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Tough Times Ahead

Dear Dave
As I sit down to write this question the stock market is now down 50% 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 and 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?

Dear LK

No doubt about it, hard times they are a coming. 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 90’s, and then once again post 9-11, but the majority of firms have done very 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 ready to quickly implement.

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, etc. 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 were ever a time when management needs to be credible it is in a crisis. Be sure to frequently and regularly update the staff on where things stand at any given moment as long as the tough times persist.

Should you find yourself in need of making staff reductions, cut hard and deep enough to only have to make the reductions once, even it that means you might reduce more than you actually need to and results in extended hours and overtime for those who remain. It is much easier on folks to have these reductions occur once, and not have to repeatedly revisit the trauma of watching others forced to leave one or two at a time over weeks or months. When making staff reductions keep a focus on maintaining 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 concentrate on marketing and networking your current and past clients which are more likely to produce near term work gains. If existing clients can’t directly add to your current backlog, perhaps they may be 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 (and 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 extend 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. Had we been managing the firm closely enough? Were we in the right market segments? Did we 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 us through? What should be our strategic plan going forward? Where are the future market opportunities? Do we have the management acumen and other human and non-human resources to continue to go it alone or should we consider looking to merge or sell the firm? In general how do we ensure that when the next downturn inevitably hits we will be better prepared than we were this time?

Wahby and Associates