When Things Slow Down
Aug 17, 1998
I would be surprised if more than one of our readers hasn’t said to themselves recently, “We really ought to be thinking about what we’ll do if things slow down.”
Well get ready folks, it’s going to happen. I’m not saying that these 300-point drops in the Dow Jones Industrial Average scare me because they don’t. But I do see some other forces at work out there that tell me this incredible ride we have been on in this great economy can’t last forever.
The White House scandal, for one, isn’t going to help the economy. Take a look back and see what happened during and immediately after the Nixon-era Watergate crisis. The market cratered and the economy went into a recessionary tailspin that lasted nearly a decade.
Financial woes in Asia won’t help either. We have already had a number of clients and readers tell us that projects they were working on were cancelled and/or had big losses due to currency devaluation.
On the other hand, we do have a very strong underlying economy. Unemployment is low, inflation is low, interest rates are low, and growth is still decent. The most important thing when it comes to sustaining a good economy, in my opinion, is confidence. Not only do you need strong consumer confidence, but strong management confidence. Business managers have to keep writing the checks that keep this whole thing moving. And the information age we are in could really revolutionize the way the world does business— and we are right in the center of it.
But experience proves that it’s human nature for people to lose confidence every once in a while. People get scared and start reacting in ways that are counter to their long-term interests. Business managers start cutting to sustain profits and growth stops. Then they have to cut some more, and it’s easy to get caught in a downward spiral.
So the issue is not “if” or “when” recession will strike. It’s “what” to do when it does occur so you aren’t hurt (or at least not mortally wounded). Here are my suggestions:
Get out of debt. It makes sense to me that if you want to weather an economic storm you’ll be better off without a lot of debt. It clouds your thinking, makes you think short-term, and burdens you psychologically. The worst thing when you have too much debt can be the bankers who start telling you what you can and can’t do with their money. That becomes a bigger and bigger problem if you aren’t making any progress toward paying it down.
Keep a reasonable salary structure. Right now the labor shortage predicted by Drucker 50 years ago is real. A/E/P and environmental firms are going to greater lengths than ever before in their attempts to hire and keep good people. It’s true that paying larger salaries is easier to finance than paying low salaries and bigger bonuses. On the other hand, it’s easy during the good times to get your pay rates so high that you can’t be profitable. Be on guard for this so two years from now you won’t be paying us to tell you that you need to take a pay cut!
Confront the low performers now, not later. It’s easy during the good times to allow the sacred cows too much freedom. The money is easy and it’s more fun to be a nice guy so you don’t put too much pressure on these people. But instead of being thankful for the job you have allowed them to stay in, these people are usually the ones with the worst attitudes. They resent the fact that they are no longer getting promotions or big pay increases, even though they may be two jobs over their head already. Some of these people can be turned around with some straight feedback, but not all. It’s better to deal with these situations now while there may still be time for a turnaround then later, when the only choice will be “adios.”
Spend more on direct marketing. Spend, spend, spend now while you can afford it. You need to make every effort to get your name well known with the clients and potential clients that you are targeting. That way when times are soft, you’ll be getting the calls for what work is out there,not some other firm. I’ll even go out on a limb and suggest that most companies need to increase their spending here by 3% to 5% of net service revenues. That’s a lot, but the payback will come in higher volume, better margins, and less time wasted cold calling.
Hire more temps/work more overtime. Make the capacity you have go as far as it can without adding permanent overhead in the form of office spaces, computer leases, and regular employees. Because the truth is, very little really is a variable cost in an A/E/P or environmental firm, except for temporary labor. You can’t just hire and fire full-time employees on demand!
Get sales and backlog reporting up to speed. There is no valid excuse for not knowing what you are selling and what your backlog is! Just accept that and do what it takes to track and report these numbers continually. These are critical to alert you on what’s coming down the road. Not knowing these numbers is like flying a plane without a fuel gauge. Only a fool would do that! Don’t be foolish. Realize how important these numbers are to your survival and know them.
Don’t just cut! Cutting unnecessary expenses is always a good idea. But don’t forget to invest, too, in the things that will make you more efficient, better marketers, and more competitive in the long haul. Your future depends on what you do today.
But unfortunately, too many firms in this business will reap today while the market is hot, not track the numbers that predict future performance, and in the process, set the stage for big troubles later on. This economy will not last and the long-term players will be ready for recession when it comes.
Originally published 8/17/1998
About Zweig Group
Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.