It’s clear we’re in for a deep and long-lasting recession.
Only this week, the Chancellor Rishi Sunak warned that Britain is facing a ‘severe recession, the likes of which we haven’t seen’. The odds stacked against businesses are high. Studies show that three years post-recession, 80% of companies hadn’t returned to pre-recession levels of profitability and only 9% were performing better.
But it’s not all doom and gloom. COVID-19 seems to be working as an accelerant. In the tech space where I operate, I’ve seen swift changes to working practices that might have taken far longer in our ‘old normal’ life. Clients have migrated from inaccessible data centres to cloud-based platforms with incredible speed. Legacy services have been dumped. New forms of revenue are being fast-tracked. Everyone is thinking – when we come out of this, what are we going to do?
It’s an opportunity. Project forward and ask yourself, ‘For COVID-19 to be the best thing that ever happened, what would need to be true?’ Where do you want your company to be? One of my clients recently told me he’d got a strong vision of his company in 5 years’ time. He’s decided to make all of the hard choices now. If the pandemic hadn’t struck, the changes might have been smaller and more incremental.
Innovation is the important word here. This is about how you manage innovation in your business. Companies who slashed costs following the last recessions did less well than those who innovated. And that innovation took two forms: getting better at core business and generating new forms of revenue.
Innovate Within Your Core Business
Sounds pretty obvious, but at times like these, you need to get even better at your core business. Here’s a vastly simplified analogy. Your core business is selling potatoes but demand has slumped. So, you sell carrots to the same customers because you know they’ll buy them. Fundamentally, you’re still doing the same thing but you’re extending your products or finding new revenue streams from existing customers. This linear innovation will drive your future growth.
When I joined Peer 1 as their MD, we identified our core customer and main focus. But then we began developing our range of products and services. When we realised we’d gained depth in VMWare, we launched a cloud-based VMWare product through a strategic partnership. It turned over $1million in its first year. Then we diversified into ecommerce with the objective to become UK Number 1. Two years later, we achieved this goal.
Getting more efficient at your core business is vital to surviving recession. A focus on increasing productivity and doing more with fewer people will make a huge difference to your ability to weather the storm.
Take Decisive Action on Any Legacy Business
Is there a line of business that you know doesn’t fit with your overall direction? I see so many CEOs who tell me how complicated their company is. They’ve got several million pounds of turnover and five streams of revenue. It’s impossible for them to grow because there's no focus. They’ve got stuck in a cash/execution cycle.
This gets worse in recession. The generalised fear has led to them clinging onto revenue and staff that won’t be helpful in the long run. You need to find the courage to recognise the core of your business and get rid of anything or anyone that doesn’t fit with this. We took this decision at Rackspace when we sold ServerBeach. We’d created a dedicated server business but it was a cultural mismatch and didn’t fit with our purpose of ‘Fanatical Support’. Look at your BHAG and 3HAG (3 Year Highly Achievable Goal). What could you deliberately let go? Maybe it’s something that you’ve been doing for ten years but it no longer fits with your overall direction.
Focus on Exponential Innovation
This is your ticket to thriving after recession but it’s the area that’s often poorly resourced or even non-existent. Exponential innovation is all about break-through ideas – finding radically new ways of pulling ahead of your competition. At Rackspace, we took ten people out of our core business into a separate space and asked them to reimagine Microsoft hosting (at the time, we specialised in Linux). They needed to forget everything they knew about Rackspace and our usual ways of doing things. Whilst their values and behaviour needed to be the same, everything else was up for grabs. They built a Windows hosting business from square one which they ran as a separate organisation. Once it was large enough, we brought it into the Rackspace fold. This was a powerful lesson for me.
Ask yourself, how could you go to market differently? What could you do that’s disruptive? Where are the bottlenecks in your industry? How can you turn that into an advantage and undermine a competitor? When I’m coaching clients through this, we often use Shannon Susko’s 3HAG attribution mapping tools and I introduce the concept of brand promises with guarantees. Often this leads us to discover the magical ‘secret sauce’ that will help them disrupt their industry.
Structure Your Business around Innovation
Innovation fails because companies haven’t set up the right conditions, environment and, most crucially, structure to make it succeed. I see this all the time. The most important thing to realise here is that the people who are innovating around your core business – the linear innovators – need to be different to the exponential innovators. They need completely separate teams.
There’s a big difference in mindset. Exponential innovators have a ‘start-up’ mentality. They pick up on weak signals. Through interviews, reading and conversations they absorb information, have hunches and make brilliant guesses. This is stitched together to make a story that they can then test. They often fail but aren’t daunted – trying over and over again until they strike gold. At Peer 1, our exponential innovation team worked outside our usual process of product development. They’d heard a rumour that GPU computing was taking off. Within a few weeks, they launched a new, hosted GPU product. To get it to market at speed, they used outside contractors. But it didn’t sell to the customers we’d expected. Instead, we sold it to the sound identification firm, Shazam who eventually became a million dollar per month customer.
This mental model is very different to linear innovators. They’re fixated on incremental, weekly improvements. As a result, they tend to be far more risk averse and far more process orientated. You need both types of people in your business.
Decide Where Your Time as CEO is Best Spent
As CEO, you need to decide where to focus the majority of your time – ie on linear or exponential innovation. As I always say, strategy is next year’s profit so it follows that the majority of the CEOs I coach should be focused on exponential growth. This tends to suit their personalities. Many of them are visionaries. Some are mavericks who didn’t fit in other businesses and wanted to start their own. They are all entrepreneurs with special skills. And these skills are much better suited to exponential innovation. This is where they get their joy.
Maybe this resonates with you and you feel like you’re running a business but not leading it? Then you need an implementor. A trusted partner or COO who will free up your time to steer the boat. Your goal should be one day a week in the business, the rest of your week on exponential innovation.
Empower your Executive Team
It’s vital that your executive team can run the business independently of you. This came up last week, when I coached an SLT from a client business. They’d tried to set up an innovation group in the past but it had failed. The structure wasn’t right – it was underfunded with the wrong people. We talked through the distinction between linear and exponential innovation. Lightbulb moment! The CEO’s eyes lit up when he realised why he’d been frustrated. He needed to focus on exponential innovation and saw that I could help him empower his executive team. I’d given him a model that fitted with who he was.
He suggested setting up some coaching sessions that didn’t involve him. This is where my ScalingUp®, 3HAG and Rockefeller Habits tools can really help. They super-charge an executive team and make them independently powerful. With time, they become accountable to each other, making independent decisions within the framework of the company’s purpose and values. It’s a great thing to see. And it frees up the CEO to do what they do best – strategy.
Once you’ve made your structural and resourcing decisions around innovation, you need to be sure you have the right people on the bus. Often, executive teams are a bunch of people who’ve been at a company from the beginning and grown with it. Whilst my preference is to hire and promote from within wherever possible, there are going to be times when you need to go outside for certain skills. This may be one of those times. In a recession you need to be big and bold, so don’t be slow at finding the talent you need to truly innovate.
Anticipate and Manage Conflict Over Innovation
Be prepared for conflict around innovation. Netflix faced this when they were launching their live streaming business. There was so much internal resistance that, in the end, the team who ran the DVD rental business weren’t invited to the management meetings as they’d been so obstructive. There will always be a vested interest in the status quo and strong feelings that ‘this just isn’t what we do’.
As CEO, you need to be all over this. Make sure you have the right people and enough resource to ensure exponential innovation can happen. Be prepared to take the flak when they fail, and keep failing – this is an inevitable part of the process. And when they do come up with a great idea, make sure this isn’t over-engineered or complicated by internal interference. When innovations fail, it’s often because of this, particularly in big companies.
Resource clashes are also common. Your linear innovation people will tell you that this is where all your revenue is. They’ll demand you stop wasting your money on the other guys – the mavericks that never follow a process and haven’t written a business case. However, it’s only through exponential innovation that you’ll become a breakthrough business. It warrants decent investment – I suggest at least 1% of your profit. Could you use the proceeds from selling a legacy business to fund this effort?
Recognise that any conflict is a good thing – you want it. It will add pace and drive, ensuring your people understand that they’re under pressure to deliver.
There’s a great phrase ‘Necessity is the mother of invention’. It’s as true now as the day it was written. See the current economic crisis as a real opportunity to innovate and accelerate new revenue streams. This is how to thrive AND not just survive a recession.
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