When Sharing the Pain is a Bad Downturn Strategy
How should you do business in a recession?
Answering that question is the new growth business in the blogosphere. Naturally, some common themes get voiced with frequency. And some of those are not good.
Example: John Caddell points out in If Your Key Suppliers are in Trouble, So Are You that the common strategy of stretching out payables has some serious downside effects.
Anyone with payables has to be thinking of stretching out payments. I don’t have stats on just how that’s playing out, but my educated guess is, it’s pretty common.
Free cash flow on the backs of someone else. Your suppliers. It has to look tempting, particularly if you grew up on the mother’s milk of competitive strategy in the last few decades. One of the Five Forces of competition, after all, is the competitive dynamic of a company and its competitor-suppliers.
But this ain’t your father’s supply chain anymore. Caddell points out that sticking it to your suppliers just could have downstream consequences in a year or two when the economy rebounds that don’t look so great.
On one level this is nothing new. I remember a paper wholesaler explaining to me why supply agreements with paper companies always broke down: “because the paper cycle lasts 7 years, and the tenure of an individual in that role is 4 years.” Self-interest and short-term gain have been the bane of business relationships for a long time.
What’s different now is that the structure of commerce is fundamentally changing. The corporate boundaries are porous. Business is no longer done in vertical, hard-walled entities; it’s done across them, in the white spaces and the contracts between and among companies. The action is not in internal collaboration and external competition, it is in collaboration across corporate lines. Collaboration is the new competition.
Which is why I noticed two things lately.
One client suggested to me that they were cutting my rates because “times are tough and we’ve all got to share the pain.” It clearly wasn’t meant as a way to keep their consultants happy; it was a way to gain advantage over them in a tough time. That ticked me off.
Another client suggested they were having to cut back on my business—but they were very welcoming of other ideas, and never suggested issues with rates. That made me like them.
I think that’s just how people work. If they keep you but try to gain advantage, that stinks. If they fire you but apologize for having to do it, you don’t feel so bad. One you want to work with again, and one you don’t.
That’s the thing about tough times. The people that treat you well when it counts are the ones who earn your loyalty. This is not a recession: this is the down-half of a business cycle. How you behave now determines the profit impact of the up-cycle.
Is your business model to make money by squeezing your partners when they’re down? Or is your business model to make money by having committed partners when times are up?
You’d think that would be a no-brainer.
Charlie: Absolutely spot on!!!!! The basic collaborative or "me VS them" mentality & behavior stays the same regardless of the condition/position of the business cycle…people who treat each other respectfully in business will behave accordingly – good times or bad. The clients that always consider you a vendor/commodity will only exaggerate their behavior in bad times and somehow manage to find a way to add insult to injury.
This economic cycle becomes a consultant’s marketing/business plan in disguise…relationships w/ clients (or lack of) in more difficult times, provides you the information, confirmation & emotional energy to stay focused on the "partners" and identify who needs to be "CULLED" once the cycle reverses.
Charles, I have a client, who asked for rate discounts, "to do more with less [or same money]". They have also started giving us more work too. Clients want to stretch dollars more – so it is not like what you have suggested. Of course the industry I am referring to, is outsourced IT consulting. Maybe different if you are in mgmt consulting, in which case you should be focusing on squeezing waste or driving revenues higher and simultaneously changing your pricing to risk based, outcomes-based etc. It is all about collaboration, I do not agree about collaboration being competition. Anyway, the client will not gain anything by making you work at a loss – in the medium/ long term it is a killer.
Charles, I have a client, who asked for rate discounts, "to do more with less [or same money]". They have also started giving us more work too. Clients want to stretch dollars more – so it is not like what you have suggested. Of course the industry I am referring to, is outsourced IT consulting. Maybe different if you are in mgmt consulting, in which case you should be focusing on squeezing waste or driving revenues higher and simultaneously changing your pricing to risk based, outcomes-based etc. It is all about collaboration, I do not agree about collaboration being competition. Anyway, the client will not gain anything by making you work at a loss – in the medium/ long term it is a killer.
I think what we’re all saying is that intent matters.
Whether the action is cutting rates or adding business or cutting back on it, the spirit in which it’s done makes all the difference. If it’s mean-spirited, self-oriented and short-term driven, that doesn’t bode well for the relationship; if it’s done for the long term, with concern for the other part, that builds relationships.
Lota, sorry for my cuteness in words; I didn’t mean to equate competition and collaboration. I meant to say that collaboration is becoming as important as competition used to be–hence the shorthand "collaboration is the new competition." I may have to rethink that shorthand phrase if more, like yourself, read that as meaning the opposite of my intent. Thanks.
Hi Charlie,
"Sharing the Pain" can be a good downturn strategy too – if it’s initiated the other way round. If you approach a client who you know to be struggling and say to them "look – let’s look at ways we can work together to ease your pain" – you might be able to identify mutually benefitial options.
A supplier or consultant taking that approach is demonstrating their commitment to helping their client and not just looking for short-term gain themselves. Over the long term that should pay off – excepting the usual caveats of a short sighted client (don’t work with ’em) one going out of business, or the people you build up the relationship with leaving.
It’s not without risk. It may trigger them thinking in ways that result in you losing some business to save them money. But I suspect if things do go down that path they would have anyway without your intervention.
Maybe instead though, they decide to reduce their business with other suppliers and give more business to the people who are thinking of their interests. So there could be a short-term win in it too.
Ian
Ian,
I think that’s very right.