Its been a little over 4 months since my last post, mostly due to a) the birth of the newest member of the Specht clan and b) the management team and I practicing what I preached in the last three posts. I can report, with great happiness, that our efforts (home and work) are paying off – my newest child is wonderful and our clients continue to be generous with work, even beyond my fondest hopes.
The stresses of the economy still exist. In both my own company and many for whom I consult, I’m hearing frequent and ongoing complaints about clients (who are cheap because they won’t buy), sales team (who are lazy because they can’t close business), consultants (who are prima donnas that don’t appreciate how hard it is to close business), managers (who are morons because they need to [fill in the blank] faster, better, more often etc.), and employees (who are ungrateful because they don’t appreciate how hard it is to make payroll and health insurance payments). Put another way, everyone seems to be complaining about everyone else. So, for those modest few that care about my opinion, I offer this:
First, everyone take a deep breath, relax and develop a sense of empathy. Those around you are doing their best in tough times, just like you. Our clients are afraid for their jobs and trying to save money when they can. Our sales teams are hearing disheartening “no-s” more often then enthusiastic “yes-s”. Out consultants feel extraordinary realization and utilization pressure AND get the onsite impact of the client’s fear. Our managers, god bless ‘em, are trying to do the best they can with short staff, short budgets and long hours. And every employee in every consultancy is wondering when a layoff is going to take their job away.
Second, strap on a pair and man up. This is a hard business played out on a complex field of complex products, high expectations and difficult business problems. If you can’t deal with that, get out and send your clients and best staff to us and I’ll see they are welcomed and well cared for. Until then, see the preceding paragraph.
Lastly, of my relatively small group of close friends, I am the only one still employed. I see the effect of layoffs in a very direct and personal fashion. Among my professional network, close to 1/3 are looking for new jobs. As a result, I spend significant time doing referrals, networking and writing letters of recommendation. So, if anyone reading this is looking for truly awesome Microsoft technology professionals almost anywhere in the country, please drop me a note with what skills you need and I’ll be happy to make introductions.
So, because you recognize my astonishing genius, you’ve taken my advice and developed an effective client management program that increased your revenue pull from existing clients and lowered your cost of sales. However, its still not enough to meet your profitability targets. So what do you do next? As I mentioned in my introductory post to this series, consulting is very simple: if you manage your opex, its either about top line revenue or personnel costs. In this post, we are going to look at the cost issue.
Why look at cutting personnel costs before finding new revenue sources? After all, firing people exposes you to legal risk, emotional angst and long term reputation risk (I’ll discuss these in detail in another post). Three reasons exist for looking at this first:
- Its faster: You can reduce personnel faster than convincing clients to buy new services from you.
- Cost has to be productive: If you are not getting revenue production out of your investment in staff, now is the time to make the hard decisions.
- Earn your salary: You should have a system that measures and evaluates performance as part of running a PSO. If you haven’t shame on you. Get it done now.
So, how do you do this:
- Establish your targets and your plan
- Go after management first
- Communicate clearly and often
Before you do anything, understand (based on your revenue forecast) what your personnel cost has to be to hit your target margins. Assume you have a $1M revenue forecast with target gross margin of 45%. That means, you need personnel costs (don’t forget to load it with taxes, insurance, 401K, non-billable travel, salaries, etc – all the direct costs of having someone working for you) of no more than $550K ($1M *(1-.45)). If current costs are $700K, you need to cut $150,000 in costs. If the average cost of an employee (fully loaded with direct costs) is $125K, you’ll need to layoff at least one, perhaps two people.
However, before you consider layoffs, think about some other ideas. Is your team sufficiently tight knit that everyone would consider reducing the variable comp to save the $125K rather than seeing someone leave? Could you get savings from canceling non-bill travel activities? Can you reduce salaries but still keep everyone together? This subject was pretty well covered in a New York Times article so I won’t cover the same ground.
Once letting someone go is the option, what to do next?
Go After Management First
I’m in management, so don’t take this as a call for proletariat revolt. My rational is pretty straightforward:
- Management runs the company and gets a premium for doing so. If they weren’t able to position the company correctly, they should be penalized by losing their jobs first.
- Management jobs cost you more. You can get bigger economic gains from getting rid of fewer managers.
- Consulting staff has the knowledge of your products and customers. They will lead you out of the downturn because they’ll be there to do the work as clients need it done. They can survive without a manager; you can’t survive without them.
Any reduction in staff is painful, so how to you keep everyone positive?
Act Fast/Communicate Clearly, Early and Often
Once a decision is made to layoff staff (regardless of level), make the decision, then execute. Don’t wait days or weeks – do it quickly. The longer you wait, the more likely everyone will begin to find out. Don’t delay because someone is key to a sales cycle or project – if they really are key, you shouldn’t be letting them go. Just get it done. This subject (how to conduct a layoff) is covered in a bunch of different forums. One I liked recently can be found here.
Once you execute, give the remaining team lots of well targeted information as early, and as often, as possible including how you made the layoff decision and who got let go. Good communication is especially important in troubled economic times as, in the absence of clear information, people will make up their own stories (always negative) of what’s really going on.
With respect communicating to staff, I have two ways I like to see this covered:
- When times are clearly worsening, do a comprehensive meeting, email, etc that discusses:
- Current company financial state: Cover the good and bad. Be clear about your forecasts and the conditions on which they are based
- Discuss the alternatives you are considering
- Talk about what you’ve already done
- Talk about the timeline for the next set of changes
Update this periodically in a similarly comprehensive fashion by comparing what was predicted, what you promised you’d do and what you actually did.
Then, periodically, send updates on:
- Sales pipe
- Staff performance (UTE, Realization, Goal) at the individual, group and corporate level. Include sales team progress against quota.
- Progress against overall goals
Remember: you can’t over communicate. Use email, blogs, text or whatever technology works best for you to get the message out frequently. If you can, do company-wide meetings or phone calls as often as is feasible. Also, don’t forget that a couple of lunch meetings a month with staff, where you connect personally, goes a long way to helping the message you want take hold in the way you want it to.
In my next post, we’ll take a look at finding new revenue sources to vector revenue up rather than down in a bad economy.
This year, we’ve had 9 straight months of increasing unemployment claims topping out in November at 6.7%; a major crisis in the credit markets; the failure of a significant number of supposedly untouchable financial and quasi-governmental institutions; a significant challenge to the financial health of our northern European banking brethren; a looming crisis in our primary, remaining manufacturing sector (the auto industry); and the typical politically charged rhetoric from Washington. Fear, uncertainty and doubt are being sown in the market place and even ebullient (although I’d describe him as manic) personalities like Jim Cramer are making incredibly negative comments about the domestic and worldwide economic forecast. In short, everyone says things are going to suck.
In our space, I think its fair to say that new client acquisition is going to slow and, therefore, become more expensive on a per-capita basis. I’ve talked with friends in each of the regional sales teams for MS and all confirmed that deal flow is slowing, becoming harder to manage, and, in many cases, the customers are just not making a decision to buy. Therefore, the consultancy business models that depend on high margin MS software (think Dynamics) are, possibly, going to feel the biggest immediate impact as new, large deals become more scarce.
As consulting managers, what can we do? Consulting is a very, very simple business model. Revenue comes from a narrow array of sources and our only real expense (assuming we manage opex competently) is salaries. So, we either have to cut salaries to align expenses to revenue, increase revenue or do both. In this next series of three posts, I want to take a closer look at:
- Increasing revenue through better attachment to existing clients
- Cutting expenses through effective staff turnover
- Finding new sources of revenue from our existing clients