From what I can tell, most firms are responding to the economic downturn with the following tactics:
- reducing costs
- increasing productivity, utilization and realization rates
- reducing or eliminating capital investments
- some are aggressively hiring talent, others have frozen hiring
- exiting unprofitable markets
- increasing hourly rates
- unbundling pricing (tactics like adding photocopy and administrative fees to each bill)
Struggle is good for us humans. Name something worth having, or doing, that is easy. I wish everyone would stop carping and whining about the economy, especially the illiterate comparisons to the Great Depression. We are nowhere near that level of deprivation, or slowdown in economic activity.
I do believe the current recession is more of a “mental recession” than anything else. It’s a lack of faith in the future, coupled with great uncertainty about how the government is going to respond. I simply can’t understand why one bridge built to nowhere is a disgrace, but thousands of them to be built is economic stimulus. But that’s a topic for another post.
For now, the current crisis is an enormous opportunity for firms to help their customers grow their businesses. Professionals are needed more in a downturn than in good times.
As for what firms should do themselves, I suggest the following:
- Fire “D” and “F” customers—low value customers take up too much capacity that is better spent with “A” customers who value what your firm offers, and want more from you.
- Diligent customer selection—do not take all comers. Not all customers are created equal, and more business should not be a firm’s goal. Better business should be the goal.
- Innovate new services for your “A” and “B” level customers. Innovation is not efficient, but so what? The goal of your firm is not to be efficient, but rather to create value.
- As Peter Drucker points out, there are only two functions that matter in a business: innovation and marketing. These are the only two that create value; the rest are costs. The default purpose of marketing is not to increase revenue, it’s to increase profitability.
- Don’t take a hatchet to costs. No business has ever cut its way to prosperity. Some costs should probably be increased now, especially innovation in new services, talent, and retention marketing.
- Put more investment into keeping existing customers rather than attracting new ones, since the AICPA says it costs 11 times more to gain a customer than keep one.
- Consider outsourcing some of your back office and low-value functions. Not so much to save costs, but rather to free up capacity for performing higher value work.
- Segmentation of your value offerings is essential. Think about American Express’ Green, Gold, Platinum, and Black card offerings. In hard times, you need a Green card—that is, a low price offering—that also strips out value so you force customers to sacrifice value for a lower price. When times get better, they can then upgrade to a higher value—and priced—offering.
- Change your pricing. Establish a pricing panel with competent pricers, and take away authority for pricing from partners and managers who aren’t good at it. Stop billing by the hour and start pricing based on value. Your customers buy your intellectual capital, not your time.
- Agree on price and payment terms up front for all work, which will eliminate aging accounts receivables, collection hassles, financing, and administration costs. You’re not a bank.
- Have your pricing panel institute a policy of Change Orders for work that goes beyond original scope, and offer a 100% money-back service guarantee to all your customers in order to command a price premium over your competition.
- Do not, repeat, do not, unbundle your pricing. Charging for things like photocopies and administration is insane. Customers don’t value it—it’s part of your overhead, not their value proposition—thus you shouldn’t focus them on things they don’t value. I heard one consultant say the airlines were doing this by charging per bag, drink, etc. So what? At least they aren’t charging their top-tier fliers those things, nor are they charging for auto land and computerized navigation. Price unbundling is not a wise strategy for a PKF. Remember, the airlines are also giving customers a fixed price, communicated up-front (even the annoying charges), which most firms don’t do that hourly bill. Transitioning to fixed prices solves these problems once and for all. (Trailblazer Jay Shepherd has a great post on this on his blog).
- Stop obsessing about efficiency, utilization, and realization—they were formulated for manual workers in an Industrial Era and are not proper measurements for the success of a knowledge worker. Knowledge work must be judged on results, not measured by quantity of inputs. Emphasize effectiveness, innovation, creativity, enhancing intellectual capital, and customer service—all of which are not very efficient as measured by the antiquated billable hour and timesheet, but are essential if your firm is going to thrive in tough times, or good times for that matter.
One more point. We ask this question in nearly all of our programs. If you think of the three factors of production, what type of income do they generate?:
- Land/Buildings = Rent
- Labor = Salaries and Wages
- Capital = Interest, Dividends and Capital Gains
So where do profits come from?
The answer is: Risk. You cannot afford to not take risks if you expect to prosper and profit in any economic environment.
We’d love to know how your firm is responding to this current environment.