recession-proofing a firm
It takes about three years to position a firm for surviving a dreary economy, according to business consultant Hugh Hochberg, principal of The Coxe Group, Seattle. “We've been telling clients for quite some time to expect a downturn in 2008 and 2009,” he says, while acknowledging that the depth of the current crisis has affected the residential market more than he and his colleagues had anticipated. “Certain firms are somewhat isolated from the weak economy,” he says. “Those specializing in high-end and resort homes haven't lost commissions; they're doing $7 million homes instead of $10 million homes. But most firms have been affected substantially more than that—mostly those in the condo market, which is dramatically overbuilt.” Hochberg, whose clients typically head design firms of fewer than 100 employees, offers these tips for tough times.
Operational. In many cities, building projects have started and stopped, and the usual operational cautions are doubly important in a down market. Get payment up front, if possible, and stop work when the checks fall more than 30 days behind. It's nonproductive to think your clients are the exception. Hochberg also recommends having three months of operating expenses in reserve, though firms with a good client base don't need a lot of cash on hand, he says.
Watch financial indicators closely from month to month. Two key indicators are how long it takes to get paid and the direct labor multiplier, which is revenue received for direct labor paid. (The average firm takes in $3 for every dollar it pays in direct labor.) Additionally, owners should keep compensation reasonable. Take the money out of profits rather than building in high fixed costs for salaries, and base bonuses on individual performance. This is also a good time to identify up-and-coming leaders and do what you can to keep them, rather than letting their entrepreneurial spirit compete with the firm. While many employees cling to job security in a nervous market, others may leave if they think the firm won't succeed.
Sometimes, downsizing is inevitable. Let economic forecasts, rather than wishful thinking, be the guide. “It makes sense to keep going on a line of credit if you expect a reasonable turnaround,” Hochberg says. “But if you accommodate everyone in the firm who isn't fully occupied, you're under-accommodating those who can do the most, and you'll end up weakening the overall firm. It's better to be stronger and smaller than weaker and larger.”
Strategic. Financial stability positions firms to move forward with new initiatives, and so does a deep understanding of potential clients' business models. Architects who provide more than architecture—confidence, connections, strategic planning—will be the first out of the block when things turn around, particularly in the multifamily and mixed-use sectors. “You're better off if you understand the implications of economic forecasts, return on investment, and the ins and outs of equity versus debt financing,” Hochberg says. Knowing players who can help potential clients strategize also puts architects a step ahead. “There's money out there, and investors who are open to good opportunities,” he continues. “Even architects who have that capacity often don't value it enough to do it. You can't know too much about your client's world. It's a question of judgment and how much you capitalize on that knowledge and are part of organizations, like the Urban Land Institute, that provide that perspective.”
Of course, it's easiest to leverage work from people you've already done business with—a client who's shifting from multifamily to campus housing or building a private home, for example. Hochberg recommends that firms making a big push into new project types hire leaders who can land the commission, rather than people who can deliver the work. Affiliations with other firms may also provide the tactical link to new sectors and scales.