Why You Should Have a Contingency Plan

The markets are soaring and the stock market appears to have no upper limit. Unemployment continues to hover at near microscopic levels. Backlogs remain strong and employers are optimistic in their business planning. With all of this, one indelible question remains: Have you started planning for an economic disaster? It is almost heresy to utter the words “recession” or “depression,” as if the mere mention will cause markets to crater. It is much more fun to reflect on the halcyon days of recent times and simply build.

So, why even tempt the economic gods with such talk? First, it is always important to remember that the economy and its business cycles do not care who is in the White House, do not watch the DOW as closely as day traders and certainly give little credence to the general level of happiness contractors are currently enjoying. Second, there is no shortage of socioeconomic, macroeconomic and geopolitical upheavals taking place on a daily basis. Third, during the last 30 years, there was plenty of exuberance immediately prior to the subsequent meltdowns. For instance, there were a number of individuals who said, “There is no way this will ever end—we will always need housing, internet, technology.”

No one wants to be the Debbie Downer who reflects on negativity. The better action is to implement strategies that help to provide guidance and position the business for the short and long term.

The Assessment

NASCAR and IndyCar racing evoke great imagery of contractors running through their backlogs, accelerating and throttling to keep pace with the competition. One of the most important aspects of any race is actually the least attractive—the pits. In addition to the maintenance and refueling, it’s where teams modify their vehicles and strategies to move up in the queue. Unlike the No. 3 or No. 20 car, contractors rarely slow down to evaluate and assess their positions. For instance, rather than simply looking at a work-in-progress report, study what trends emerge from the firm’s data:

• Margin capabilities—Are margins increasing or decreasing? What can be attributed to gains/losses?
• Volume distribution—How much volume does the firm have within a niche/market/customer/geography? Is the distribution of future backlog evenly distributed or overweight?
• Market share—What aspect of the market does the firm currently occupy? What is the forecast for these markets? Is there shrinking opportunity or growth pockets?

The “pit stop” is hardly just a measure of financial performance. More importantly, learn what can be said about the capabilities of the firm’s talent:

• Operations—Is the firm operating at the desired efficiency? How far away from the standard operating procedures have the operators migrated?
• Talent—When was the last time the firm did a true appraisal of its talent within all aspects of its business? Have the organization’s ranks become bloated or has it settled for mediocrity within the firm?
• Marketing—What is your firm sellingand is it relevant? What do your customers think of your organization?
• Communication—How linked are all of the firm’s business units? Does everyone have a perspective on the firm’s true health?

A true, fact-based assessment grounds the organization and provides optics on issues surrounding the firm, as well as factors that can impact its future. Without this deep dive, firms risk running the race with an empty tank at the most critical time.

The Triggers

Metrics provide those optics into a firm’s health and also serve as an early warning system. With much discussion on key performance indicators and data-driven businesses, the answer is using the data to make informed decisions. Many leaders still have the uncanny ability to sniff the air and make effective business decisions. For the general populace, there is a need to first see the numbers to gauge the enormity of the subject and reinforce the strategy. For instance, firms routinely look at their backlog as a forecasting component. What if this same forecast also forced the firm’s leadership to make decisions?

As an example, let’s say a firm consistently has $5 million per month in backlog. However, it historically has $10 million per month and, based on the business plan, the number should be $12.5 million. When does the firm make critical decisions about the market, personnel, go/no-go tactics, etc.? Should the firm downsize if it has 5 straight months of sub-par performances? All too often, many of these decisions are made too late. It is never easy to make earth-shattering moves; the corollary is the same when looking at growth. How many firms delayed hiring when economic forecasts were improving, fearful of increasing overhead with so much uncertainty? Metrics such as these should serve as triggers to, if nothing else, stimulate the discussion about the firm’s strategy. Without data, the leadership can become unduly fixated on opinions that can provide a misshapen landscape and lead to poor decisions.

The Future

The one inalienable truth is that people will continue to age and time will not stop. Hardly profound, but consider that when thinking about mortality within the firm. How many firms grossly altered their succession plans when the last recession hit?

Maybe it was the owner delaying his or her departure, or a senior staffer exiting earlier than planned, only to see his or her savings vaporized due to market conditions. This is another reason to develop a strong strategy replete with contingencies. Several following considerations are simply reflections from the last recession:

• Training and development—While firms wrestled with shrinking discretionary expenses, associates within firms saw training opportunities diminish. Career development shouldn’t be put on hold while the economy rights itself. Also during this time, firms sought answers about the next generation of leadership and talent while stifling their growth.
• Value generation—With the younger generation assuming the reigns, what are they purchasing and at what value—where it was, or what it could be? Ownership transfer is an already-complicated algorithm; further complicating it by failed strategy is foolish.
• Market diversity—Most experts agree that the only way to adequately protect a firm is by diversifying its portfolio. Too often, firms wait until the market has turned against them. It takes discipline to assign resources to new ventures when the traditional sectors are on fire.

Winter is coming, the only question is when. Even in the most robust marketplace, it is critical that business leaders do not become complacent.