Recession Planning – Take Action Now

A reader showed me a business case that is doing budgets and planning for the next three years right now. The astonishing thing is that both management and board refuse to see reality of this recession, that we are in the most severe recession possibly a depression since the great depression and that economic activity will fall substantially across the board.
Current management hold on to the same economic models, assumptions and predictions that was originally set up more than a year ago. They refuse to mentally really take in that demand for this company’s products and services will fall, like most things, perhaps income will fall by 20-30-40%.
Now the company want to set itself up for commitments that will for sure require new financing with new capital sometime in 2009. Where this financing is going to come from is unclear, “we will need some money”, references are made to board meetings in late 2007 when the need for financing was decided by the board, not taking into account that things have changed dramatically since then. The alternative radical cost saving strategies the company has identified is seen as something that “can’t be done”, it’s “impossible”, “diversion from strategy” etc, so the management refuses to even consider them seriously – a mental block into a dead end. Well, when the money runs out these radical cost cutting alternatives are not going to seem so “impossible” after all, but getting them to see it now seems indeed impossible.
Management refuses to see the whole picture, that the cost structure is to high, preferring to split the picture into numerous parts, each with its own complexity, and before you know it the forest it lost for the trees.
For me, being in the Austrian framework it is absolutely evident that economic activity will fall considerably, and that businesses need to assume this and take this into account now while there is time – by necessity – not after the fact when it might be too late. Secondly that external financing will be hard to come by, so businesses better not rely on money from “somewhere”. Businesses better assume that external financing will be very hard to come by, if available at all. But, people are heavily vested into their current thinking, personal interests, their jobs, their models, their assumptions. Many will refuse to change their mindset until the moment it is too late, then they will claim that “no one could have predicted that it would become THIS bad” to save their own skin.
Can you force people then? Well “A man convinced against his will is of the same opinion still” so probably not. Even gently getting people to answer some questions that will make things evident seems hard as people are masters at avoiding conclusions contrary to what they already believe. They turn around and get into a defensive attack mode to divert attention from the necessary conclusions.
One gent recently back from the US even proclaimed that “I did not see the recession in the US, everything looked normal to me” and so he refuses to change the company’s market assumptions.
If this is true for this small company, it is most likely true for millions of ventures out there, small and large. They are now running along for some time by depleting their capital; this can go on for months, quarters, perhaps a couple of years for some. At some time though, capital is depleted and the need for refinancing will arise, this will create enormous pain, but also opportunities. But, as this phenomenon arrives it will only get worse and worse for a considerable amount of time as it has an accumulative effect – so investors will wait on the sidelines fully anticipating better deals ahead. When the deal making finally gets going there will be a large number of transactions and recapitalizations done, this might come in 2009,2010,2011 – it is too early to tell now.
What is for sure is that many will deeply regret the decisions made, or not made, now, early in the recession, while there still was time, blaming themselves for not taking action earlier – but this might be the only way, the hard way, that it must be done.
The Austrian framework is a tool to make predictions about the economy, we used this to tell people overly explicit to sell all their shares in our January 21. 2008 video, and we now urge people to take business action before it is too late.
We fully expect notes from readers as regretful about not following today’s advice as they have been not to follow our January 21 advice. PLEASE TAKE ACTION NOW, TODAY!
What is necessary to do is at present politically impossible to do, people will refuse to accept it, this is especially true in the knowledge economy where the people are the assets. In the old days you could close down one factory, and keep going on the others, in an advertising agency, or a law firm, you have to make sure people are with you, and then if they are in denial the right decisions become impossible to get done. One has to let time pass and prepare to make the right decisions once the market has killed the denial in people’s minds. We are witnessing the failure of the democratic model of running companies, where all stakeholders have a say and where numerous undefined stakeholders can gridlock the painful decision making process needed.
These kinds of miss adjustments in the economy are everywhere, and this example shows us that the adjustments will be slow, painful and costly.

Oslo, Norway. Nov 25. 2008 Hans Lysglimt

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