Passion, People and Principles

Recession Responses

post # 514 — March 7, 2008 — a Strategy post

So now comes the test. You’re a professional firm, with a variety of pracrice areas or target industries. Due to turmoil in the markets, business is down (or is forecast to be down) in one or more of our major areas. What do you do?

Choice One: Lay off some of the junior staff, thereby cutting costs to keep them in line with declining revenues.

Choice Two: Have the partners take a “haircut” (ie reduced profitability) and continue to show loyalty to the juniors by keeping them busy with whatever work we *do* have (ie delegating as much as possible) and using the relative underutilization of partner time to free them up to go out and and work against the weak year (ie client service, marketing and selling.)

Guess which one most firms are going to do?
Guess which approach builds a more profitable firm over time?
For extra points: how much is this decision really going to be affected by firms declared programs for retaining scarce staff in the war for talent?

Get ready for a dropping of the facade of idealism and principle, and a return to the pragamatics of sustaining short-term earnings at all cost.

As always, I have to stress that this is not a moral issue but one of pragmatics. If one of your key competitive issues is attracting and retaining key staff, how can you have a policy of laying them off (or “asking them to re-apply to another part of the firm”, as one firm describes it) at the first sign of trouble?

15 Comments

Charles H. Green said:

David,

My business school class held its reunion a month after 9/11. One of the speakers in a panel discussion was our classmate Koh Boon Hwee, at that time Chairman of Singapore Air.

Boon Hwee told of the devastating impact on the travel industry, particularly air travel, as people cancelled all kinds of travel plans. US airlines responded, he said, by massive layoffs and cutbacks.

At Singapore Air, top management took a 20% pay cut, and he himself a 50%. No layoffs. Now there’s a retention program for you.

That’s an airline–lower level employees, razor thin margins. How can an airline do that, while a law firm or consulting firm, with highly-paid employees and fat profit pools, not manage to stay the course for an economic correction?

One of the biggest fallacies out there is that short-term performance demands short-term management. That belief is suicidal. The best short-term performance comes from consistently managing long-term.

I’ll be interested to hear from your readership what the professional services community’s response is going to be to this (eminently predictable) drop in the economic cycle. My bets are with yours.

posted on March 7, 2008

Ron Shuck said:

I think that an additional option would be to ask the partners/shareholders to “think outside of the box” to look for additional revenue sources. In any economy, up or down, there are winners or losers. Those in our profession tend to restrict development efforts to the “old tried and true.” Neither of the options that you propse would be acceptable to me unless I was sure that our firm had exhausted every opportunity to find new revenue sources.

posted on March 7, 2008

Jordan Furlong said:

Looks like some firms are adding a third option: get rid of partners. It seems that Jenner Block is “de-equitizing” (what a horrible word) or even firing ten partners, on top of another 15 to 20 last year. The ABA Journal article points out that Mayer Brown, Winston & Strawn, and Sonnenschein Nath & Rosenthal have also gone this route.

It’s all bad enough chopping associates because your PPEP looks shaky, but at least associates realize, at some level, that they’re viewed as fungible. “De-equitizing” partners, though, cuts to the soul of a law firm. It sends a clear and chilling message to every current and (more importantly) future partner: “We’re all partners. But some partners are more equal than others. And one day, there could be a knock at your door, too.”

Every future extension of a partnership invitation at these firms is now tainted. And for what? If it is a war for talent, this is friendly fire.

posted on March 7, 2008

Wally Bock said:

A lot of how you deal with this issue is tied to your goal horizon. If you are striving to build long term competitive advantage and profitability, you will want to maintain the junior staff, since they are the firm’s source of future competitive advantage. If you’re thinking short-term, then letting the juniors go excises expenses that drop to the bottom line.

posted on March 7, 2008

Fred Janssen said:

I believe focusing on cutting expenses as small thinking with limited and finite benefits. Big thinking on the other hand focuses on new revenue opportunities with existing clients, new markets, new products and improvements in process and technology that add efficiency, leverage and result in more margin. Laying off good, productive staff members (note the qualifications) is short-sighted for reasons mentioned elsewhere and incurs less-obvious but often severe. I.e. loss of accumulated knowledge and experience, loss of established customer and staff relationships (and related trust), changed perceptions by prospects, customers and staff as to firm stability, etc. Add to that the future costs (on and off the books) of finding and replacing those staff when business bounces back and you have a different equation than just reducing your immediate overhead.

I know from direct experience and from my clients experience that staff retention in tough times builds loyalty and commitment and pays off in the long run.

posted on March 8, 2008

maz iqbal said:

Business issues such as a downturn in business due to turmoil in the financial markets will tend to bring to the surface the primary values and in the process the espoused values will tend to be pushed aside.

In an organisation where community and the longer term perspective are the primary values, senior management will tend towards a) keeping the community intact; b) sharing the pain over the community; c) using the pain and the sharing of the pain to enhance loyalty; and d) taking decisions and action that will cause short term pain and are likely to delivery longer term benefits – revenue, market share, profitability etc.

If on the other hand the organisation is one where the individual (superstar syndrome) and the short term prevail, senior management will cut people/labour costs to show good economic/financial performance.

Interestingly both types of organisations and their senior management are operating from ingrained, hidden, ideologies. The first ideology has tended to dominate in the East hence the actions of Singapore Airlines. The second ideology – the economic one – tends to prevail in the West and particular in the US and UK where members of the organisations (human beings, our fellow team members) are viewed as parameters in an economic equation – to be manipulated to get ever growing profits.

Which is the better approach? Only time will tell – everything else is either conjecture or post-hoc rationalisation.

posted on March 8, 2008

ROI Marketing, LLC said:

The classic fight between short-term “success” and long-term prosperity.

Public companies have to meet quarterly targets, law firm partners get used to a certain distribution and want to keep it up, etc etc etc; while all along they are forgoing long-term prosperity.

Sadly enough, this really goes much beyond a business issue into a life issue. How many have ruined a relationship, gotten in legal trouble, our damaged their health in exchange for some kind of short-term gratification.

Wise is the organization and wise is the individual that can see the long-term and disregard the short-term for it. There is plenty of room for a company or individual that wants to achieve greatness.

posted on March 8, 2008

Coert Visser said:

Here is an example from the airline industry: Organizational Resilience in Times of Crisis. In my view this does not imply that companies should be prohibited by law to easily lay off people or that they should be judged. More so, I think it implies that a no-lay-offs strategy generally works better, both in normal times and in crisis. It seems to be the more wise thing to do because it is an example of doing what works.

posted on March 9, 2008

Barry Wilkinson said:

We work mainly with small to medium size firms (real partnerships?) – but I have noted a potentially toxic element to this in several clients.

Long established partners (10-15 years ) know that business has its ups and downs, and will trim a little, but not cut to the core of the firm.

More recent partners (up to 5 years?) seem to expect profits to rise 15-20% per year indefinitely – and are now demanding more brutal action to protect their immediate income.

Why?

Maybe they were sold a false prospectus – and were not grown up enough to see through it (lawyers, surely not?)

Maybe they borrowed heavily to buy in, and now feel very exposed.

Maybe they see Partnership as purely a financial relationship

Most likely a combination of the above and other factors

It seems illogical that those partners with potentially many years to work through are more likely to risk the firm’s long term health than those who may retire shortly.

But it is there – and in the UK with Private Equity circling, there may be far more consolidation than was initially expected.

posted on March 9, 2008

Johanna Rothman said:

What’s wrong with making more money as an option? When a recession hits, or is forecast, smart organizations will ask their senior staff to revisit strategy, become “thought leaders,” work with their customers to make sure the organization does not lose money. It might mean that senior partners are not active on projects, but if the firm waits too long to start, there isn’t enough work for everyone anyway.

If a company is in trouble or is heading towards trouble, raising the top line (increasing revenue) is almost always a better idea than cost cutting of some variety.

posted on March 9, 2008

Joseph Heyison said:

Throwing juniors and partners without expanding books of business off the sled is rational in many cases.

If the professional firm’s business is “institutional,” attracted to the firm by branding and collective expertise and not to individual fee earners, there’s a case to be made that one-firm, “let’s all pull together” responses are rational.

But, in law, where most of the business is attached to and controlled by rainmakers, one-firm responses are probably irrational. The imperative is to retain rainmakers and attract more to offset the contraction in revenues. That is best done by offering immediate rewards and ample support for growing their books of business, not by reducing short-term profitability.

As for the “war for talent” at the junior level, ruthless firms do experience some trouble recruiting — after the recession passes. But not that much. And right now, there’s a welcome surplus of well-credentialled bodies.

posted on March 10, 2008

Jean Caragher said:

David – Your Post #514 emphasizes the importance of an ongoing, consistent marketing program. For years we’ve heard from CPAs about their staffing challenges and hesitation in obtaining new business for fear of not being able to handle the work. Now, these same CPAs will find their new business pipelines empty and will need to invest the time and money to generate prospects. Marketing consistently, in good times and in bad, will help prevent this cycle.

posted on March 11, 2008

Anonymous guy said:

David,

Speaking as a partner in a UK “magic circle” firm, I would love to go for option 2. This is what we did back in the downturn in the early 90s. But I worry that, this time, things are different, and if we were to ask partners to take a significant haircut then a small but significant number of partners would leave for other firms that had taken option 1.

We seem to be locked into a version of the prisoner’s dilemma, where nobody dare take the sensible long term approach for fear that they will lose out to those going for short term gain. I’m not sure there’s any way to avoid this.

posted on March 12, 2008

barry.wilkinson said:

Anonymous guy said

“Speaking as a partner in a UK “magic circle” firm, I would love to go for option 2. This is what we did back in the downturn in the early 90s. But I worry that, this time, things are different”

As I commented above, in the UK private equity firms are circling – if not the Magic Circle then certainly the next levels.

Maybe the short term focus this time round is an unintended by-product of the Clementi changes.

Or perhaps a product of the impersonality of growth?

Or maybe the generational change which has eroded loyalty and mutual confidence?

When networking among lawyers from larger firms, the “older generations” are deeply unhappy about the corrosive influence of the emphasis on PEP.

Prisoner’s Dilemma sums it up well – It is not easy to see a way out

posted on March 12, 2008

Structured Settlment loan said:

No doubt recession comes as a big challenge for everybody. But companies should not behave selfishly during this phase, cutting profits ia a preferable option rather than simply firing the employees.

posted on April 18, 2008