KnowledgeForward

The recession has proven to be a boon to writers of articles and blog postings you can email to your executives about how whatever domain they are experts in (like customer relations folks or training people) is critical to avoid cutting and maybe even increase spending on it like other smart companies do.

In researching how the recession is impacting my domain (information technology, and communication, collaboration, and content technology in particular) I was pleased to find articles saying that should really get more budget in tight times. Wonderful! 

… But then I decided to check and see what other domains were saying about recessionary spending. After trolling dozens of sites on other domains like customer relationship management, training, marketing I noticed a familiar pattern – they all say they are smart places to spend too. Needless to say I did not find any articles from domain experts saying “In a recession, our department’s budget should be cut” or “Companies that come out of a recession stronger are those that cut spending in our department”. Instead every department has become the business equivalent of Garrison Keillor’s Lake Wobegon. At Wobegon Corporation every department provides greater than average returns on investments in recessionary times.  Everyone can’t be right, so who is right that spending in their domain should increase during recessions (please let it be portals!) ?

The “Don’t Touch My Wallet” (DTMW) script

There are arguments and articles that rise above the fray – I’ll get to them at the end. But the bulk of them fall into a script I’ll call the “Don’t Touch My Wallet” (DTMW) script. There are a standard set of key elements you’ll find in a DTMW article.

The “Don’t touch my wallet” (DTMW) statement

• “Now is not the time to slash advertising budgets.“, “This is not the time to cut advertising”
• “Maintain marketing spending”
• “Now is the perfect time to increase your innovation efforts”
• “In a downturn it can actually make more sense to spend more money on training, not less”
• “Customer relationship management (CRM) technology is one of those critical areas that companies need to continue continually embrace, especially during tough economic times”
• “ Of course, now is the time to be frugal, but be frugal in areas that don’t touch the customer.” (this last one, from a CRM firm, is my favorite because it not only makes the “don’t touch my wallet” statement, but grants permission for the cost cutters to raid someone else’s!)

The metaphor

• “ Shoot the moon”
• “If the distance runner is really strong, when the runner hits a hill, the runner is gonna speed up”
• And the winner, for mixing metaphors about belts, frogs, and catapults in the same paragraph: “While others are tightening their belts, truly successful companies use the recession as a chance to leapfrog their competition. My favorite company … increases their investments during difficult times. They know that if they focus on innovation while others are cutting costs, they will quickly catapult past everyone else. “

The motivational pablum

• “ The first competitors to take action will be the ones who reap the greatest rewards.”
• “Have you ever noticed that many of the big winners in business were willing to make bets that ran counter to the prevailing wisdom of the time? There are countless success stories of leaders who ‘zigged’ when everyone else ‘zagged.’”
• “Smart companies know you can’t save your way out of a recession. “

The survey

The articles often quote a survey that shows organizations who spent more on their domain in a recession did better than their peers. They generally don’t reveal enough about their methodology to truly evaluate their findings, but these surveys feel fixed for 3 reasons:

1. They are almost exclusively sponsored by organizations with a vested interest in the domain and would be unlikely to publish the results if they showed cutting costs to be a more effective strategy.
2. The mere fact the surveyed organizations were in a position to increase spending in a recession indicates companies with comparatively better financials (compared to their peer group). Of course companies that go into a recession financially stronger are more likely to come out of it stronger.
3. Just surveying those companies that increased spending in one domain is a self-selecting sample. Companies that increased spending on a particular domain already determined it is important for their type of business. For example, companies that doubled advertising expenditures in a recession are probably those that know they are in industries where advertising gets high leverage (like image-related consumer goods), while those in unimpressionable markets (like mining) would probably not bother to increase the minimal ad spending they have. So blanket statements that say “companies that increase ad spending in recessions do better” are not as universally applicable as they imply.

A good study should be sponsored by an institution that doesn’t have a stake in the results and examines both sides of the coin: winners and losers, companies who started in good or bad financial condition, companies that increased or decreased spending in the domain.

Principles about spending in a recession

Reading all these DTMW articles did help me uncover some underlying principles about spending in a recession. These are scary times. I don’t begrudge anyone trying to make the case for their domain (and, by proxy, their job). Quite the contrary, it’s everyone’s responsibility in tough times to think about the value their role brings. Where small investments can provide leverage in these conditions, you should make the case for them, throwing them into the marketplace of ideas with the understanding that everyone else is doing the same. With every experts in every domain publishing a DTMW script, running to your executive with a request for more money attached to an article backing up increased spending is likely to be laughed at when every department is making the same argument.

If you have money to spend in a recession that your competitors don’t, you’ll get more leverage anywhere you spend it wisely: IT, training, customer service, etc. Industries have different leverage points (elasticity) where a dollar of recession spending added or removed has a multiplicative effect on profitability. Don’t accept blanket statements across all industries about where that elasticity exists (e.g., “All companies should increase sales travel rather than cutting it when times get tough”). The key is to understand the dynamics of your industry and firm and select the correct points of leverage.

Recessions can shake organizations up for the better – they force organizations to cut waste, improve efficiency, be more aware of what they are doing and why. That last point (what you’re doing and why) brings me to portfolio management. In a recession, as at all times, portfolio management theory applies. This theory says organizations should allocate spending to categories – usually these three: running, growing, and transforming the business. Then all initiatives should be categorized accordingly and evaluated against each other.

So first, keep the lights on. Assuming you have some money left after that, understand there is a portfolio of incremental improvement projects and transformational projects that should be evaluated as a whole. The DTMW articles make the mistake of bypassing reasonable portfolio management discipline to make the argument that one should just jump to spending more on their pet domain without analyzing its relation to other projects in the portfolio. Spending more on domain A may indeed have a high return.  But if spending on domains B, C, and D have an even higher return, spending on A wouldn’t be a wise move without money to cover all four domains. 

So how do you do this right?  After hours of reading DTMW articles, it was a joy to finally find one that stated the case for its domain (web design) properly, succinctly, and with a professional level of humility.  This may not grab the attention of the CFO, but it will withstand reasonable scrutiny once investigated further:

Is web design really worth spending money on now, when money’s so short? It depends on your circumstances, but we think you should give it serious consideration.

Conclusion

So my conclusion is that, despite what DTMW articles say, smart companies are not the ones that blindly increase spending in one domain just because other companies do (it’s a self-selecting sample) or because a logical argument can be made for the importance of spending in that domain (all domains have differing elasticity based on industry and individual factors). Recessions give smart companies an opportunity to gain an edge by selectively outspending their competition in key domains. They select the domains by digging harder into the data and applying portfolio management discipline.

Back to my domain of IT, I posted previously about a Diamond Management and Technology Consultants study. While it is from a company with a stake in IT spending, I like the fact that they looked at companies that underperformed as well as outperformed. And their high-level advice fits the “be selective” mantra:

The central lesson of our research is that at the very time when a leader is tempted to shorten his or her time horizon and make simple across-the-board cuts, superior performers dig into the data and act more intelligently than the competition.