I, together with some stellar colleagues, ran a business that enjoyed 13 years of unbroken growth. But no one defies gravity forever and even the best-run businesses will face a downturn, eventually. So come a downturn, what should you do, and when should you do it?
Unless your business suffers a shock calamity (not that uncommon, actually; founders get ill, clients implode, fraud takes place, etc, etc), downturns don’t come out of nowhere – there are always warning signs.
So the first thing to think about is whether your business is already showing leading signs of difficulty, irrespective of whatever’s going on in the macro economy. Some thoughts:
- Are bad debts growing? Could it be your clients are the canary in the coal mine, or it could be that your service standards are slipping, making clients reluctant to pay for poor service?
- Are the margins in your “core” client base shrinking? This can be masked by exceptional income elsewhere boosting the top line, but “core” margins will diminish over time, unless you constantly refresh the offer, as clients take matters in-house; as your specialist product becomes commoditised; as competition drives down prices. So maybe your product is past its best?
- Is it becoming harder to win new business? It’s always hard, of course, but firms that are really on top of things should be returning hit rates >70%. If you are no longer getting there, is it possible that the business has become a bit “stale” (staff moaning when new business opportunities come in is another warning signal)?
- Are staff numbers too stable? It’s healthy to have fresh blood in the business, and natural that good people get itchy feet (poor people often stick around, as they can lack the confidence to move). So if you find that spontaneous inbound recruitment enquiries have stalled and that no one is leaving, could it be that your “employer brand” has issues in the marketplace (and if so, why)?
And there are the more obvious signs – steadily diminishing margins; high staff cost to income ratio; weak productivity numbers; replacement of prestigious client names by those of unproven or lesser quality.
Beyond that, I have found one of the best indicators of trouble ahead is to look across the Atlantic, and see what’s happening there. I have worked through three recessions so far, and each was preceded by widely reported, consistently deteriorating economic news from the US.
We live in unpredictable times and opinions are split on the impact of Brexit, which makes forecasting harder, but even if you are in the “it’s all going to be marvellous” camp, I think it’s worth following informed commentators looking at the state of the US economy, to get advance warning of what could be coming here.
If bad times are on the way, then the first rule of planning is to do your planning, before the bad stuff hits – fix the roof whilst the sun is shining, as it were. Because once you are in the midst of it, watching clients and income evaporate, you won’t be in a fit state to plan coherently, and you won’t have much time left, anyway.
There are two things you need to plan for, and execute – fast – when the time comes. The first is cutting costs. That means getting rid of people (measures like cutting everyone’s pay to save jobs are noble, but difficult to implement).
Discretionary spend everywhere else should come under the microscope of course, but non-staff costs are generally too small to help much. You have to cancel an awful lot of Uber rides to save as much as losing even one Director’s pay…
When looking at people, I draw up a list with three basic columns: People who are vital to the future of the business; people who are solid performers; people who are marginal. Doesn’t matter how senior or junior they are, nor how long they have been with you. The aim is – after taking legal advice– to remove all of the marginal folks and as many of the next group as the business can stand.
How deep you have to cut depends on how bad you think things will get, so work out what you need to do if income were to decline 10%, 20% and 30%.
It’s ugly, but not as ugly as doing too little too late, or over-reacting in the heat of the moment. And even if the bad times have not yet arrived, shouldn’t you be moving some of these people on, anyhow?
Second thing is to bolster the top line. There are two parts to this. The first is the state of your offer and the positioning of your business. If you have let that slip – not offering the right range of services, not modernising existing products, not expanding sectors, falling behind competitors, that sort of thing – then you had best set to, to improve your offer while you have time. It’s never too late to start.
And the other part is fighting, biting and scratching; working harder than ever for every scrap of business out there. Look at every single client and think what additional services you could provide to them; look at every client and check you are being paid for all the time being spent.
Look hard at your marketing and new business effort – are you targeting the right potential clients and using your marketing to reach them. If you are not spending money on this whilst you can, you will regret it. If you are spending money going after ill-defined clients, you will regret that, too. Are people out of the office regularly, networking and attending events? If not, why on earth not?
And have you got your new business processes in great shape? Do people know what they need to do to win clients? Are they doing everything they should? Are proposals and pitches the best they can possibly be (as opposed to re-treads of what’s been done before)?
You really have to put your foot down on these things, to make them happen and you have to show visible leadership in the process.
It’s not easy and it’s certainly not fun, but if you think bad things are on the way (today’s FT – 14thAugust – makes serious reading: ‘Bond market flashes ominous warning over US and UK economies’…) then you need to get your thinking cap on.
As always, there’s much to do and time is short, so good luck and get cracking.