The Next Bust - How Vulnerable Are You?

Debbie McGrath, CEO of, recently wrote about how in each of the last four decades, there has been a major recession that lasts about three years.

She also predicts, and we all hope she is right, that we are officially out of the most recent recession (255,000 new jobs created last month - USA) and we should have six to seven years of smooth sailing before the next cycle happens.

Debbie went on to ask: "Think about this, as you position your business for a long-term exit strategy and for growth. How vulnerable is your business to a recession, as it will happen again?"

In Warren Buffet's latest annual report (if you don't regularly read them start now - they are simply the best writing's on business found anywhere), Buffet tells two stories that have relevance to the question "How vulnerable is your business to a recession, as it will happen again?"

In one story, Mr. Buffet talks about how in the insurance industry people rarely ask for an insurance product by brand name like they do for many consumer products (e.g., coke - BTW, how many times have we written about the importance of brand building marketing and PR campaigns for HR service providers who face this same challenge?). And because insurance is a commodity-like product (something many employee benefit providers can relate to) there is tremendous pricing competition which often leads to insurance companies underpricing their products in order to build market share and grow revenues (again, think employee benefits especially EAPs). Buffet discusses how one of his very successful insurance companies attacked this problem by NOT cutting prices and instead, pricing for profit which while leading to a significant customer exodus over a period of time, the company became and remains quite profitable to this day. However, as Buffet says, "most American businesses harbor an institutional imperative that rejects extended decreases in volume..." and most companies and investors would never allow a CEO the time to implement a strategy that led to revenue decreases over the short term.

But, it is something to think about, as we have seen far too many vendors in the human capital space go out of business or sell their business at garage sale prices because they had poor pricing strategies and focused on rapid volume based revenue growth rather than disciplined profitable growth - and recessions are typically when these mistakes are highlighted (or, as another Buffet saying goes, "It's only when the tide goes out that you learn who's been swimming naked.").

In another story in his 2004 Letter to Shareholders, Mr. Buffet talks about the importance of not overstaffing when times are good. To make the point, Buffet tells a story of famed CEO of Cap Cities, Tom Murphy, who liked to tell a hypothetical tale about an employee who asked his boss if he could hire a $20,000 a year assistant. The employee said that the payroll addition would be inconsequential. The manager responded by saying the employee's proposal should be treated as a $3 million decision because once hired, the assistant probably wouldn't be dismissed and the added costs in terms of salary, raises, benefits and other expenses over the lifetime of the hire would amount to about $3 million (I'll have to try this one at our company :-).

What's the point of all this? It's about reminding HR vendors of the importance of pricing for long-term profit (not just volume-based revenue growth or short-term exit strategies) - especially as we appear to be leaving a recession and entering more favorable economic times - and controlling costs in order to build a strong business.