Navigating a Downturn

Introduction

Many firms began facing a downturn early in 2001. Though it was immediately easier for them to find qualified employees with the tech implosion, their clients were making more conservative spending decisions. This affected design firms the worst, and public relations firms the least. (Advertising firms seemed to be between the two.) This position paper was written during that time, hoping that the lessons could be memorialized.

What Surfaces as the Economy Drops

Recession highlights and magnifies the differences between firms that would not otherwise be apparent. Any downturn at all tends to hit firms harder who have incurred fixed obligations like term loans and capital or operating leases, who have recently faced high growth rates, or who have recently moved.

If a slowdown doesn’t kill you in the process, you will emerge stronger. You’ll be lots smarter, for one thing. And if you weren’t running a firm in the early 1990s, you could probably use a small dose of realism about how quickly things can change. You’ll also treat hiring a little more cautiously, having felt the pain of dismissing your employees.

We have come to expect that life will be cyclical. Business, too. We all experience times of unprecedented prosperity and near failure. No amount of planning can eliminate all cyclical influences, but with some big picture thinking you can knock the rougher edges off these cycles to create a more predictable business environment. Cycles are good, but extremes are dangerous.

You Must Still be in Charge

Downturns are caused by many forces, some in our control and others not. But regardless of the extent to which you can control the cause itself, you can—and must—control the environment around the cause. In other words, everything is still your responsibility. It may not be your fault, but it is still your responsibility. Your “ship” needs to be ready for storms. And when you see a storm coming, you should double check your preparations and make any final adjustments.

Sometimes knowing what to do is not as agonizing as knowing when to do it. There are legitimate, powerful reasons to wait as long as you can to take decisive action, like your desire to limit disruption to employees. The important thing is to recognize and then account for your tendency to react too slowly. There are many instances of firms compounding their situation because of slow reaction times, and very few instances of firms reacting too quickly.

Think of a ship headed in a straight line but off the proscribed course. When the error is discovered, a course correction is made. If it is discovered early, the correction is minimal and painless. If it is late, the correction is severe. And getting back on course will require a much longer period of time because of the slow reaction.

The tension is usually between having a team ready to go again when work picks back up versus cutting expenses quickly and then not having that team around when they are needed. Listen carefully to what the signals are telling you.

Mistakes to Avoid

Here are some mistakes you might want to avoid as you navigate the downturn. We are listing four temptations you should work hard at resisting.

First, try not to water down your positioning. It’s an understandable temptation given the pressure you feel to keep the work pipeline full, but once things do turn around, you’ll have to live with years of difficult effort to regain the high ground. If you are focused, stay focused. If you have set certain standards for qualifying prospective clients, don’t give up on them too easily. Some compromise is inevitable, but keep a little “do the right thing” in the mix, regardless of the consequences.

Second, recognize your tendency as an entrepreneur to tend toward extremes—extreme panic and extreme optimism. The truth is somewhere between the two, and now is the time to moderate your instincts a bit by talking with colleagues, reading good advice, and talking with trusted advisors.

Third, and closely related to the second point, don’t try to keep your staff together at the expense of your firm’s core health. If there aren’t enough life boats, make some tough choices so that the majority of people have options, either at your firm or others. It’s a very admirable thing to be committed to your employees, but you need to balance that with your obligation to keep the firm healthy. You can’t predict how long it will take to turn things around, and as hard as it will be to rebuild the team, that will be less painful than waiting too long to actually effect a recovery.

Fourth, don’t mask these hard decisions by incurring any additional financial obligations that will either defer the recovery or create even more pain if your firm does not recover. If your firm is experiencing a downturn, take a deep breath and make the big, tough decisions now. Just rip the band-aid off.

More About Dismissing Staff

Now a little bit more about dismissing staff. You’ve probably noticed that some firms that would normally be thriving are just keeping their heads above water. Others are doing much worse and are staring at the possibility of staff cuts (or even deeper staff cuts).

Why are staff cuts so integral to recovering from a downturn? First, the potential impact on the bottom line is enormous. Typically you will spend more on employee compensation than on all overhead expenses combined. This is even more likely if you are overstaffed. Second, no other “adjustment” to your overhead is as painful as eliminating staff.

Eliminating staff is referred to variously as firing, downsizing, rightsizing, involuntarily separating, terminating, restructuring, laying off, dismissing, or reducing. Regardless of the terminology, you—and the employees directly affected—will be sobered and saddened.

Here we are talking about incurring results that didn’t meet your expectations to the extent that scaling back is necessary to preserve your firm’s health. And we are presuming that you’ve done all the other little things that you can before relying on steps this drastic.

So obviously this is the place where you can make the largest correction, particularly since in most cases they are not “fixed” costs (like a facility lease which has a contracted monthly payment).

Your salary load should be about 45% of your AGI (essentially, gross profit after outside expenses are subtracted from total revenue). If you have already tried to hold out on tough staffing decisions, chances are that you are quite a bit over this. You might want to trim to—or beyond—that level, based on what your cashflow projection is indicating. Also factor in anybody who is known to be leaving the firm, the solidity of your client relationships, the amount of cushion you have in the firm (or available personally to loan back to the firm), and where you think the economy is headed.

Sometimes leadership isn’t fun, but there’s a good chance that the lessons that stick with you are the ones you learned when you were getting beat up, not when things were going great.