When markets decline, cash is king. It can carry you through a storm, protect you against unexpected shocks from markets or lenders, and put you in a position to take advantage of competitors that suddenly find themselves in distress.

A recession-readiness program therefore must include a series of actions designed to maximize the generation and conservation of cash. Yet among the 3,000 global business executives who participated in the AlixPartners Disruption Index survey last autumn, just 33% said their company has been building up its cash reserves. The benefits are more than cyclical: If you take advantage of this moment to turn your company into a cash-generating machine, you will gain additional benefits when business turns back up—and increase enterprise value in any transition or transaction.

Short-term cash generators are an important first step. There are a number of quick actions companies can take to optimize working capital and generate cash. One is to protect and speed up receivables. In a recessionary environment, you want to tighten your cash conversion process, reduce DSOs (the average number of days it takes to be paid for a sale), and keep watch on the creditworthiness of your customers. 

To do this, first, actively monitor customer credit profiles and be ready to change credit lines as necessary; you don’t want to be stuck with bad debt. Second, revise your discount policies and incentives. Create a “deal desk” to reduce unnecessary discounts to customers that aren’t profitable. Holding the line on discounts can provoke resistance from sales teams, which is why you need to take a third step: Act to shift the culture from sales-driven to cash-focused by aligning executive and sales rep bonus policies with cash conversation performance. Fourth, avoid unforced errors: Speed up your own AR processes, eliminate invoicing errors, automate internal processes, and accelerate your move to electronic payments. 

On the other side—payables—look for ways to hold onto cash longer. Lengthen payment terms for non-strategic suppliers, and, where you can, for others as well. For all suppliers, put in place price-escalator limits to mitigate the threat of inflation. Cut back on the number of payment runs; if you’re paying weekly, make it fortnightly; if fortnightly, monthly. Establish a preferred supplier list—a select group of suppliers who are strategically important to you, and vice versa; for these, you can often negotiate mutually beneficial deals (for example favorable terms in exchange for guaranteed business). Finally, institute a vendor management office (a cross-functional governance team like the AR deal desk) to protect against value leakage. For example, this team can ensure discounts or rebates are honored and that suppliers are meeting service level agreements, and, where necessary, help the businesses review complicated invoices and manage change orders.

A downturn is an opportunity to strengthen long-term cash generation, too. This is the time to make structural changes that turn fixed into variable costs, so that your expenses go down if sales weaken. Companies with warehouses and trucks can rent rather than buy, for example. Data centers can be moved to the cloud.

In our experience, there are large untapped opportunities to shift from a fixed labor model cost structure to a variable one that can adjust quickly to market conditions. Many tech companies bulked up in recent years, especially in response to demand generated at the height of the pandemic; many of them are now paying the price in the form of layoffs.

Variablizing costs is often a better solution—but it must be done thoughtfully; after all, a tech company’s value proposition is often based on the expertise of its people. Therefore, the right model depends on:

  • Characteristics of the activities/job role –whether they are transactional or value additive, for example
  • Whether activities can be executed from a remote or offshore location
  • Frequency of activity (e.g., seasonal, monthly, daily)
  • Any statutory or language requirements that impact job role
  • Implementation speed

We have seen four models that work well. One is business process outsourcing, also known as a managed service model, which focuses on variablizing transactional processes that can be offshored. Typical roles that are in-scope are finance, HR, customer service, and IT back-office roles.

Second, it’s possible to develop long-term specialist outsourcing models. Such models often take the form of staff augmentation, where companies can fill out a core team of employees with outsourced or freelance work in specialist roles like product development, coding, and reporting and analytics. Such arrangements can be onshored or offshored.

A third model—increasingly pervasive and growing fast—is to develop a digital workforce with automation tools such as robotic process automation. As AI improves, chatbots and other digital workforce options become increasingly viable for both back office and customer service operations.

Fourth, you want to develop the capability to call upon temporary and freelance labor—and get good people fast—to cover peaks or spikes when the frequency of work is cyclical.  

All of these have downsides. For example, it can be hard to deliver differentiated service using outsourced or freelance talent; continuity can also be an issue. That’s why a structural shift to variable labor costs needs to include a careful examination of what your core, differentiating capabilities are and what customers expect. But the cash-generating benefits can be extraordinary. A well-defined business process outsourcing arrangement can yield savings of 20% or even 50%. Temps and freelancers can save as much as 30% of labor costs for seasonal work.

Companies therefore should build a framework to facilitate and reach consensus on what processes should be looked at, since the ease and risk of variablization depends on the complexity of the tasks and the impact on customer experience. You want to be particularly leery of disappointing loyal customers at a time when demand is weak—but, at the same time, you want to avoid saddling yourself with high fixed costs during a tough part of the business or technology cycle.

This is part two of our four-part series about recession-readiness best practices. If you missed part one, you can find it here. Watch for part three next week: “Don’t Just Make Plans; Create Options.”