All the Right Moves

James M. Schneider, senior vice president and CFO of Dell Computer Corp. in Austin, Texas, felt uneasy in August 2000. Despite robust profits through the first half of that year, the company's revenues had dipped slightly, and the daily sales and margin data that Dell's finance team tracks was showing signs of weakness.

Compaq, Hewlett-Packard and Dell's other competitors were not predicting trouble. They made their numbers in September of that year. "They spoke very optimistically about the fourth quarter," explains Schneider. "I led off our analyst meeting a month later by reading a prepared statement that we were going to miss our numbers. You can imagine how much fun that meeting was. Our competitors said it was a Dell-specific problem."

The company's executive team did some soul-searching to determine whether that was the case. Schneider says, "As more data came in each day, it became clear to us that industry demand was really starting to drop." Pivoting from self-examination to action, Dell sliced costs and significantly lowered prices. "You have to start cutting costs," Schneider explains. "But then the question is: Do you try to maximize profitability as much as you can over the short term? What if the downturn continues for a number of quarters? If there's not going to be growth in the market, then we want to take market share. That's when we decided that we were going to be very aggressive on price."

At the time, the investment community wasn't sure what to make of that decision. "Even though we diligently explained our approach, our stock at the time got whacked," says Schneider. "Still, we continued to explain our approach to the Street, our employees and everybody in our supply chain."

Dell's actions in 2000 -- focusing on critical information, executing strategy based on that information, strategically managing costs and communicating with stakeholders -- followed best practices for dealing with an economic slowdown, according to a new Accenture report titled "Creating Sustainable Shareholder Value From an Economic Downturn." And despite analysts' initial doubts, those actions paid off handsomely in the end. Dell saw its value increase by more than 23 percent in 2001, while Compaq, Gateway and Hewlett-Packard saw theirs decline by 36 percent, 62 percent and 32 percent, respectively. Dell's 2001 sales remained relatively flat (down 2.3 percent), while sales by the company's competitors declined 7 percent to 37 percent. Since April 2000, Dell has lost significantly less value than its three major competitors, while increasing its market share.

"I think the biggest problem we see with companies that don't do a good job during the recession is that short-term expectations are so out of line with what they can truly deliver," says Brian F. McCarthy, Atlanta-based senior manager in Accenture's U.S. finance and performance management practice and author of the best-practice report. "Their focus tends to be on massive cuts, and the result is that they unwittingly erode their competitive advantage. They'll meet the short-term goals, but they won't also achieve longer-term objectives because they essentially got rid of their capability to grow profitably when the economic environment improves."

To pinpoint successful strategies for bringing businesses through an economic slowdown, McCarthy surveyed the performance following the early-'90s recession of 848 public companies that had at least $500 million in annual revenue. Only 33 of those enterprises -- less than 4 percent -- outperformed the S&P 500 based on total return to shareholders (stock price appreciation plus dividends) in any of the following six-year periods: 1991 to 1996, 1992 to 1997, or 1993 to 1998. (See They Outperformed the Others.) After analyzing the response to recession of these "outperformers," McCarthy isolated six actions that enabled these companies to beat their competitors for much of the last decade.

"The role of the CFO during a recession typically has been to focus on the cost containment side," says Michael R. Sutcliff, London-based global managing director of Accenture's European finance and performance management practice. "But this report underscores the fact that the CFO can play a key role in working with the management team to help it understand some of the counterintuitive investments the company might make to position itself for growth in the upturn and to build capabilities now that are going to make a difference in the future."