The Great Resignation...

The broader economy looks poised for a decline, but looks can be deceiving. The metrics that matter lie deep within each individual organization.

By Russell Pearlman | Illustrated by Alex Wells

The Problem

“Everyone” expects their business—and the economy— to deteriorate over the coming months.

WHY IT MATTERS

“Everyone” may be wrong, especially long term. Plus, the broader economy, good or bad, may not have much bearing on individual organizations.

THE SOLUTION

Zero in on key profit, process, and people metrics to determine which way your organization is headed.

But if vendors are taking significantly longer to pay their bills, that could spell trouble—no matter the economic environment. Only by looking at the fine details can a leader determine the difference between the natural ebb and flow of the economic cycle and serious trouble. These details aren’t exclusively financial metrics, either. How a firm adopts—or ignores—new technological changes can indicate future trouble more than any leading economic indicator can. Above all, leaders should be keeping tabs on their own employees. Leaders can’t just ignore the macro forces. “A leader should always be wary of whether the firm is in an exposed position,” says Ralf Specht, author of Beyond the Startup: Sparking Operational Innovations for Global Growth. But those forces, he says, should still take a back seat to internal metrics—which will be the only indicators of whether your company is experiencing a onetime blip or there’s trouble on the horizon. “What you can control is creating an environment of performance inside the firm,” Specht says.

Corporate earnings get the headlines, and sales growth is obviously important, but the most telling indicator of a firm’s financial health, experts say, is how much its cash holdings are growing or shrinking. Free cash flow is easy to measure, and almost impossible to fake. “When you run out of cash, you’re in trouble,” Schnoor says. Many companies in the dot-com bubble era fell apart for exactly that reason, even with reasonably strong worldwide economic growth and internet usage increasing exponentially. In seeking to grow their businesses as fast as possible, Pets.com, Webvan, eToys, and countless other firms spent all of the money they raised from venture capitalists and shareholders—and then some—on advertising, hiring, and tech infrastructure. Even if the firms made money on each individual sale, they still weren’t generating free cash. Big organizations can see their free cash flow decline for quarters, even years, without going bankrupt. But in an era of increased corporate scrutiny, most stakeholders won’t let a leader burn through a firm’s resources indefinitely. That free cash is eventually supposed to be used for dividends, stock buybacks, debt payments, or future growth projects. Leaders up and down the corporate ladder can use other money-related indicators to gauge the health of their organizations. As chief operating officer at the advertising agency he cofounded, Specht kept close tabs on such metrics as average revenue per employee and operating costs per employee. The company was growing rapidly, but he knew that if revenue per employee was falling, or costs per employee were rising, that would reflect inefficiencies in the business. Indicators like these don’t have that much to do with the broader economic environment, he says.

Sure, these conditions sound very much like 2022. And they do describe this historical moment accurately. But they could also describe another era—circa 1970, when the United States dipped into and out of a mild recession over the course of six months. And a hundred years before that, there were similar warning signs leading to the so-called Long Depression of 1873, a period of economic contraction that lasted more than five years in the US and, by some metrics, a stunning 23 years in other parts of the world. In both the 1970s and 1870s, many of the same statistics looked grim. Yet the former period turned out mostly fine, while the latter one bankrupted thousands of businesses worldwide.

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The Great Application?

Tomorrow:

Today:

Famed economist John Maynard Keynes characterized the data and developments of the early twentieth century as “unstable, unreliable, and temporary,” but he could just as easily have been talking about any other period in economic history, including today. Searching for clues to explain changes, corporate leaders often turn to an obvious list—inverted yield curves, inflation levels, consumer anxiety, employment gains and losses. But these factors won’t accurately predict the environment for an individual organization a year from now. That uncertainty can be awfully hard to reckon with, especially now, when social media, pundits, and practically every stakeholder constantly remind leaders of what’s going on in the world. “When you are in the eye of the hurricane, it’s not so easy to see things,” says Ian Schnoor, executive director at the Financial Modeling Institute, an accreditor. For all we know, the Great Resignation could morph into the Great Job Application in a few months. But instead of fixating on the macro indicators, experts say, leaders should pay attention to the statistics coming out of their own organizations. If a company’s free cash flow is increasing even as the macro environment deteriorates, the firm is probably fine.

Inflation at the highest level in decades.

Investments, after years of pushing higher, crashing down.

A war involving one of the world’s largest nations bringing fear and anxiety to millions.

An authoritarian nation flexing its muscles in Asia.

Profits

Other important metrics measure how expeditiously existing and future revenues reach the firm. Savvy leaders will closely watch the number of deals in progress in their organization’s sales pipelines, says Brad Frank, a senior client partner in Korn Ferry’s Technology practice. If there are fewer than expected, or the deals are taking too long to consummate, that could indicate that change is in the air. Other experts point to accounts receivable—or how promptly other firms are paying—as a telling metric. Sales could be growing, but if customers are taking a longer time to issue payments, that’s concerning. “Slow pay is the precursor to no pay,” says John Crossman, a Florida-based consultant and investor in shopping centers. For one thing, it’s hard to pay bills when the money actually isn’t there. A problem with accounts receivable could also be an indicator of nonfinancial issues. For instance, the billing department could be sending out invoices with mistakes in them. Or there could be a problem with the relationship between a customer and the organization’s sales team.

Process

If anything, top leaders focus too much on financial figures, experts say, and not on other stats that could predict trouble. Indeed, a company’s processes—or lack thereof—are often more important than whatever the latest measurement of consumer sentiment says. The most obvious trouble spot could be the advent of a competing product that offers a feature that your company’s doesn’t. That should immediately signal that your firm needs to take a look at how it makes and markets its products and services, Schnoor says. “Insightful cab owners probably got really scared when Uber first showed up,” he says. But process problems affect more than a firm’s products. Take something as mundane as inventory, the task of counting up and valuing the products in a company’s warehouses, factories, and stores. It has to be done, of course—companies need to know whether they have an adequate supply of raw materials and finished goods. For years, this tabulation was done by hand, and in some cases it still is. But the process can be a major time sink, stealing employees away from revenue-generating roles. Some firms still haven’t adopted software and other technological innovations that can significantly shorten inventorying.

Companies delay or ignore digital-transformation projects for plenty of reasons, among them potentially high costs and the time it takes for the results to bear fruit. Companies have thousands of run-of-the-mill tasks such as emailing prospective customers, finding job candidates, paying bills, and administering employee benefits. All of these likely could work faster, better, or cheaper if leaders prioritized them. Not undertaking process changes is a troubling sign, Specht says.

Deciphering the Signs

Survey your own customers. Even if the average consumer expects prices to rise, your customers may not accept an increase.

Savvy leaders can use these macro-economic indicators as starting points to gauge the health of their own organizations.

Indicator:

Use:

Inflation expectations

People

Schnoor’s whole business is selling training in financial models—teaching leaders how to use those models to identify where their company might be falling behind. But when he wants to identify trouble spots in his own company, his first step is to find out how his employees are feeling. “If your team is unhappy, the business is in trouble,” he says. Unhappy employees are a prelude to problems with manufacturing products and generating profits. Schnoor uses engagement surveys and meetings with employees to take their professional temperatures and to assess how motivated and satisfied they are on the job. The most overt sign of personnel trouble, of course, is voluntary departures. There’s been a lot of that lately. More than 40 million Americans quit their jobs last year—a record. They were joined by many millions more worldwide. But according to Crossman, too many leaders have blamed the Great Resignation for people leaving their firms over the last twelve months. It’s true that many employees, having rethought their priorities and career goals, have switched jobs over the past two years. But not all, and perhaps not even the majority, are leaving because of some great epiphany. They could be leaving, Crossman says, because they don’t see their career growing at the firm, or they’re being paid less than their colleagues, or they find the culture toxic. But too few firms take the time to find out. It can be particularly troubling if mid- and senior-level managers are quitting in droves, Crossman says, since those workers take longer, and cost more, to replace. “Slow down and investigate the root cause,” he says.

Specht likes comparing customer satisfaction and employee engagement in the same market. Usually, he says, both will move in the same direction. But when they don’t, it could be a red flag. Rising customer satisfaction coupled with declining employee engagement could mean that staff members feel overworked and are ready to quit. The reverse—rising employee engagement and lower customer satisfaction—could mean that the organization is taking its current success for granted and may be setting itself up for failure in the future

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Indicator:

Stock-market levels

Investigate your free cash flow rate. A broad market decline means investors are worried about future profitability.

Use:

Indicator:

The job quit rate

Ask whether your employees are leaving at rates above the industry average. Then find out why.