Preserve Cash and Earn Profits in a Downturn

What's so unusual about this recession is that, everyone has always approached the economic cycle with a base case, a positive case and a downside case, but this is a set of markets where the downside case just gets totally thrown out the door a week after you've postulated. The speed of change is tremendous.

I'm Tom Glocer, Chief Executive of Thomson Reuters.

We're fortunate in that we're a very cash generative company. We generate about two billion dollars of free cash flow every year. We do that because our business model is quite simple and straightforward. We sell primarily recurring subscriptions to professionals of content and services that are electronically delivered. They're often billed in advance, and we convert around 100% operating profit into cash flow. So it begins with a strong business model. And then we're careful. We watch capex [capital expenditure] carefully.

One of the great things about being technology-enabled is that we are able to ride what is not just often the Moore's law curve, but actually the exponential Malthusian curve of the efficiency of technology, and what it can do for you in scaled businesses, like say transaction systems in the financial markets, or databasing systems in the legal or tax or accounting area.

Question: What mistakes do companies make in recessions?

I don't need to look just to other companies for mistakes. I've made plenty of my own. I have a rich history of mistakes to draw upon.

I think some of the mistakes some people make, and certainly in a difficult recession like this, is that when there is a need to cut back, they do it across the board. It's often much easier as a manager to say to your eight reports, I'm taking 20% out of each of your budgets--because you don't have to do the hard work, and you don't have to disappoint people, and there's the appearance, at least, of fairness in the sense that we are all in it together, we are all scrounging around to come up with savings.

I think that is a disaster of abdication of the responsibility of management. Because actually what you need to do is back your best horses. And sometimes the right answer is actually to give one unit 10% more, and cut or dispose of other units. And it does become difficult in these periods.

I saw some interesting analysis that I think McKinsey had done, looking at the last couple of recessions, and what it found was that the companies that were able to continue investing, both organically and by acquisition through the last two recessions, came out with essentially an extraordinary gain on the upside. That makes some sense.

What we're doing at Thomson Reuters is focusing on the two or three things that we think are real game-changers, and increasing the investments there, and cutting all of the nice-to-haves. Because although we seldom admit there are nice-to-haves in the business, the truth is that after a period of good growth, lots of discretionary projects do grow up in large companies, and it's not a bad thing, every now and then, to zero-base and go back and ask the question, "What value is really being added ultimately for our customers?"


Technology makes Thomson Reuters a cash-generative company, according to its CEO, Tom Glocer. But that doesn't stop some recession-scarred managers from making cuts "across the board," a mistake that misdiagnoses any company's core weaknesses.

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