FORTUNE MAGAZINE Value Driven by Geoff Colvin

Stay lean and mean even after the recession

It's critical to stay lean and mean during an economic recovery - and even expansion - so you're ready for the next disaster.

By Geoff Colvin, senior editor at large

(Fortune Magazine) -- If ever you were entitled to start breathing easier, now would seem to be the moment. So why am I telling you not to?

The end of the recession seems so close that you can almost smell it. The stock market is surging, China and India are firing on all cylinders again, and no one would be surprised if in the next quarter the U.S. economy shows signs of growth too.

Yet this is exactly the wrong moment to let up on the mean and lean strategies you've adopted over the past year and a half. In fact, it's time to go further and develop a new, even tougher mindset: managing for -- yes -- the next recession.

Downturns are only a small part of the economic cycle, but they are the moments when the pecking order shifts -- and when entire sectors change in ways that last for years.

Think of how the landscape shifted among investment banks (Goldman Sachs (GS, Fortune 500) stronger than ever; Lehman Brothers and Bear Stearns gone for good) and automakers (Chrysler bankrupt and bought; Toyota (TM) roaring past GM). The primary factor in determining which companies won and which lost was the way they were managed during the boom.

So now that the next expansion is about to start, it's time to make sure not only that you grow and succeed, but also that you position your business to prevail in the inevitable next recession. Three imperatives:

Make friends now with the people you'll need later.

At a meeting of leading CEOs this past spring, a top Obama administration official (speaking on the condition that he not be named) told the corporate chiefs bluntly that they had done a lousy job of making friends in Washington.

When the government needed businesspeople to serve on task forces, he said, companies sent functionaries. But when a company wanted to lobby officials on a potential tax or regulatory change that would benefit them, the CEO showed up and had plenty of time.

Such behavior isn't forgotten when a company suddenly appears asking for help, the official said.

Listen to unconventional wisdom.

For unsuccessful companies, risk is a hot topic at the depths of a recession. For great companies, it's a hot topic at the height of a boom.

In the previous expansion, contrarians like Yale professor Robert Shiller, New York University professor Nouriel Roubini, and fund manager Jeremy Grantham were saying what no one wanted to hear -- that real estate and other asset prices had become insane bubbles. Well, Grantham is still here, while many fund managers are not.

When the good times return, make it a priority to find the thinkers who stand apart. Like? Check out economists Emmanuel Saez of the University of California at Berkeley and Susan Athey of Harvard, the two most recent winners of the John Bates Clark Medal for America's best young economist. Saez is an expert on tax policy -- an important topic as federal rules are being rewritten. Athey studies investor behavior and market structure, another key subject.

And always be alert for others. You can't know if they'll be right, but considering their views will make you wiser.

Don't go soft on evaluations.

Expansions make it easier for everyone to look like a star, leading undisciplined managers to believe somehow everyone just got better. The best companies, like Procter & Gamble (PG, Fortune 500) and McKinsey, are as rigorous in evaluating people during good times as bad. Otherwise they'd find themselves with a roster of C players when the next downturn arrives.

This whole way of thinking may seem backwards. Good times seen merely as preparation for the bad? But managing intelligently during the next expansion will be much more than a chance to clobber competitors. At least as important will be preparing the organization for the make-or-break environment of the next recession.

Recovery checklist

1. Manage capital fiercely. It is always hard to try tightening receivables and payables when everyone else is doing the same. So get capital efficient when you don't have to, as Deere (DE, Fortune 500) and Staples (SPLS, Fortune 500) did in the last cycle.

2. Recession-proof your model. Silverjet and Eos, flying all-business-class jets across the Atlantic, failed in this recession. Southwest (LUV, Fortune 500) gained market share. Is your business model ready for the next downturn?

3. Keep growing personally. Adversity builds character; good times can erode it. The best managers find new ways to challenge themselves as the economy picks up. To top of page

More Galleries