Leadership in the Era of Economic Uncertainty: Managing in a Downturn [Hardcover]

Ram Charan's Leadership in an Era of Economic Uncertainty (LEEU) is a playbook for senior executives to get back to the basics in these tough economic times. Charan is the first author to take a serious look at what running a company will be like under the assumption that the economy will not recover in the short run, but rather what you will need to be effective over the next two to three years.

In this regard, it is an excellent book with clear guidance, well written and focused on the basics. It's a 125-page primer for executives to remind them what it means to manage in tough times. Based on that strength it's a five star review - but there are some serious omissions that limit the completeness of the playbook - hence the missing pages in operations and IT.

THE MAJOR WEAKNESS IS that this book treats leadership as financial leadership paying ALMOST NO ATTENTION TO LEADING OPERATIONALLY or the the changes necessary to acheive and extend operational and cash performance. That is the reason for the two stars, as its a good book on the financial dimension, but just following that financial advice may lead companies into strategic and operational dead ends.

CEO's and CFO's will like this book. Other executives, particularly COO's, BU leaders and CIOs should read the book and supplement it with their operational plans to achieve and sustain operational improvements - the big gap in this book.

Charan gives clear advice that is free from pontification or opinion. You get the feeling that you are sitting across the table from an executive that is giving you clear guidance and a tough message that you need to pay attention to. Couple this book with Kotter's "A Sense of Urgency" to know how to manage the change all companies face.

However, there are two major weaknesses in the book.

First is the lack of discussion regarding the use of information, technology and communications to drive operational performance. This is surprising given that many of the recommendations in the book require technology to execute them properly. In fact the collaboration, performance reporting, supplier coordination, customer intelligence are more expensive and less powerful if they are not supported by effective information and technology. Charan's excellent discussion in other areas and the four paragraphs he dedicates to IT give executives the impression that they can get by without good information or effective IT. Leading companies know that this is not possible and while IT cannot be a cash or capital black hole, effective enterprises have effective IT.

Second, reading between the lines you get the sense that Charan sees leadership in this environment in terms of the CEO/CFO and everyone else. The treatment of the other executives and the employees in the book puts the CEO and CFO against everyone else. This is subtle but clear throughout the book. The bias is expressed in terms of the number of pages dedicated to each role CEO/CFO get 20 while 8 for each other role. Only the CFO gets a section that describes their role to the CEO. Every other role is described in terms of a focus on finances, cash and cutting costs with little treatment of operations. Now the CEO and CFO are important roles, but they are not the only ones required to get results. The omission of IT and the Charan's light treatment of operational considerations are unfortunate from the co-author of Execution.

Overall it's still a good book to read, but it's not a complete playbook. Here are a review of the overall strengths, challenges and each of the role/chapter discussions.

Strengths:

Concentrating on the importance of cash flow and cash generation. This is the first third of the book and Charan puts the issues of cash clearly on the table.

Recognizing that the post uncertainty world will be different than the world we knew and the world we are managing through.

Recognizing that the company is a system and that managing it for one dimension, even cash, can have unintended consequences.

Strong advice on how CEOs should lead in this environment and their need for getting their "hands on, heads in" the business.

Challenges

The book is a neo-classical view on management with little to no consideration of how to use information, technology or communications to restructure the company and better match resources to revenues. The advice in LEEU was applicable back in the 1950's as much as it is today, despite the fact that technology and the economy have changed.

The focus is on finance more than on the operations that drive finance. In my experience operational data is a leading indicator of what is happening, and Charan recognizes this, yet his focus is on managing from a finance perspective, which is a lagging indicator of what has happened.

The lack of serious consideration given to information and information technology, particularly given the need to make companies more flexible, respond to changes in the market.

The driving concern on cost to the point that Charan's advice on how to deal with a tough economy can become a self fulfilling prophesy. From page 42, "The objective is to cut costs before revenues decline and to get ahead of the curve. Timing and speed matter." Such a management philosophy was part of the recipe for the Great Depression. Few people have cut their way to greatness, and there could be more on the customer service, growth and other issues discussed in the book.

ROLE/CHAPTER REVIEW

The book is organized into sections based on each of the major roles played on the executive team. This is a unique way of looking at the issues and I would recommend reading all the roles. This "you" frequently used in the text refers to you as CEO, CFO, BU executive among others. The sections and highlights include:

Corporate Crisis - how DuPont recognized and reacted to the economy

The Challenge of Managing in a Toxic Environment - the best 20 pages on what to do in this environment including the six essential leadership traits for hard times:

- Honesty and Credibility
- The ability to inspire
- Real-time connection with reality
- Realism tempered with optimism
- Managing with intensity
- Boldness in building for the future

At the Helm - the CEO - concentrates on the need for CEOs to become more engaged in the company, the fact that you are leading in an environment of uncertainly and volatility, the need to face up to that and the fact that the future will not be an extension of the past. Charan points out that understanding operational data is more important and critical than getting the financials. The tool for CEOs is the "cash breakeven point" which has changed for every company.

On the Front Lines - Sales and Marketing - concentrates on the need to maintain a focus on generating revenues and the fact that those revenues will be harder to come by in the future. Charan reminds us that there is a need to keep the sales force motivated, engaged and with the customer so we can all understand what is going on. The tool for Sales and Marketing professionals is constant communication with the field and Marketing ROI.

Mind over Money - the CFO - this section concentrates on issues of cash, cost and the CFO's role in leading in these areas. While frequent budgeting and cash flow analysis are the CFO's tools, Charan positions the CFO as the advisor of last resort to the CEO. I think that this is unfortunate as it basically says that all decisions are finance driven and it sets the operational executives who deliver the results in a pejorative position. Particularly the COO and the CIO who are often the executives in the best position to effect and sustain operational change.

Making it all work - Operations recognizes that operations is at the heart of the company. The tool is restructuring operations to cut capacity to meet demand. Here on page 78 Charan points out that the enterprise is a system and cuts in some areas can create havoc in others. It would have been nice for him to provide similar advice to the CFO.

Refocusing Innovation - Research and Development is a variation on the theme of resource reduction, concentrating on the choices that will pay off and support the enterprise. Their tools? Zero based budgeting for R&D projects and an active "end of life" focus on R&D projects. Charan points to the use of offshore resources as a way of cutting R&D expense but maintaining R&D capacity.

Tying it all together - the supply chain recognizes the importance of these operational processes to cash flow. Here the tool is synchronizing activities across the supply chain, a good thing. A better thing would have been a discussion of how you reduce the unit of work within the supply chain (from say a truck of product to a case) to improve its flexibility and responsiveness.

Supporting the team - the staff functions has some good material and some real gaps. The normal coverage of HR, Legal, IR and IT are contained in here. This is disappointing as this treatment does not reflect the role of IT in the core of operations - a real gap as leaders are using information in new ways to preserve cash. I am particularly taken a back by Charan's binary description of leaders versus individual contributors (page 104) as it seems in this world you are either one or the other. BTW individuals are to be pushed out of the company as they do not have `specific budgets supporting them" This is unfortunate in that individuals doing their jobs well drive the changes in operations, not the managers who oversee the work. This is a surprising gap in the book.

The view from the top - the board of directors exercise their responsibility for the shareholders through a combination of strong oversight, realistic goal setting, and risk management.

I have read and reviewed all of Ram Charan's previously published books and was thus eager to read this one in which he shares his thoughts about how to follow "the new rules for getting the right things done in difficult times." Although the rules he discusses are hardly "new," these are indeed difficult times and require decision-makers in all organizations (regardless of size or nature) to provide effective leadership. More specifically, leadership that is honest and credible because it is authentic (i.e. transparent, visible, and consistent), inspires others, is connected with reality in real time, realistic tempered with (cautious) optimism, hands-on "in the foxhole," and bold while in pursuit of what Jim Collins characterizes as a "BHAG" (i.e. big hairy audacious goal). According to Charan, "being a leader in tough and uncertain times means always anticipating the next challenge and building the fortitude and skills to face it."

Easier said than done? Of course. In fact, developing a new mindset may be the single greatest challenge that C-level executives (especially CEOs) now face. "The new reality is that barring acquisitions, your company will be smaller two years from now than it is today." Therefore, success in what will continue to be a volatile business environment "requires frequent adjustments at the operational level of the business as well as an occasional disruptive shift. It demands what I call [begin italics] management intensity [end italics]: a deep immersion in the operational details of the business and the outside world combined with hands-on involvement and followthrough." As I suggested earlier, Charan offers no head-snapping revelations, nor does he make any such claim. He is a world-class empiricist and pragmatist with highly developed street smarts who helps executives to understand what works, what doesn't, and why. Everything he recommends is common sense. The business world he now surveys, however, is quite different from the one he surveyed when writing The Leadership Pipeline: How to Build the Leadership-Powered Company. The advice he offers in Leadership in the Era of Economic Uncertainty is essentially the same as it has been since then (2000) but with one great difference: There is no longer any margin for error. "You must dig into the right details with much higher frequency than ever before."

To paraphrase Thomas Paine, "These are the times that try CEOs' souls." The realities they must recognize and to which they must then respond are more numerous and more perilous than ever before. In a previously published book, Know-How, Charan discusses the eight skills that separate people who perform from those who don't:

1. "Positioning (and when necessary, repositioning) your business by zeroing in on the central idea that meets customer needs and makes money;
2. Connecting the dots by pinpointing patterns of external change ahead of others;
3. Shaping the way people work together by leading the social system of your business;
4. Judging people by getting to the truth of a person;
5. Molding high-energy, high-powered, high-ego people into a working team of leaders in which they equal more than the sum of their parts;
6. Knowing the destination where you want to take your business by developing goals that balance what the business can become with what it can realistically achieve;
7. Setting laser-sharp priorities that become the road map for meeting your goals; and
8. Dealing creatively and positively with societal pressures that go beyond the economic value creation activities of your business."

All of these skills are needed when accommodating "the new rules for getting things done in difficult times." Board members, C-level executives, and heads of departments all need "know-how" but they also need "know-what." I agree with Peter Drucker that "There is surely nothing quite so useless as doing with great efficiency what should not be done at all" and with Michael Porter that "The essence of strategy is choosing what not to do." Leaders must also be effective communicators so that everyone involved knows what their organization's goals are and understands why those goals must be achieved. Charan cites Chad Holliday, CEO of DuPont, as an example of a leader who answered the call when realizing that a global economic crisis was imminent. "He stared into the face of uncertainty and accepted the change he saw coming. Neither fear nor uncertainty paralyzed him. He took charge, pulled people together, and took decisive action. This is what every leader must do now."

Only 127 pages, this is Charan's shortest book. It is also, in my opinion, his most valuable book thus far because it offers both a call to action and a wealth of sound advice about what to do as well as what not to do, how to do what must be done, and why "hands on, head in" is the guiding principle. "Adjust your mindset, gather your people, and tackle the problems squarely" As noted earlier, Charan aserts that "being a leader in tough and uncertain times means anticipating the next challenge and building the fortitude and skills to face it." With all due respect to CEOs such as Chad Holliday, an organization's success will ultimately depend upon having effective leaders at all levels and in all areas. In this context, presumably Ram Charan agrees with me that this brief excerpt from Lao-Tzu's Tao Te Ching provides an appropriate conclusion to my review of Charan's latest book:

"Learn from the people
Plan with the people
Begin with what they have
Build on what they know
Of the best leaders
When the task is accomplished
The people will remark
We have done it ourselves."

While there is some good advice in this book, most of it is generic and applies in good times as bad. The one key new directive is to focus on cash more than anything else. This follows clearly if one understands the business fundamentals presented in the author's book What the CEO Wants You to Know : How Your Company Really Works. Since credit is tighter, and most companies' financials will look worse with declining revenues, getting cash externally will be much more difficult. The best solution is to work to avoid needing external cash.

Another new suggestion is to accept the greater uncertainty by revising budgets more frequently. By doing so, companies can react more quickly and also keep goals more realistic. With (unchanging) annual budgets in a very uncertain world, a month or two into the year, the budget may already be impossible, or met, if a turnaround happens sooner than expected. Either way, persisting with a grossly unrealistic budget for most of a year is not a good idea.

Unfortunately these two solid ideas and a little fluff (advice applicable anytime) does not make for compelling book.