The biggest threats to a firm are often predictable, preventable risks that leadership simply failed to plan for.
Most A/E and environmental consulting firms don’t go out of business because somebody wakes up on a Monday morning and decides to destroy the company. Usually, it’s a series of seemingly manageable mistakes that accumulate until one day the wheels actually fall off the car.
I’ve seen some pretty remarkable examples over the years. They’re worth remembering because every single one of them was preventable.
Take the 250-person A/E firm that had a bank line of credit with covenants they apparently considered more like suggestions than contractual obligations. They ignored the covenants, maxed out the line, and eventually the bank pulled it. Then the bank did what banks are entitled to do when they get sufficiently nervous: It shut the company down and collected on its accounts receivable collateral. A 250-person firm disappeared because its leadership apparently thought their bank would never pull the plug on them.
Then there was the 35-person engineering firm with a 67-year-old owner who had absolutely no ownership or leadership transition plan. He died suddenly of a heart attack, and the company passed by default into the control of his wife. She’d spent 45 years doing exactly what her husband told her to do, which was apparently excellent preparation for running an engineering firm. Except it wasn’t. The company had never prepared for the one event everybody knew could eventually happen.
Another firm had 17 people and an owner who was essentially the entire business. He was exceptionally talented and extremely capable, and he did virtually all of the important design work. He made more than $250,000 a year while nobody else came close to making a quarter of that. The owner always felt he would work as long as he could and then shut it down on his schedule. That might’ve worked for a while, but it created a business with no bench, no succession plans or even thoughts of succession, and no reason for talented people to stay. Eventually, they all left over about a 12-month period. The owner wasn’t ready to retire at all, and got left with a pile of projects that still had to be completed and nobody capable of doing them. Congratulations. He’d successfully designed himself into a corner.
I also remember a 100-person design firm where nobody really understood accounting, including the owner. He personally managed 13 different bank accounts because having 13 places to put money supposedly made the finances easier for him to understand. As he got older, he became less focused, eventually got divorced, and discovered that his soon-to-be ex-wife owned part of the company. He couldn’t afford to buy her out, and the business ultimately fell apart. Sometimes the biggest financial problem isn’t that you don’t have enough money. It’s that you have no idea where the money is.
Then there was the 550-person design firm that had allowed approximately 95% of its work to come from one enormous retail client. For years, this looked like a wonderful business strategy. Then the client pulled all of its work. The firm went into a tailspin from which it never recovered. Having one great client can feel like winning the lottery. Having one great client who represents virtually all of your revenue can be more like renting your company from them.
Insurance mistakes can be even more painful. A 150-person environmental consulting firm allowed its professional liability insurance to lapse for 30 days because of an administrative or accounting mistake. During that uninsured period, the firm performed a Phase 2 hazardous waste site assessment and issued a report saying the site was clean. But it wasn’t. And when construction began and problems surfaced, the resulting lawsuit started a chain of events that eventually brought down the firm. Nobody intended to save money by going without coverage, but an administrative failure produced consequences that were every bit as serious as if the lapse had been deliberate.
And then there’s the case nobody wants to talk about. A 30-person engineering firm didn’t have effective shop drawing review procedures. A construction error occurred involving an internal building bridge they’d designed. The bridge failed, killing more than 100 people and injuring hundreds more. The principal lost his professional license, and the firm went out of business. There are mistakes that hurt your profit, mistakes that cost you your reputation, and mistakes that change people’s lives forever. This was one of the latter.
The common thread in all of these stories isn’t bad luck. It’s failure to manage risk.
Owners sometimes become so focused on selling new projects, producing work, collecting fees, and making payroll that they forget they’re also running a business that has to survive the unexpected. They don’t read the loan agreements they are signing. They don’t train anyone on the business aspects of the business so they don’t develop successors. They get too selfish or egocentric and can’t retain talented people. They don’t understand their financial statements. They chase the big fish, catch it, and then let that one client become their entire business. They allow an administrative error to interrupt insurance coverage. They don’t establish and enforce real quality-control procedures. None of those decisions necessarily feels catastrophic when it’s made. That’s what makes them dangerous.
The best-run firms I know spend considerable time thinking about things that hopefully will never happen. What happens if our biggest client disappears? What happens if I die tomorrow? What happens if our bank pulls our line? What happens if our best people leave? What happens if we get sued? What happens if we make a mistake that causes serious damage? What happens if my spouse suddenly owns half of the company?
Those aren’t fun questions. They aren’t particularly optimistic questions, either. But they’re responsible questions. No one gives you extra credit for being surprised by something that was entirely avoidable had you planned for it
Some firm principals take risk avoidance too far. You don’t have to eliminate every risk. That would be impossible, and it would paralyze you if you tried. But you do need to identify the largest risks – the ones that could kill you – and make sure you have a plan for them.
One thing I have learned over the years is nothing good happens when you go out of business!
 |
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com. |
