In times of crisis, companies tend to respond by downsizing their operations. But instead, they should be taking stock and considering opportunities for innovation, so they can emerge stronger during the recovery
When travellers flocked to UK airports last summer, keen to fly for the first time since the pandemic, many found their hopes dashed. Despite huge demand, international hubs couldn’t cope with the surge in passenger numbers, even though they were still below pre-COVID levels.
This chaos came in the wake of the air industry’s decision to close runways, lay off staff and mothball terminals during the pandemic. But, as the air travel sector discovered, winding down operations can be costly, and ramping up – whatever the sector – is not simply ramping down in reverse. Once let go, experienced staff are hard to come by, and furloughed skills grow rusty. Even after a few months out of action, pilots needed to retrain with flight simulators. Efficiency had been sacrificed to lockdown cost cutting.
Understanding what drives business decisions amid uncertainty... can help leaders make better strategic choices
We wanted to investigate the true cost of mothballing staff and resources during uncertain times. What action should business leaders take if the outlook is rocky? Should you maintain costly facilities and employees even though demand has fallen away? Or, take a risk and shed staff, equipment and facilities, knowing that it will be complex and expensive to get everything going again as business picks up?
These difficult decisions are often taken in the heat of the moment. Usually, it’s considered a straight financial equation: does it cost more or less to keep resources ticking over until business picks up again? But we’ve shown that it’s about more than money – these choices can have strategic implications down the line.
Difficult decisions in uncertain times
Here’s a simplified example: say a leading luxury brand lies low to cut costs during a time of uncertainty. By the time it returns, the name may have lost its cachet and customer tastes moved on. And so, the cost of mothballing resources may be greater than first calculated.
Once let go, experienced staff are hard to come by, and furloughed skills grow rusty
In the words of David Cote, former Chief Executive of US conglomerate Honeywell, there should be a greater awareness of the knock-on effects of decisions made in a downturn. “I’ve been a leader during three recessions,” he reflected in 2013. “And I’ve never heard a management team talk about how the choices they make during a downturn will affect performance during the recovery. But in 2008 and 2009, I kept reiterating that point: there will be a recovery and we need to be prepared for it.”
To take a closer look, we examined thorough records of more than 100 oil and gas drilling firms in Texas over nearly two decades (1999 to 2018) to assess how their decisions to maintain or stand down more than 800 rigs affected business in the longer term amid oil price volatility.
Why oil and gas extraction? These rigs tend to work around the clock and require experienced staff with specialist skills. Costs of allowing rigs to stand idle and laying off staff are high; equipment deteriorates, but more importantly it’s tough to find enough skilled staff to crew the rigs when production ramps up again. Drilling firms’ capabilities have been eroded. But uncertainty means fortunes can rise as well as fall, and businesses must be poised to take advantage of an upturn.
We’ve found that the more complex and extensive a firm’s resources, the more likely it is to keep staff on the books, and equipment ticking over. It’s riskier to mothball staff and operations in an uncertain climate precisely because the effort and expense required to find expertise or train new staff is so high.
Business decisions and impact
We have focused on a sector where staffing and machinery are major resources. Businesses with higher levels of automation and less dependency on human capital may find the cost of idling operations during a downturn is much lower. After all, automated processes don’t suffer from forgetfulness.
But within knowledge-intensive industries such as pharmaceuticals, engineering, scientific research and technology, the effects of shedding or furloughing staff during a downturn may be even more significant than they are in oil and gas. How these firms respond during downturns could give them a competitive advantage or disadvantage in the longer term.
There should be a greater awareness of the knock-on effects of decisions made in a downturn
We don’t yet know enough about how other cyclical sectors such as mining or aerospace might be affected by shutting down resources. Nor do we understand the full impact of external shocks such as war or natural disasters.
Cycles of growth and contraction are to be expected. While there’s appetite in business and academia to examine growth and innovation, there’s less enthusiasm to focus on the lulls. But understanding what drives business decisions amid uncertainty, and the impact of these on capabilities, can help leaders make better strategic choices.
As we saw during the pandemic, these lulls can provide a window in which to take stock and innovate, as businesses step off the treadmill. Firms that took time to digitalise operations, spot new opportunities, or train staff ended up reaping the rewards. There are a host of ways businesses can respond beyond laying off staff and ceasing activity. Better understanding could allow businesses to respond more strategically and emerge more competitive in the longer term.
This article draws on findings from "Resource Idling and Capability Erosion" by Jan-Michael Ross (Imperial College London), Toby X. Li (Texas A&M University), Ashton Hawk (University of Colorado) and Jeffrey Reuer (University of Colorado).