We are in the middle of the deepest recession in the past century-plus. The current global contraction, estimated at 33 percent in some markets, greatly exceeds the 5 percent drop in GDP during the financial crisis of 2008–09, and it came about much more quickly. The current recession, the result of a healthcare emergency that developed in under six months, differs in many ways from the previous one, which developed in 18 to 24 months and was triggered by financial markets. Nevertheless, the experiences of these companies that emerged fastest from the Financial Crisis hold lessons for companies today in light of the COVID-19 crisis.
Learning from the past
Most sectors of the global economy are experiencing some degree of stress versus their financial health at the end of 2019, with some experiencing significant stress. Levy and Sternfels investigated the companies in McKinsey’s database and compared, sector by sector, the health of companies today with the health of companies entering and exiting the Global Financial Crisis. They used the Altman Z-score, a weighted average of three broad categories of company-health metrics: earnings-margins growth, revenue growth, and optionality (measured as profits retained for optional reinvestment—whether that’s restructuring capital or acquisition capital). They then used this data to determine the actions and moves that allowed companies to really make the difference and move ahead of their peers—five and ten years out.
We learned from the 2008-09 downturn that a set of resilients —the companies in the top 20 percent of every sector—end up outperforming the non resilients (the other 80 percent) by a material margin. The research also suggests that better-performing companies tend to do well across the balance of metrics versus just spiking in one. To realize their full potential and emerge from the COVID-19 crisis as new resilients, companies must find a consistent balance of margins, growth, and optionality in their corporate actions today.
Becoming tomorrow’s resilients
To increase the likelihood of becoming the resilients, companies need to create conditions that allow them to generate value-added growth while maintaining optionality. 2021 will be a dynamic year, and leaders need to set high aspirations and embed resilience objectives within all aspects of their companies’ operating models. By quickly taking bold actions—such as divesting assets early in the crisis, pursuing M&A on the upturn, revamping technology, and defining a trigger-based plan that covers margin, growth, and optionality—companies in every sector will be able to capture opportunities even as they’re climbing out of the recession.
For more on this topic, please watch the webinar recording and read the article “The emerging resilients: Achieving ‘escape velocity.’”