5 Ways Leaders Can Prepare for the Next Recession

Will the U.S. have a recession?

Although the financial signals are mixed, many economists and financial sector leaders believe that a significant downturn is likely within the next year. Gallup’s Economic Confidence Index -- which measures Americans’ net optimism about the economy -- remains decidedly negative, with 70% of Americans saying the economy is getting worse.

As corporate leaders develop their strategic plans for 2023, the potential for recession is certainly top of mind. How should leaders prepare for an economic downturn?

Here are five key concepts to keep in mind:

1. Your Talent: Level Up Your Human Capital Strategy

Leaders who know the value of star talent are desperate to hold on to their best people. But the hard truth is that businesses must be prepared to adjust the size of their organization to meet lower revenue and lower customer demand.

If cuts are unavoidable, how do you make cuts that are strategic? By “strategic” we don’t just mean “smart.” Leaders need to have a theory of victory during a recession: How is our organization going to transform to win the future? How can we make cuts that don’t just make us leaner, but better? If you are laying off 10% of your workforce, what exactly are you attempting beyond cost savings?

Here's an unconventional take: A recession can be the best time to look for the talent you couldn’t get before. Some of your competitors for talent are not going to treat their people well during this time. People who stayed for the pay and benefits might be ready to switch when morale and engagement drop. High-talent workers know they have options. They may be looking to move now. While everyone else is looking at who to cut, savvy leaders are looking at who to add.

2. Your Communication: There’s Time to Plan

When it comes to layoffs, any reduction in force is tough. It should be tough. It’s tough on managers, coworkers, even customers and partnerships. If leaders aren’t feeling this -- if they don’t see talent reduction as a last resort -- they aren’t authentic leaders.

When stress and anxiety are high, communication is critical for resiliency. We saw this play out in the initial months of the COVID-19 pandemic. Leaders increased their communications to followers, and employee engagement actually rose during that time. Predictably, when leaders pulled back on communication, engagement levels fell.

Unlike a pandemic, leaders have time to prepare for a recession.

Leaders should train their managers to be better listeners, communicators and coaches. They should also make a plan for communication, and a commitment to communicating, even amid uncertainty. Leaders can let followers know what they are paying attention to, what options are being explored, what their responses will likely be if conditions change and what the priorities are.

Bottom line: Organizations withdrawing manager support and leadership communication in difficult times only makes morale worse. The natural tendency is to pull back, so leaders must make a conscious effort to engage their people.

3. Your Customers: Be Closer Than Ever Before

Every business has parts that are vulnerable to recession and parts that are insulated. Some teams sit really close to your customers. Listen to these teams intently to know what markets and competitors are doing.

Leaders: It’s time to get really close to your customers. As we see in most times of change, it’s essential to know where you stand with your customers.

• Find out their plans and what risks they see to their business or lifestyle.
• Understand the likelihood they will shift to other solutions.
• Minimize the shift to alternative solutions (e.g., pricing).

Tread carefully on pricing. Raising prices can seem like an obvious lever to pull in an economic downturn. But price changes disrupt customers’ status quo bias. Not knowing how your customers will react is a major concern.

So, make sure your employees know customers’ needs. Do your teams know that customers are changing? Are they able to identify (and capitalize on) new opportunities? Not surprisingly, this requires engaged front-line employees who are alert, motivated and in tune with the mission.

The best businesses see opportunity in change, rather than fear. A recession is a great time to steal market share -- if you are paying closer attention than your competitors to customers.

4. Your Leaders: Align on the Big Things

Preparing for a potential recession can be a good time to make sure everyone is pulling in the same direction. When uncertainty looms, don’t assume you know your leaders’ priorities. Ask them. As we saw during the pandemic, economic shocks can make some teams very busy and others slow. Aligning on priorities can help you navigate these changes.

This is also a time to plan for scenarios and contingencies. It’s the difference between a slowdown and a shock to the system. Form a plan that says, “If X happens, we do Y.” Or identify project milestones when leadership will decide to move forward or not. When these problems arise, your leaders won’t panic because you won’t be calling an emergency meeting -- you’ll be executing the plan.

5. Your Plays: Know Your Big Ideas

Leaders should consider more aggressive plays during a recession. What’s your big idea? Maybe it’s an acquisition. Maybe it’s divestiture. A new product launch. An expansion. When everyone panics, be ready to bet big on the future.

Your best ideas are going to come from your people.

Unfortunately, a lack of innovative ideas in the C-suite can be a result of cutting back on communication. Leaders need to be talking to their people, having conversations.

But it’s not just about asking. Employees need to have the courage to speak up and give their honest opinions. In an uncertain environment, your people may be less likely to speak up. Your teams might struggle to ideate boldly on solutions. Leaders can’t remove all barriers to creativity, but they can model what they want to see.

Moreover, leaders can give their teams confidence by gaming out responses to scenarios ahead of time. Let your team know, “If that happens, we will do this.” Instead of telling your people that all options are on the table, communicate the plan of action based on the situation.

Recessions can make leaders feel like they are losing control. And some of leaders’ worst responses to these pressures are attempts at regaining that perceived control. Rather than trying to control the uncontrollable, come up with a positive plan for victory. Be honest about what you don’t know. Keep your people close. And keep your eyes open for unexpected opportunities.