Economics of professional services - surviving recession 2: know your business

In my introductory post in this series, I suggested that we had probably made every mistake in the book in responding to the severe downturn that hit the Australian professional services market place at the beginning of 1990, the last major downturn to hit professional services, at least in Australia.

Before describing some of our errors, I wanted to make a basic point: know your business. This may seem self evident, but in my experience the most fundamental error that firms make when facing trouble is to focus on corrective action without linking that to the nature of the business itself.

Most firms facing economic challenges respond in a small number of ways - they try to cut costs, they look for new business, if things are really bad they look for merger partners. Each has its place. However, the actual action taken has to be consistent with the firm's underlying business. To illustrate.

We had introduced an external director, a very senior experienced business executive with a sales and marketing background, to provide independent business advice.

As the recession hit and fees dropped, his advice was to cut back spend to the level required to restore profit. This meant retrenching professional staff. In start up, we were reluctant to do this because  it meant losing productive capacity and especially people whom we had invested in and were just becoming productive.

Both points of view were equally right, both equally wrong. Neither side knew at that point that the bottom of the downturn in the economy was then eighteen months away, a long period when you are struggling to survive.

Our director's business experience in sales and marketing lay in cyclical areas with considerable pools of trained people. The logical business response to downturn was to cut costs, then rebuild as the downturn came to an end.

Our business was different. Our productive capacity was directly related to staff time. Because we were working in a new area, developing new types of professional services, we had had to train our own people. Apart from loyalty issues, staff cuts meant a longer term reduction in productive capacity, not something that could be turned turned round quickly.

If you have to discuss serious business restructuring issues, please do so off-site. Our board meetings became difficult affairs focused on arguments about the quantum of the required cuts. Staff quickly became aware of the nature of the dispute. Enthusiasm and productivity dropped.

I said both sides were equally right and wrong. We did need to make cuts. However, instead of focusing on the cuts themselves, we should have focused on the business - what were core activities, what development activities might be deferred, how long were projected pay-back times and so on.

Had we done this first instead of moving straight to a discussion focused just on financials, we would have been in a far better position to address cost issues in a sensible way.

Each firm is different. The key lesson is that effective action in a downturn starts with the business, not the financials as such.

Return to the entry point in the series.