Tough times ahead

December 2008 » Columns
Dear Dave, As I sit down to write this question, the stock market is now down 50 percent from its value of just one year ago, banks have stopped lending, our clients are in full retreat when it comes to starting new work, and our political leaders and the government are stumbling around like a wounded beast trying various strategies, desperately trying to get the economy back on track.
David M. Wahby

Dear Dave,
As I sit down to write this question, the stock market is now down 50 percent from its value of just one year ago, banks have stopped lending, our clients are in full retreat when it comes to starting new work, and our political leaders and the government are stumbling around like a wounded beast trying various strategies, desperately trying to get the economy back on track.

As one of several owners of a mid-size consulting firm, I speak for all when I say we are becoming more concerned about the outlook and prospects for going forward. Several years ago, we diversified our practice by adding municipal and state clients to our previously exclusive private client base. Our thought was that governmental clients would be somewhat more resilient in a downturn and help to insulate the overall practice. While we are glad we did it, the governmental clients are getting as caught up in this mess as our private clients and may not be the stable work base we had hoped for. Do you have some suggestions or tactics for weathering this storm?
L.K., Kan.

Dear L.K.,
No doubt about it, hard times … they are a’comin’. However, anyone who has been around this business for any length of time realizes that cycles of good and bad times are the norm. The overall consulting industry is going to ebb and flow with the economy in general. Depending on market mix, geography, and management from one firm to the next, some will be more affected than others. Many firms thought the world was ending in the earlier 1990s, and then once again post 9/11, but most firms have done well in years since the last downturn, and will do well once again when this storm runs its course and passes. The trick is to still be here when it does.

Be honest with yourselves. Do not go into denial. If you’re already in trouble or potentially heading for trouble, admit it and deal with it as soon as possible. Develop a set of contingency steps you will take based on several best case and worst case scenarios that you imagine may occur. Don’t wait to figure out what you will do when monthly billings drop to X or cash reserves approach Y; have those actions thought out in advance and be ready to implement them quickly.

Stay highly disciplined as a business. Regular schedules should be maintained (or developed) for timesheet submittals, project manager reporting, invoicing, monthly financial statement preparation and review, account receivable follow-up, et cetera. Do not get sloppy and let routine processes wither away.

Over-communicate with your staff. Once you have assessed your circumstances and have your thoughts together, share them with all hands. Tell them the truth, even if it is ugly, but couple the honest state-of-the-union report with your tactics and strategies for coping. If there is ever a time when management needs to be credible, it is in a crisis. Be sure to frequently and regularly update staff on where things stand at any given moment as long as the tough times persist.

Should you need to reduce staff, cut hard and deep enough to only have to make the reductions once, even if that means you might reduce more than you need to and those who remain might have to put in extended hours and overtime. It is much easier on folks to have these reductions occur once instead of repeatedly revisiting the trauma of watching others forced to leave one or two at a time over weeks or months. When making staff reductions, maintain symmetry to your overall average payroll cost per person by making cuts at all staff levels and not just thinning the lower-paid ranks.

While payroll is the single largest cost for all consulting firms, it is still worthwhile to take a look at reductions to what non-payroll cost may be subject to cuts or deferrals. Marketing and sales are an area ripe for review. Consider reducing new client development activities and costs and concentrating on marketing and networking your current and past clients that are more likely to produce near-term work gains. If existing clients can’t directly add to your current backlog, perhaps they are in a position to introduce you to others who may.

At the end of the day, every business is nothing more than a mechanism generating a series of cash flows in and out. To stay in business, cash flow in (or capital on hand) must be greater than cash flow going out. If you have not already done so, and it is not too late, arrange to increase your line of credit limit. If you have short-term obligations coming due, negotiate to stretch out the payment terms for months or years forward. Meet with your landlord and seek to defer a portion of your monthly rent until things improve. If you have unused assets, sell them. If you own some whole life insurance policies, borrow out the cash value. Consider if you might be able to raise new capital by selling some additional ownership in your firm to others. Be creative in the search for ways to extent your cash flow.

Finally, when this storm passes (and it will), take an honest look and see what you could have been doing differently in the years leading up to the downturn and learn from that in planning how to go forward. Were you managing the firm closely enough? Were you in the right market segments? Did you rely too much on too few clients? Which clients, vendors, and staff really stepped up and joined with us in making the sacrifices that saw you through? What should be your strategic plan going forward? Where are the future market opportunities? Do you have the management acumen and other human and non-human resources to continue to go it alone or should you consider looking to merge or sell the firm? In general, how do you ensure that when the next downturn hits you will be better prepared than you were this time?


Get answers to your questions about design firm and project management, finances, marketing, and related topics by sending them to Q&A c/o: CE News, 330 N. Wabash, Suite 2525, Chicago, IL 60611, or faxing them to CE News at 312-628-5878. Include your name and telephone number in all correspondence. Your name will not be used in connection with published questions. David Wahby is president of Wahby & Associates (www.wahby.com), a management consulting firm serving A/E clients. He can be reached at 616-977-9756 or via e-mail at wahby@wahby.com.


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