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Global Recessions: A Survivor’s Manual

March 10, 2013 • Finance & Economics, Global Business, STRATEGY & MANAGEMENT

By Irv Rothman

The article is an excerpt from the book “Out-Executing the Competition: Building and Growing a Financial Services Company in Any Economy”, by Irv Rothman.

 

Over my career, I’ve endured recessions of varying size, depth, and duration. Three of those recessions – in the early 1990s, at the start of the new century, and this most recent Great Recession, so debilitating on a worldwide scale – found me in key senior leadership roles, the last two as chief executive officer of a good-sized US-based company.

There is no executive education quite like managing through a recession. Nothing tests your leadership ability more, or your skill in juggling the myriad demands of your company, customers, and employees. There are no absolute guarantees that any business, no matter how well-managed, can emerge from a near-depression fully intact. Many will sputter and die.

But, if you manage your business intelligently, through clear eyes and guided by a judicious, analytical sense of mission, the damage of any recession can be lessened. I’d say it starts with a basic philosophy – do what you’re good at doing. Too many companies decide to branch out in directions and down paths that are all too likely to lead them to disastrous results.

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[su_pullquote]If you manage your business intelligently, through clear eyes and guided by a judicious, analytical sense of mission, the damage of any recession can be lessened.[/su_pullquote]

When some stumbled through recessions, frequently it was because they veered from the core businesses that made them so successful in the first place. Too often, an executive wakes up in the morning and decides, “The business isn’t any good anymore; let’s start a new one.” Business cycles are a reality. Companies improve, they devolve, they change fundamentally over time. As a corporate leader, you have to adjust.

For better than a quarter century, Comdisco was the leading player in the computer leasing industry. That’s actually a gross understatement: it was the glamour puss of a business few knew or cared that much about, yet it gained iconic status as a high flying publicly traded company with a somewhat notorious corporate culture. Its founder and CEO, Ken Pontikes, was a legendary figure for both his business acumen and flamboyant lifestyle.

But if there was ever a poster child for a company straying from what had made it so remarkably successful to reach a disastrous end, it was Comdisco. Following Ken’s untimely death, his successor decided that the business that had yielded such fantastic results and wealth for shareowners and employees alike was no longer viable. Rather, it was the promise of dot-com riches that became the focus of the company’s direction and resources.

Venture capital, telecom, Internet, network . . . Comdisco made investment bets across the board. And, what’s more, supported them with a bloated expense and executive structure. When the bubble burst, it all came crashing down. None of the bets paid off, and Comdisco filed for bankruptcy in 2001.

The underpinnings of any successful enterprise are what account for its viability and strength. It’s a big world out there. A lot more opportunity exists during a recessionary period than you might think. At HP Financial Services, we’ve been particularly good at functioning in the enterprise space. We never held a particular funding advantage other than that we had our parent company’s balance sheet. Although some of our competitors didn’t have that, many did.

That doesn’t diminish the need to think long and hard about what we bring to the table when we talk to a customer. Those metrics don’t change. What’s the real value proposition? How do we make our product attractive to customers? How do we make it a point of differentiation in the marketplace? How do we convince and train the sales staff to sell it?

You maintain your equilibrium during down economic times by conducting business with companies that are more creditworthy. That served us especially well during the late 1990s and the explosion of the dot-coms. We had a set of reliable credit granting philosophies and processes. While not deliberately designed to be recession-proof, they nevertheless served us well when market value fell, businesses contracted, and workers were released.

In this particular recession, we were far better prepared for it than at any other place I’d been. In the early 1990s, when the economy went south, we weren’t ready. I was running the redefined AT&T Credit Corp. Half our customer base was small- and medium-sized businesses, or the SMB space. For small businesses, it’s all about overhead expenses: the cost of operating a factory, for example, and controlling credit losses. Often in bad times, customers are calculating how much they can reasonably stretch the payment schedule.

I had learned an invaluable lesson from that earlier time. We were invested heavily in the SMB space because it was so profitable. AT&T Capital lost sight of its responsibility to manage carefully, even when there was pressure to loosen the reins. We didn’t execute, and so we got our butts kicked. It was our own fault. It’s good to eat ice cream, but every now and then, you have to eat some spinach, too. We weren’t eating enough spinach.

That was 20 years ago, more than a generation in business years. I’m a way smarter guy now than I was 20 years ago. At the time, we were focused more on growing the business than on running the business. That’s an important distinction, and one that none of us thought about making as the money poured in and our revenues kept rising. Today, I’m focused like a laser on both growing and running the business. That comes with the territory; you have to balance proactive and reactive thinking.

[su_pullquote]Today, I’m focused like a laser on both growing and running the business. That comes with the territory; you have to balance proactive and reactive thinking.[/su_pullquote]

I remember doing an interview with an industry publication reporter who asked me what worried me the most about running a business. “An economic boom,” I said. “When the boom stops, as it inevitably will, are our credit-collection people going to be skilled enough or experienced enough to handle workouts and recoveries, and complete all the tasks that must be completed to keep the business running effectively?”

That’s hard to do. But you can ease that by understanding that there will be ups and downs. We’re never going to get as rich in the up periods, but we’re never going to be hit as hard in the down periods as some of our competitors. I genuinely believe that.

I had the following exchange with Mark Hurd, the former CEO of Hewlett-Packard. “When was the last time you saw HP Financial Services in the Wall Street Journal?” I asked him one day. His response: “I’ve never seen your name in the Journal.” To me, that’s an accomplishment. Never get in trouble, never drive off a cliff, and you won’t be news – at least in ways that can hurt the company.

The lessons I took with me from my days at AT&T served me well a few years later when I was named the CEO of Compaq Financial Services, in 1996. I had a clean sheet of paper. We were going to be a player in the enterprise space. We were not going to be a player in the SMB space. That wasn’t us. Enterprise was where we needed to be; it was what we did best.

My turn in the CEO’s chair at Compaq Financial Services coincided with the dot-com boom. Businesses with enormous stores of cash accrued through venture capital investment or IPOs were flooding our radar screens. These were very attractive to many executives. My inclination, however, was to take a step back, assess this unpredictable new wave, and think hard about what it would mean to us and how much of a plunge we should take.

We were cognizant throughout, as we are to this day, of our fiduciary duty to shareholders. Our objective is to deal with the adults, first in the age of Internet start-ups and more recently with social networking and related businesses. In considering a financing arrangement, we have to be practical.

That world had the feel of a digital Wild West. Nothing was assured, and things could turn on a dime. I wasn’t averse to financing some of these new businesses if I thought they had credible backing, but even that wasn’t always enough. In one instance, we financed an online toy store. The primary investor was a major entertainment company with a very successful track record. We thought if they were the primary investor, this was probably one where we could stick our neck out.

So we did. A year later, the investor pulled the plug. The toy store’s performance was from hunger. They were in deep yogurt from the start. Even though that venture, supported as it was by the acknowledged leader in family entertainment, failed, it left an impression with me. When it’s a company that is established and indisputably successful, you take the calculated risk. You don’t take a shot with a couple of guys who dropped out of Harvard one afternoon with a kernel of an idea, raised millions of dollars on the flimsiest of business plans, and ended up playing ping pong all day long and frittering away their investment capital.

Recently, a sizable deal in Asia Pacific went bad on us. Fortunately, we did so well during our 2010 fiscal year that we covered it, and eventually we should manage to recover a significant percent above our planned losses. But a post mortem was needed to determine what had happened and whether this deal could have been avoided. What did we miss? Did we fail in our due diligence?

We gathered the Credit Committee around the table, and I asked them to present the deal to me exactly the same way they pitched this business the first time around. I wanted to make sure we weren’t asleep at the switch when we signed off on this transaction.

They re-presented the deal – the pros, cons, upside, reasons to move ahead with it all over again if given the option. And we unanimously agreed, again, that it was a deal well worth doing. It had been an existing customer of HP; there was an established track record. Their business was going through a rough patch, we were all aware of it, but they’d been with us for nine years and always exhibited resiliency and an ability to operate through difficult times. In the end, the forces of the recession this time were too crippling, and they succumbed.

There are no guarantees in our business. Even what seem like rock-solid enterprises can suddenly fall off the face of the earth. Sure, it’s easy enough to see how some companies find themselves in a fix. All these guys who sold home mortgages to people without getting any financials, without getting pay stubs, without realizing these loans were a complete crapshoot, they were doomed to failure. If you have reliable credit-granting procedures, the odds of deflecting bad deals increase dramatically. You can be wrong for the right reasons.

Deals don’t disappear when the economy is tight. They didn’t in the early 1990s or at the start of the first decade in the post–9/11 era. They certainly may have been harder to find and book in our most recent conflagration, but they were still out there. In the midst of the recession, I was standing on line in the cafeteria of our New Jersey headquarters next to Fernando Gomez, one of our senior credit managers. We struck up a conversation, and he told me we were still approving a lot of deals – “It’s just taking us a little longer to get there.” The business is out there, but as Fernando noted, it’s taking us a little longer to get to the point where we can push the button.

In the early part of the last decade, when the merger of Hewlett-Packard and Compaq was finalized and we could get rolling on new business, we were presented with an opportunity to finance a Brazilian telecommunications company. They had come to us when I was at Compaq; we turned them down for $50,000. We’d done our due diligence and just thought it prudent to pass. Not Hewlett-Packard Technology Finance (our counter- part at HP premerger). They already had a deal with the company on the books for a half million dollars.

[su_pullquote]In times of recession, the job becomes exponentially harder. So stick to the basics. Do what you do. Any movement away from the essential business is too risky.[/su_pullquote]

After we finalized the merger in 2002, I asked the people who had been at HP Technology Finance to find out why something we thought so ill advised had looked so good to them. Turns out the telecom had received a visit from an HP senior executive who was impressed by their operation – never mind that they had no creditworthiness to speak of. Not a lot of research had been performed before an agreement was signed. That was an example of a deal done for the wrong reasons. Avoiding a bad decision based on bad reasoning is Financing 101. You can’t run a business like that.

This most recent recession was longer, deeper, and far more challenging than any that had come before it, at least in my experience. The vast majority of companies retreated to a kind of bunker mentality. Delay, if not fully deny, any and all opportunities. That became the working philosophy. Uncertainty about the next few years continues, with businesses sitting on an estimated $1 trillion or more that they are reluctant to spend.

In times of recession, the job becomes exponentially harder. So stick to the basics. Do what you do. Any movement away from the essential business is too risky.

Excerpted with permission of the publisher, WILEY, from Out-Executing the Competition: Building and Growing a Financial Services Company in Any Economy by Irv Rothman. Copyright © 2012 by Irv Rothman. This book is available at all bookstores and online booksellers.

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About the Author
Irv Rothman is President and CEO of HP Financial Services, a wholly owned subsidiary of Hewlett-Packard Company, where he is responsible for the worldwide delivery of customized leasing, financing, and financial asset management solutions that simplify customers’ IT life-cycle management and reduce their total cost ownership. Prior to joining HP, Rothman was president and CEO of Compaq Financial Services Corporation (CFS) and a group president of AT&T Capital Corporation.

 

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