Leading in the Age of Austerity
It's taken a couple of years, but the penny is finally dropping. The global financial crisis is not just a quick passing phase, after which it's back to business as usual. Instead, we're into change that's much more fundamental, perhaps even a "paradigm shift".
At the heart of this shift is the availability of money. Trillions of dollars have vanished from the global economy. The NICE decade was characterised by "easy money". But, for the future - in the Western developed economies at least - money is going to be tight, very tight.
In an era of tight money, what's likely to happen? Top management bonuses will be constrained; governments will be raising taxes, and cutting or charging for services; consumers will be feeling the pinch; and major investors will be cautious.
It may still be too soon to see with 20:20 foresight the implications of this emerging Age of Austerity for organisations and their leaders. But the terrain is starting to become clearer:
Measuring and valuing performance
Towards the end of the NICE decade, "shareholder value" had come close to meaning "borrowing money to turn a quick buck for shareholders". But the crisis of the past two years has shown, all too painfully, that "turning a quick buck" is not the same as growing and preserving wealth. And borrowing money is now much harder to do.
Companies are going to have to generate more of their own financial resources, and decision-makers will be more cautious too about getting the best returns for their expenditure and investments. Words like cash flow, margins and retained earnings are likely to come back into fashion. And "sustainability" is likely to come into use for the first time - meaning investments that are likely to produce good returns over a timescale longer than most leaders have become used to thinking about.
Radical change in business models
Conglomerates have been out of fashion lately, but they can be a good model when companies are compelled to act as their own bankers. On the other hand, where markets have shrunk, new forms of consolidation - such as vertical integration across business units at regional or divisional level - may have greater potential.
Other new ways of organising to add value are also likely to come to the fore. For example, strengthening employee engagement it is a comparatively low cost/low risk investment, yet an engaged workforce has significant potential to improve business performance over time - so this makes it a good candidate for a "sustainable" investment.
And who knows? Greater competitive pressures, combined with the customer's voice via new social networking technologies, may mean that business processes and products are re-invented, so that this time they actually focus on serving the customer - profitably.
We're even more likely to see business decision-makers concluding that it's cheaper and less risky to organise to partner with governments in support of their goals (e.g. sources of tax revenues; reduced pollution; consumer rights) than just to keep trying to game the system.
New challenges for leaders
The best leaders seem to be the people who take their personal risk management seriously. They read their environment, they decide on appropriate goals, they assess and mobilise their resources, they manage for desired results, and they review their progress and performance.
But when paradigms shift, everything seems to be in flux. Good leaders are aware that old certainties aren't certain any more. So they are open to scanning for new developments and new approaches. At a time like this the key challenge for good leaders at all levels is to stay in touch with the changes that are happening around them, and the opportunities and implications these are bringing.
Paradoxically, in a way, now is therefore the time when the best leaders need to be engaged with the richest of learning resources.
To do this, they need to feel responsible, through their business planning and change management processes, for addressing questions such as:
What new trends and step-changes are occurring in my business environment as a result of the emerging Age of Austerity?
What's the probable impact of these trends and changes on:
- What "good business performance" means?
- the internal and external business relationships we will need?
- how we need to organise the business?
- the capabilities that will be called for from leaders and the whole workforce?
- how we can bring about these changes in the most sustainable way?
But also, leaders need to explore and develop their own answers to such questions, through exposure to knowledgeable challenge and support. This means not just reading The Economist, or listening to senior management speeches or academic talks. It also means active engagement, through dialogue, with colleagues and with external experts.
If the Age of Austerity is likely to be very different from the NICE decade, now is the time for leaders to learn to prepare their businesses for the future. Could anything else lead to a more sustainable business?
*NICE = "non-inflationary, continuous expansion", Source: Mervyn King, Governor, Bank of England
Nickie Fonda, Director
Value Partnership LLP
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