Understanding uncertainty: How leaders can navigate the next economic downturn

After a steady period of growth, the economy has shown initial signs of sputtering. Companies have started making mass redundancies, consumer sentiment has reached new lows, and the stock market has officially entered a bear market. Add all this to the UK's Cost of Living Crisis, and many are wondering and worrying if a recession looms around the corner.

Whether or not an official recession is imminent (generally determined after two consecutive quarters of GDP decline), leaders no doubt need to prepare proactively for some economic turbulence. That said, we’ve been here before. The Great Recession was not long ago and the recent pandemic also provided many lessons that leaders can apply to the current moment to reassess short- and long-term strategy, continue to retain and attract top talent, and guide the business successfully through uncertain times.

What’s clear is that companies who take an offensive stance versus a defensive or reactive stance tend to fare far better during recessions. According to research by Bain & Company, the businesses that were faster at capturing opportunities before the recession — by way of stress-testing the balance sheet, actively managing working capital and costs, and reinvesting for growth and acquisitions — grew at 17% compared to those who reacted defensively and thus showed no growth.

Identifying the known unknowns

During typical times of economic growth, leaders benefit from having predictability in business metrics, as well as the luxury of time to create a long-term strategic plan. But unpredictable circumstances like the pandemic illustrated how critical it is for a business to stay nimble and adjust plans in real time. “When a sudden major challenge emerges unexpectedly, there isn’t time for incrementalism. You need a strategy now,” says Amie Devero, President of consulting firm Beyond Better. She suggests leaders start scenario planning to identify which economic unknowns pose the biggest threats and identify possible solutions, whether that’s changing product make-up, adjusting pricing to retain customers, or addressing different verticals or markets better equipped to withstand the new challenges.

Typically, businesses will identify one major problem, like being unable to service debt because of higher interest rates, or experiencing too few sales to support existing staff. “Leaders need to solve that problem and do it quickly — without false optimism,” she says. “This is the time for radical honesty. If that problem is unsolved, nothing else matters.”

However, remember that high-pressure times like recessions put a lot of stress on not just the business, but on the mental and emotional well-being of employees. So it’s even more imperative to build trust with your teams now before there’s a crisis at hand. If employees have insight into what values and variables you consider when making strategic decisions, they’re more likely to have long-term trust — even if your decisions end up impacting them negatively.

And when you do have a plan in place, the next step is to communicate it. “When you have a logical, testable, and executable strategy, you also have a way to include your entire organisation in the process of building that resiliency,” says Devero. When employees understand how the organisation plans on confronting headwinds, they can feel like they’re a part of that strategy and embrace the role they play in ensuring the future.

Transparency builds trust in challenging economic times, and that can be key in retention — especially important as the labour market continues to be competitive. “When budgets get tight, rumours fly,” says Sharon Steiner Hart, Executive Coach at Talking Talent. “Leaders who navigated the pandemic with transparency, sharing details about decisions that were being made and why, built more trust with employees than those who made decisions behind closed doors and announced mandates without explanation.” This means sharing if cuts are coming or teams are consolidating, even while acknowledging how uneasy uncertainty can be.

As with the pandemic, executives need to engage first and foremost with empathy and understanding. “As we head into this economic downturn, leadership must continue to stay curious about what employees need the most,” says Steiner Hart. “Is it a flexible schedule so they can manage personal costs such as daycare or commuter fees, or do they need to understand employer-sponsored financial benefits available to them as they navigate economic uncertainty?”

Make decisions based on impact not fear

While redundancies are often a tempting option to conserve cash with economic turbulence on the horizon, businesses learned the hard way during the pandemic that this can be a short-sighted strategy. Those companies that did a preemptive staff reduction without needing to ended up in a lurch when the economy rebounded faster than expected, and hiring became more difficult than ever amidst the Great Resignation. Many couldn’t find the staff to ramp up in time to capture the full opportunity and therefore missed revenue goals further down the year.

And, once you do a staff reduction, retaining — and attracting — top talent becomes harder, so doing one should be seen a last resort only if and when revenue streams will be acutely impacted.

If a redundancies are determined to be necessary, keep a close eye on your middle managers. Less support staff can lead to managers being left to do the work of two or more people, which results in burnout and resignations, contributing to a catch 22 spiral that will only put even more pressure on the remaining team. Leaders need to stay attuned to how their employees’ personal and professional needs continue to be met.

“If the pandemic has taught us anything, it's that people's values and how they're met within the workplace matter,” says Laura Ashley-Timms, Executive Coach and COO at Notion. Employees want to work in environments where their contributions are recognised, where they receive regular feedback, and still have career advancement opportunities. Challenging economic times can often lead organisations to put these kinds of conversations on the backburner, but that strategy can often backfire as employees disengage from the workplace and their hopes for the future within an organisation.

While false optimism should never be a frontline strategy, leaders must maintain a future-thinking attitude even in the most challenging and uncertain times. A positive mindset enables the whole team to stay focused on achieving hard things, staying resilient, and emerging stronger.

“Remind your team how strong they are and how much they have grown over the past two-plus years,” says Steiner Hart. “Reminding employees that they have just come through one of the biggest challenges this world has seen in a generation can help put the looming economic downturn into perspective.”

The ability to be resilient has been shown to be one of the leading indicators for both the success of a leader and organisations. Research shows resilient leaders are seen to be more effective by their managers, peers, and direct reports. By having a strong vision for the future and a commitment to the organisation’s mission, leaders can cultivate a stronger tolerance for uncertainty and a bolder commitment to action, effectively navigating the future, whatever it might hold.

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