Thoughts on ways to improve the management of professional services firms

Thursday, November 06, 2008

Economics of professional services - surviving recession 5: expanding the business 1

In my third post in the surviving recession series I emphasised the need not to simply freeze all new spending since this was likely to cripple your chances of doing the new things that might be required to survive a downturn. This is especially important if you want to grow the business despite the recession.

Just because the economy has gone into downturn does not mean that you cannot increase billings in your existing practice areas, nor expand into new areas. However, you also need to be aware of the problems involved.

The starting point is to understand your marketplace.

How bad is the contraction in your key areas? If the market is down by a third, and this happened in a number of professional services areas in the Australian economic downturn over 1990 and 1991, then you have to increase your market share by just over fifty per cent to maintain constant fees.

If you are already the market leader, this may in fact be impossible. In this case, you will need to consider new areas if you are to maintain or increase billings.

The next point is to understand your competition. They will be facing the same problems, and may respond quite aggressively. You need to be able to understand this and take it into account.

An example to illustrate.

The 1990 crash meant that all the big shops suddenly started looking for new work to try to cover their fixed costs, in so doing bidding for jobs that they would not have considered before. In the case in question, the firm (the consulting arm of a big consulting firm) had a survey centre whose work had dropped very sharply.

The Australian Department of Defence wanted a capability census carried out of a small but important local sector. This involved identifying and then contacting every industry participant, writing the results up in a standardised way to allow the Department to make judgements about both existing capabilities and capability gaps.

Defence industry was one of our core areas. We really wanted this job, cut our costs as much as we could while putting forward a very detailed methodology. The Defence area in question wanted us to do the job because they thought we would give the best result. However, without giving away information, they indicated that the big shop had come in with a much lower offer, making it very difficult to reject them even though their methodology was not as good. We and the big shop were invited to put in revised offers.

We really agonised over this one, Finally, we told Defence that we could not lower the price further because this would almost certainly risk a cash loss on the job. The assignment went to the big shop.

Later when we found out the tender price (tender results of this type are on the public record) we discovered that our opposition's price was 60 per cent of ours. We knew our costs very well. It seemed clear that they had no idea of the real costs involved. And so it proved. The job took twice as long as expected at a cash out cost on our estimate more than twice the tender amount.

The third point is to understand your clients. In a sense, the starting point in surviving recession is to try to keep what you have.

Now this one may seem self evident. Of course you need to understand your clients. You do, don't you?

The problem is that understanding clients is quite complicated and is actually not well done because it involves interactions at a number of different levels. Many firms are really quite bad at it.

I will look at the detail here in my next post in this series.

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