but the golden parachutes are distributed among the soon-to-be-unemployed members of those unions.  I am instead suggesting a more productivity-oriented approach.  The revenue stream has dropped but the demand is still there at a lower price point?  Adjust prices and cut profit for the sake of equitable growth or at least stability; don’t simply shrink and jump with whatever cash you could squeeze out.  The only shareholders profiting there are short-sellers anyway, and their concerns should come second to the long-term goals of the corporation.