In December 2008, Baker Tilly hosted a joint seminar with Legal Risk LLP focused on the issues facing professional practices resulting from the credit crunch. Mike Huggins draws on some of the themes discussed and outlines twenty tips for managing in a downturn.
Boom and bust has returned with a vengeance. The period of consistent and sustained growth has come to an abrupt end following unprecedented turmoil in the financial markets. The consequences of the collapse in economic confidence are now working their way through the rest of the economy and firms look set for a period of falling profits, tight credit and little, if any, growth for some time.
Many professional firms are only just beginning to see their results being particularly hit, but there is great concern about what the future holds and what steps are necessary to protect their profits. League tables have appeared showing job cuts – a sign of the uncomfortable times we are going through.
Not all areas of work undertaken by professional firms have been affected, in fact some are booming. Many areas, however, have been and continue to be, hit hard. Firms are often keen to talk about their growth strategies but much more reluctant to discuss their recession strategies, either publicly or with their own people. That isn't to say, of course, that those strategies haven't been developed – only that they haven't been articulated. Such strategies normally draw on elements of these three different approaches to dealing with affected parts of the business:
| Approach |
Advantages |
Disadvantages |
| Wait and see, despite not having enough work to keep everyone busy. |
Keeps team intact for an upturn. Maintains morale in the short term. |
Staff underutilised and inefficient. Profitability plummets. |
| Slash and burn partner and staff levels to match work. |
Protects profitability in the medium term. |
Requires expensive hires to recover staffing levels on an upturn. Morale and profits suffer in short term. |
| Lowball on fees to mop up available work. |
Retains team for an upturn and keeps some cash rolling in to pay fixed overheads. |
Threatens profitability in short and medium term. |
It is possible to identify firms whose actions demonstrate a predominance of one of these strategies. Many firms, however, will apply blended strategies, tailored to the different parts of their business. Some firms are also taking the opportunity created by the downturn to address previously ignored long standing issues in the healthy parts of the business.
"The fundamentals of business never change: protect what you have, make better use of what you need, and always try to grow your business"
In many respects the fundamentals of business never change: protect what you have, make better use of the resources you need, and always try to grow your business. These maxims, however, have to be applied within an overall business strategy. Here are twenty tips on management in tough times.
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- Fees inevitably come under pressure during a recession as competitors target your clients. Now more than ever is the time to maintain the highest standards of quality and service and to build closer relationships with your clients.
- Don't jeopardise your business by increasing your risk profile without compensating controls being introduced. Now is not the time to cut corners to match trimmed fees; the quality of work must be maintained.
- Clients that might be considered second tier in boom times can be key clients in a recession. Reappraise your clients in the light of changed market conditions.
- In addition to the client list, the firm's other principal asset is its staff. Be a responsible employer. While some staff reductions may be necessary to protect the overall business, how the firm behaves in a downturn will be remembered for a long time to come. Treat staff sympathetically and keep them informed of your recession strategy.
- Consider whether good people can be retained by being redeployed, seconded or moved to part-time working.
- Where redundancies are necessary, try to do it in one hit rather than repeatedly unsettling the whole workforce.
- Maintain the financial management disciplines of prompt billing and tight credit control. Now is not the time to be sitting on work in progress or debtors. Turn it into cash as soon as possible.
- Look at the firm's finance facilities and watch out for any hardening of attitudes of the firm's bankers. Is the firm in danger of breaching any banking covenants? Is your present policy for paying partner drawings sustainable? Do you need to talk to the Government's Business Payment Support Service about more time to settle tax payments? An iron grip on cash flow is an essential precaution.
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- One danger of a downturn is that work is stretched to fill the available time, rather than completed in the most efficient way possible. This is a particular danger when a "wait and see" strategy (as above) is adopted. It should not be for staff to take this upon themselves. Efficiency should be maintained, and underutilised resources should be identified so they can be redeployed.
- A good management information system is essential to identify productivity and profitability by service line, sector, fee earner and client. Firms need to know the ebb and flow of demand, over and under supply of resource, the best performing fee earners and who the key clients are. It is only with this knowledge that resources can be deployed most effectively.
- In a downturn time can actually be freed up for productive use by ensuring only necessary activities take place, such as cutting back on non-essential travel and conference attendance.
- Most firms can readily trim their expenditure quickly just by cutting back on discretionary spending. It is also an opportunity to review all your suppliers and to shop around to secure better terms for essential items.
- Technology can help reduce costs. Video conferencing instead of travelling to meetings, for example, but in addition IT asset lives can normally be extended without too many adverse impacts.
- Few firms are actively hiring staff, but those that are can find good candidates without resorting to agencies and paying commission charges.
- Reform of the professions and the possibility of external capital had already started to change market dynamics even before the credit crunch. For many firms market conditions will if anything increase the importance of considering how the dynamics of their industry will change over the next few years.
- Many firms were already considering merger strategies to take advantage of market changes to come, and such strategies can also be a means of achieving economies of scale and diversification. There is also an increasing number of firms in need of a merger partner and the costs of merging are likely to be lower in the current climate.
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There is likely to be little or no overall growth in the market for professional services for some time. However, experience has shown that with the right strategy some individual players can fare much better than others.
- Now is not the time to stop all practice development activity. It is, however, the time to ensure that practice development expenditure is properly focussed and justified by results.
- Market conditions in many respects loosen the bonds between client and advisers, as clients themselves seek to ensure they receive best value for money for the services they need. Firms need to ensure they are getting through to these more receptive targets. It can be a golden opportunity to increase market share, and be well placed for the eventual economic recovery.
- Net growth, of course, also requires firms to retain their key clients in spite of the loosening of the bonds. Growth can't be achieved in isolation; service standards and quality must be maintained.
- Another advantage of identifying underutilised capacity among your existing partners and staff is being able to switch resources to practice development. This enables a proper, focused campaign to win new work to be led by the most appropriate people, not just those with the most time.
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Many professional practices will be in for a rough time over the months ahead. That doesn't mean, however, that all firms will be casualties. While the skills needed to manage in a downturn are more demanding, by applying those skills firms can ensure they survive and even emerge stronger once conditions improve.