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  • Writer's pictureBen Paul

In tough times, what type of firm are you?

In Tough Times What type of firm are you?

What type of firm are you? In professional services, it is not uncommon to see year-on-year growth. Certain sectors have experienced yearly growth for a number of years now. However, the economy is slowing and even if this isn’t impacting you right now, most businesses will have years where they find their growth has either slowed, halted, or at worse, declined.

In the private sector, many companies take measures to please either their shareholders or the board of directors. Ultimately, in any private sector firm, companies are built to make profits and reward the owners. These rewards are mainly financial but are now also linked to achieving goals and doing societal or environmental good.

For many professional services firms where the partners/directors are also owners of the business, this relationship between executive decision-making and the need to maintain salary levels of the owners creates a unique tension. It can be very tempting to take short-term measures to ensure current earnings remain the same.

Even if the Management Team aren’t the owners of the business, the need to please/placate the partners/directors they are employed by has a real effect on the decisions they make. In this background, how firms react in tougher times is a good indicator of how successful they will be long-term, and whether they are likely to see substantial growth going forward.

Below are a few examples of how firms react in a recession, and what this might mean for them going forward. I say ‘might mean’ because not even Nostradamus could predict the future correctly every time.

What type of firm are you?

1. Investors in marketing and innovation

Studies have shown that after major global downturns like the GFC, those that invested most in marketing and R&D were mostly the firms that achieved the quickest bounce back and the highest growth post-recession. This excellent article in the Harvard Business Review by Nirmalya Kumar and Koen Pauwels, provides some research and details that support this.

For professional services, it may mean some short-term pain, in the form of a reduction in partner/director drawings. But it does mean that your market position will likely be (at the very least) maintained and more than likely it will grow against the competitors. The long-term pay-off is likely to be increased drawings in the future for the owners, and as a high-growth firm, it means that the top talent will likely want to work for you.

2. Panic work buyers

While I fundamentally believe that most purchasing decisions for professional services are not done on price, it does not mean that some firms when faced with panic, won’t start reducing their fees. This short-term thinking can be heard when those bidding for the work use phrases internally like, “let’s just buy the work” or “price it to win” or “we have to put a competitive fee in to keep our people busy.”

These are all understandable emotions, but this is a very dangerous tactic to follow. Firstly, even if you think it is short-term or a one-off, you’ve now created a new price expectation in your customer base. It takes a lot of time and effort, and it is really hard to raise rates significantly once you’ve hit rock bottom.

While this may help keep people busy, it is at a much lower profit rate. Heed the lessons from industries like construction where some big players have gone under doing this. It’s far better to work harder do more BD and try to grow your market share as this article explains.

3. Confident rate risers

If you can’t grow your work, the other lever you can pull is to increase your fees. With inflation all around us, this is most likely necessary and, in some ways, easier to justify. The tricky part is, how much of a rise will your clients’ stomach when they are also finding economic times tough?

However, if you are confident and can articulate the value you provide, you can try to increase your rates. This helps maintain where you are, but without an increased marketing, BD, or R&D investment (money & time), your client base won’t grow much (if at all).

4. Slashing costs (not people) for the status quo

This is very common amongst many firms. Reducing costs to maintain Partner/Director earnings won’t get your firm “Rockin’ All over the World” (excuse the bad rock music pun!) Management Teams are called in to look at their budgets and go through them line by line looking to reduce costs. This means that planned activities get canned.

Why do firms do this? To make sure the Partners/Directors, those with equity in the firm who get paid by drawings, maintain the same earnings as the previous year? On an individual basis, it’s easy to understand this approach. Most of us live to our means, in fact the majority of people do live pay cheque to pay cheque. Therefore, it is hard to take a reduction in salary, particularly when you are working extremely hard.

However, firms that do this are going to find themselves locked into a cycle of stagnation with little or minimal growth. Owners of a business, if they want that business to be successful, need to think about what’s good for the overall firm first and then their own personal earnings second. That’s if they want long-term sustainable growth.

5. Head count slashers

Certain sectors in professional services do this more than others. When fees are down, they look to remove people, and start with support staff or business services. Then they move on to those doing the least amount of billable work.

In the short-term it works, but it is costly in terms of restructuring fees and morale. Most people will have experienced a restructure in their firm, not many would look back on it as an enjoyable time in their working life!

The firms that do this a lot will find it harder to recruit the best talent, as the vast majority of employees value certainty of work and income. A concertina approach to recruiting and restructuring is not a great way to build a long-term healthy firm.

Conclusion – choose your approach and stick to it

What type of firm are you? When faced with rising costs and reduced income, having a long-term vision and sticking to it is not easy for any business owner or management team. However, the brief examples and outline above should help you decide which course to steer onto with a bit more clarity.

What’s important is that all the key stakeholders in a firm agree to that course and that the vast majority are on board with it. This part is really tricky as you tend to have partners/directors at very different stages of their careers and working lives, which means their visions for the firm will also be very different. It pays to remember that a focus on the right areas can pay off handsomely in both the medium and longer term.


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