With more positive economic news emerging, many executives are starting to breathe more easily, having weathered some of the worst business conditions in memory.
Unfortunately, the hard work of getting their companies back into fighting form has only started. Company leaders should feel a strong urgency to get their businesses back into shape if they hope to remain competitive.
Recessions are the times when many future winning companies come to the fore. Even amid a downturn, unexpected opportunities await executives who can capitalize on their firms' internal strengths - as well as on their rivals' weaknesses and indecision.
Recalling the adage from economist Paul Romer of Stanford University (and echoed by the Obama White House) that "a crisis is a terrible thing to waste," a recession can be an opportune time to boldly restructure an organization.
This finding was outlined in a recent report, "Rapid Restructuring: Let No Crisis Go Unused," by my McKinsey colleague Warren Strickland and his co-authors. They examined the performance of leading U.S. companies in their industrial sectors during 1998 and 1999, and measured whether they maintained their leadership position as the economy emerged from the relatively mild recession of 2001.
The findings? Just 60 per cent of the sector's pre-recession leaders maintained their top-quartile position after the recession.
Many of the remaining companies were victims of their own inability to change and were overtaken by more adaptable organizations ready to seize new opportunities. The new leaders delivered a total return to their shareholders of 10 per cent over the 1998-2002 period - while laggard firms delivered zero.
A recession provides executives with a window of unusual flexibility. Because most companies are reporting falling quarterly profits, or even losses, a downturn gives a company's management a temporary reprieve from investors' customary expectations of ever-higher profits. Using this momentary flexibility, management can make investments of time, effort and capital that can reposition their companies for long-term success.
The prescription for what Mr. Strickland and his team terms "rapid restructuring" calls, initially, for brave restraint by managers. Unless an organization's situation is truly dire, executives should resist hasty headcount reductions, because ill-considered job cuts could impair long-term performance.
Instead, they should consider three levers for gaining value through restructuring. First, they should get their priorities straight, then proceed to burn fat and then selectively rebuild muscle.
Top executives and senior managers should focus initially on their highest-value opportunities and most urgent challenges. They should reconsider the "master architecture" of their company under a wide range of likely business scenarios.
Are there any "no regrets" moves that can be quickly taken? Are there trigger points for potential actions that depend on specific changes in economic conditions, or on competitors' moves? What are the likeliest sources of cost reductions and revenue improvements?
To burn fat across the organization, "value capture" teams should be deployed to "lean out" the business.
Creating an accurate cost baseline is a crucial first step against which teams can create a prioritized matrix of opportunities for reducing costs and seizing opportunities.
An important caveat is that top management should weigh the potential effects of such decisions on overall organizational health.
Building muscle is perhaps the most challenging step. Executives must consider both "the hard stuff" and "the soft stuff" of organizational fitness: the potential hard economic benefits of improving pivotal functions such as procurement and pricing, and the softer effects that reducing complexity and strengthening management processes will have on the organization's effectiveness.
If sequenced appropriately, such steps can lead to quick initial gains: freeing up leadership time to concentrate on higher-level problems, eliminating decision bottlenecks and better deploying a company's talent.
Organizational change succeeds best not when it results in a sense of panic among employees, but when it is aspirational: Top executives should motivate their staff with a clear and convincing vision of the future, even while exhorting them to pursue aggressive cost control and value creation measures. Muscle-building initiatives, in particular, depend on establishing an atmosphere of hope about the long term.
Recessions, inevitably, impose severe challenges, yet ambitious firms can embrace opportunities embedded within the crisis, using the downturn's added sense of urgency to spur positive, long-lasting change.
As executives begin to sense that we may have endured the worst of the downturn, they have no time to waste in pursuing the kind of organizational restructuring that will position their company to emerge as a winner after this painful period.
Jiri Maly is a principal in the Toronto office of McKinsey & Co. Warren Strickland, a director in McKinsey's Dallas office, contributed to this article.
