Have you noticed the storm clouds on the horizon? A more difficult economy to navigate?
This subject of risk and that of resilient innovation has been a focus at the recent DFC Leadership Summit on the Business of Design in New York and at the Georgia Tech Symposium on the Future of Practice, hosted by the College of Design and its architecture school. Gravitas is not in short supply.
Many of the informal conversations at these meetings and others indicate that the state of the profession is quite positive at this moment in time. After all, there is full employment, even a shortage of licensed architects and engineers. Backlogs are strong. Revenues per full time equivalent staff are up again this year. Anecdotally, quite a few firm leaders say that productivity is at record levels. It is not unusual to hear that profits are above goal levels. As for growth, I’m hearing that many firms believe they will be somewhat larger next year—new sector specific growth is expected. Short-term confidence is good due to new business put under contract.
However, for the longer view, there is serious caution in the air. There is not a lot of complacency going on even with record revenues and profits.
To sum up the mood: Business as usual is not a smart nor viable option. We should not allow ourselves to float along in denial. Let’s explore the situation we find ourselves in. Rather than whine, how about considering a well-designed contingency plan to preserve and even enhance financial success. Today’s focus is not just capital preservation in the face of new threats, but your own leadership health and wealth.
As we have discussed, part of a leader’s game plan and confidence resides in the belief that the firm’s own strategic plan is strong. And as part of that plan, it’s always wise to have a contingency plan subset—in up or down economies. But when developing contingency strategies, firm leaders can sometimes get distracted.
The last eight years have provided just the right climate for us to ignore threats. These warning signs include policy change and political change, socioeconomic issues, technology changes, demographics, global shifts, and the financial markets that could falter and with that bring negative aftershock unlike any we have seen to date. Even today’s strong economic sectors are changing. For instance, check out the state of the retail sector. This shift and slide prove that a rising tide does not automatically raise all boats. Change is complex. How can we forget 2008?
Everyone who cares about financial resilience in his or her firm should keep two files handy—one file titled: “Profit Philosophy (Our Commitment to Profits)”; and the other file titled: “Cutting Costs.” In these files, you can keep articles that will help you to stay motivated to increase, even double your profits in the short term and preserve your capital in the longer term. Both files will help you create future wealth. Both files will be your friend to help you sustain your organization. You will sleep better at night.
The Idea Is to Spend Wisely
With Scott Simpson, I wrote a practice book called How Firms Succeed (now in its 5th edition). In this book, we discuss strategic and non-strategic costs in practices. Strategic costs bring in the work. Non-strategic costs are those necessary to run the practice. The objective is to spend wisely. We have learned that some firms spend based on precedent. In other words, they spend habitually without questioning the value of the expenditure to the firm’s long-term health. This is a mistake. These wasteful expenses can unintentionally and quickly weaken a firm’s financial position. It’s usually not a conscious thing, of course. But it happens. Sometimes it happens because of old habits, like outdated marketing expense strategies. Sometimes it’s due to ignorance; other times, laziness.
Low overhead can be a competitive positive for your firm. We like the idea of zero-based budgeting when looking at the 24-month budget horizon of firms. What is zero-based budgeting? Simply that each business expense must be justified. It sometimes helps to have a resident bad guy in the firm. This is the voice of responsibility, the person who asks the tough questions such as: “Is this trip necessary?” A bottom-line attitude person is good to have around. These people pay for themselves many times over. They scrutinize the cost of each budget item. While this may seem mundane, it works.
A contingency plan should respect the mission and vision of the organization. It also protects the positive aspects of the culture of the organization. But it also cuts costs. If there is waste, it is cut. Firms of all sizes usually will admit that they are not where they want to be from an expense point of view. Therefore, with due consideration, firms can rid themselves of unnecessary expenditures. In resilient firms, every business expense must be justified.
In regard to financial fitness, let’s look at 12 sample action items:
• Do question and then change the spending habits of your organization.
• Do streamline your meetings. Some organizations report that 50 percent of meetings are wasteful.
• Do ask your vendors for 8-10 percent savings.
• Do provide role model leadership on going lean with your administration and management overhead expenses.
• Do clearly communicate performance expectations using your own five metrics of performance definition. These can be counted on one hand and your staff will remember them.
• Do reward your top employees. Put in place a meritocracy culture.
• Do sign all the payable checks yourself.
• Do review and then consider enhancing your marketing budgets.
• Do review everyday expenses such as travel, office supplies, equipment.
• Do declare freezes—every organization has a blind spot that ignores the “spending machine” culture found in many professional practices.
• Do emphasize that no cost is too small to worry about.
• Do stress with your professional team that the priorities of your firm must serve your mission—your reason for existence.
Without profitability, design firms have no future. What is the flip side of the substantial risks that hang over professional practices today? The substantial profits taking those same risks can generate. The point is, don’t buy the line that the economic storms on the horizon will damage your firm. It just isn’t so—that is, if you are prepared. With a strong contingency plan and a belief in your value, your actions will be guided by your expectations, not your fears. You can weather the storms.
And remember, with every economic and technological shift, there’s always a shakeout period. Downturns don’t have to be a death knell; they can be your wakeup call. Foresight is one key to your firm’s future success.
James P. Cramer is the founder, chairman emeritus and a Senior Fellow of the Design Futures Council.
Excerpted from DesignIntelligence Quarterly.
Photos from Unsplash.