January 2009

Most design firms -- and many other professional services companies -- face difficult management decisions in light of the current economic situation. Declining revenues and backlogs are forcing management to take a serious look at their business.

When evaluating various alternatives, you must balance the long-term view with short-term needs. Current economic conditions were partially caused by decisions made with only a short-term perspective. Long-term implications of those decisions were seemingly inconsequential. 

Personnel Decisions Deserve Thoughtful Consideration

Design firms must now deal with the painful reality of declining revenues after years of unprecedented growth. In addition, shrinking backlogs make prospects for future revenues even more uncertain. In light of these declines, firm management must weigh cost-cutting strategies.

For most professional services firms, personnel costs comprise the largest percentage of costs incurred. Some might say it is logical to think that if we don’t have work for these people, then you should reduce your personnel. Of course, this strategy may become necessary, but it should be one of the last options considered.

Why? Because history shows our economy is cyclical. It will rebound. Also remember that not long ago professional firms lamented, “We can’t find enough good people!” Another reason is you have made a significant investment in your staff and managers. Releasing staff then hiring others later - if you can find good people - will increase your costs and impact productivity and profits. 

In fact, it is crucial that existing personnel be viewed with a strategic eye. A large scale layoff can have a very negative effect on retained employees. Many will wonder if their positions are next on the chopping block. For self-preservation, they will start looking for other opportunities from well managed firms able to attract "A" players.

In other words, focus your strategic eye on the long-term. Your employees know the truth, sometimes better than firm management. Nonperformers on your payroll cause other employees to wonder why the chaff would be retained. Layoffs should weed out weak nonperformers regardless of their department or discipline. It is better, for example, to keep a top performer in land development while outsourcing the responsibilities of a weak performer in transportation even when the transportation department is busy and land development not. At the same time, reassign that top performer to keep him productive and gain a higher qualified, more valuable member of your team. Such a strategic move reduces the attractiveness for "A" players of leaving the firm. 

As strange as the concept may seem, now is the time to upgrade staff. Closely examine why you have each of your staff members. Were they hired within the last few years when many firms had the “warm body” mentality? Honestly evaluate them. Also look for stars from other firms. People who have been unapproachable in the past now will listen to a strategic firm having a definite direction and history of not entertaining non-performers. "A" players want to be part of an "A" firm.

Good Client Selection Equals Profitability

For design firms the number one key to profitability has always been client selection. Even when times were good, design firms struggled with getting this concept correct. Now that the opportunities for new projects are less prevalent, firms are tempted to accept risky engagements only to keep their people busy. Resist this temptation. Risky engagements come at the cost of reduced profitability, employee dissatisfaction, and potential legal liability. Existing problems are compounded by poor client selection.

If retaining the best qualified and performing staff is the key, do not risk having them busy on an unprofitable project. The economy will turn and they must be available for the more profitable projects to come.

Plan for Worst-Case AND Best-Case Scenarios

Know your sweet spot and stay there!

Strategic thinking begins with knowing that spot and planning for both growth and a declining economy. The well managed firm accumulates a cash reserve in order to accomplish those goals. The availability of cash means painless growth when available and strategic hiring when the economy declines.

The ultimate goal is being able to upgrade staff members, replacing “C” or worse players with “B” or better from lesser managed firms.

Maintaining a Healthy Cash Flow is Critical

Strategic firms have cash and know how to use it. Does the cash position of your firm allow you to accomplish the staffing goals mentioned? A firm dedicated to understanding their ideal client and meeting the needs of that client will have the funds available to provide high quality work from top level staff. This can be accomplished without the fear of damaged reputations over cash flow. The benefits of that long term focus will be reaped when succession plans are realized.

Bottom Line

As you look at the next 6-18 months, keep in mind that many firms will not make it out of this economic downturn. Some who survive will still fail because they cannot successfully compete because of short sighted decisions made in times of crisis. At the same time, better managed strategic firms will reap the benefits after the turn.

Management has the power to determine that today. Let your firm be among the group that survives, attracts and retains the best staff, and is prepared for this same challenge in the future.

The Authors: John E. Matthews, CPA, CFE, is the Managing Partner of Deemer Dana & Froehle LLP. He has extensive public accounting and consulting experience specializing in the construction, real estate, engineering and professional services industries. As Managing Partner, John oversees the daily administration of the firm including new client development.

T. Wayne Owens is the A/E Business Development Director of Deemer Dana & Froehle LLP. With 30 years of consulting, auditing and financial management experience, Wayne provides a full range of consulting services to A/E firms including benchmarking, auditing, FAR Overhead Audits, taxation, accounting system selection and implementation, and succession planning.  Wayne has authored numerous articles, taught university and continuing education courses, and presents programs on behalf of several professional organizations including ACEC, AASHTO and PSMJ throughout the United States and Canada.

About Deemer Dana & Froehle: Deemer Dana & Froehle has provided accounting and financial services in the Southeast for over forty years. Their well-rounded professional team draws from a deep reservoir of expertise and brings a relationship-centered approach to each client engagement. Deemer Dana & Froehle serves as business advisor, sounding board and advocate for clients in a number of industries, with a strong focus on Architecture & Engineering firms. Offices located in Atlanta and Savannah, GA.