AEC Best Practices, COVID-19April 6, 2020The Upside of Downturns: What We Know About Succeeding Through Uncertain Times Emily ThompsonDemand Generation ManagerWhat is world going to be like after COVID-19? What does the long-term impact look like? How will my life be changed? Everyone is asking themselves these questions every day. And the truth is, the answers all remain unknown. There is no way to know what the effects of this global pandemic will be. We can analyze the past H1N1, SARS, or Ebola outbreaks, but the truth is, one of the things that sets global health pandemics apart from all other natural disasters, is their lack of consistency. These viruses are all unique, and with them come their unique challenges. Here’s what we do know. Although all of these viruses have had unique challenges and characteristics, the way the world responds remains relatively consistent. Above all else, the goal of defeating the disease is often to save the lives and put an end to the rapid transmission, as opposed to prioritizing the health of the economy. Because of this, it’s not farfetched to imagine the resulting outcome of this pandemic being an economic downturn. With any crisis – health or economic – there is a before, during, and after stage. History has told us that those that execute well in each of those stages have the best chance for a powerful recovery at the end of the crisis. As you also are likely aware, each industry has is faced with different challenges during each of these stages. The AEC industry has their own set of unique differences, and as you continue reading, you will learn about how the leading firms have executed throughout the process.Right now, we arguably have little control over the “before” of this current crisis. While we are not entirely sure of the economic impact we will see coming out of the COVID-19 pandemic, we are dealing with the current impacts daily that this virus poses. We are also looking forward to the “after”, but it’s not clear how far we are from that or what the world or our businesses will look like once we reach that point. What we do have control over, is the “during.” The thing that separates the companies that emerge leaders out of times like these, as opposed to the firms that struggle to regain their momentum, is how they act right now. This blog examines what exactly those leaders have done and taught us as they focused on that same “during” stage of a previous recession. We’ll start by examining what the numbers have taught us, and then explore how the construction industry has faced their own challenges during these trying financial times. Let’s start with what the big reports have said. A Look at What History Has Told Us Over the years, a number of reputable sources have taken a look to see what separates those who thrive from those who barely survive an economic downturn Tighten the purse strings… strategically.For starters, McKinsey published a study in 2002 of 1,000 U.S. companies where they were studied between 1982 – 1999. This covered the recession between 1990 and 1991. The study specifically covered what certain companies did during the recession that affected their business after the recession. Those who came out on top were classified as “leaders.” One of the commonalities between those leaders was their ability to be more disciplined during times where business was booming. This discipline meant more flexibility during the lean years. This discipline allowed the successful businesses to spend significantly less than their lesser successful peers during periods of financial freedom. It then allowed the successful businesses to pivot and refocus spend, rather than cut spend during the leaner years. Identify areas of sustainability. A Bain report went on to further examine these findings and realized that the best of the leaders identified a strategy that would offer sustainability through any economic downturn: Remove excess costs ahead of sharp signals of a financial crisis Identify the short list of projects that will form the next business model Spend and hire before the economy has fully rebounded Anticipate the comeback. One area of that comes when acting during a financial crisis that is often shortsighted is the recovery process. While the overall morale during a financial crisis may be low, it’s critical to remember that there is always an end in sight and in order to thrive in that post-recession world, you must prepare for it ahead of time. A Harvard Business Review study analyzed nearly 5,000 public companies and examined three years before, during, and after recessions. Within the leading companies in that study, one of the more surprising findings was that companies who drastically cut costs faster and deeper than their competitors weren’t leveraged to come out stronger. In fact, they had the lowest probability, 21%, of pulling ahead of their competition once the economy recovered. Two companies specifically examined were direct competitors Office Depot and Staples. “Office Depot cut 6% of its workforce, but it couldn’t reduce operating costs significantly. Although the company created an incentive plan to boost sales, its sales growth fell from 19% before the recession to 8% after—five percentage points below Staples’ post-recession sales growth rate. By contrast, Staples closed down some underperforming facilities but increased its workforce by 10% during the recession, mainly to support the high-end product categories and services it introduced. At the same time, the company contained its operating costs and came out of the recession stronger, bigger, and more profitable than it had been in 1999.”Two other Harvard Business Review studies came to similar conclusions. One noted that companies who were deemed resilient through the Great Recession cut their operational costs by 1% compared to the previous year within the first quarter. But this doesn’t mean they immediately made drastic layoffs or downsized their investments in technology – conversely, they often increased their investments in technology and looked for areas that could be automated in the peak of hiring challenges. The other, a study of more than 900 B2B companies who survived the last recession, the research concluded that more than four times as many winners, found that companies who grew revenue at a significant rate and increased market share – as losers had digital tools embedded into their core capabilities. These investments in digital tools meant data-driven decision making for sales teams, automated account management, and streamlining the back-office. By automating otherwise very manual processes, the company’s workforce was able to focus on the tasks that bring in revenue, rather than the tasks that require extreme amounts of back office labor. By locating these operational efficiencies, these companies were able to do more with less, ultimately securing their ability to scale amidst a crisis. So, What Does this Mean for the Construction-Related Industry? Recessions impact all industries with unique challenges. The Architecture, Engineering, and Construction (AEC) industry happens to be one of those who sees perks and consequences grossly different than the rest. The AEC sector is quite literally a feast for famine industry. When things are good, they’re great, alarmingly great. Occasionally, this “boom” in construction can start to plant the seeds for a potential downturn, an unfortunate example of that being the 2008 housing crisis that lead us into the Great Recession. Another unfortunate common misstep of the construction industry is relying on the assumption that there will always be another project to bid on. Firms will extend their resources, putting themselves in a vulnerable position, which ultimately leads to succumbing to the fallout when the number of projects continues to dwindle. So, what steps can firms take to secure their position ahead of the downturn, as opposed to being forced to being reactionary? The first step is keeping an eye on cashflow. It’s incredibly important during the time period leading up to a recession to hold accounts receivable at a higher regard than you might otherwise. If you have a client with a history of chronic late payments, now is not the time to explore a new project with them. On the same side of that coin, it’s also critical to continue to scrutinize spend. Understanding the true cost of pursuing new business will be dire in order to balance cash in with cash out. Keep in mind that understanding your spend, doesn’t necessarily translate into cutting spend. Another crucial reminder is that a prospect of cashflow is not an indicator of the cash your firm has. When things are healthy, it’s common for firms to rely on the cash coming in 8 – 12 months down the line as a given. However, many firms have reported that throughout the previous downturns, projects that had been awarded for the future were rescinded given the client’s difficulty of guaranteeing debt, a general tightening of spend, or even a client’s bankruptcy. Your firm needs to recognize that some level of economic impact has already begun in 2020 and you need to act appropriately – without taking extensive measures in cutting spend before necessary (remember what we said earlier about this hindering your chance of growth?). Next comes the tough part. If you’ve been following Cosential for any length of time, you know that profit margins, and ultimately increasing those profit margins is one of our core missions as a company. So, what if we told you that one of the best things you can do leading into a recession is to offer more flexibility into those profit margins? Pretty shocking right? The truth is, some work is better than no work. Securing that work may come down to coming in at a slightly lower bid in order to win the job and offer financial security to your firm and the people who depend on the firm. As your competitors monitor the same signals you are watching in terms of economic turbulence – and the economy’s ability to sustain new construction projects becomes more slim – you’ll find yourself chasing less projects with more competition. Suddenly firms that are not in your niche are chasing down a project you would otherwise be leveraged to win. In previous downturns, we’ve seen ENR Top 100 companies bidding on projects that would traditionally be better suited for a smaller, more narrow-focused firm. While relying on price and price alone is rarely a best practice when it comes to bidding for new projects, sacrificing a small amount of the profit during an early downturn is one strategy that will set you up to mitigate the risk of sacrificing all profit when the economy totally slides. Keep in mind that during the time of financial crisis, your supply costs will likely also be lowered. The cost of common commodities (steel, fuel, concrete) has historically come down through the previous economic downturns, so while you may be feeling the pressures of reducing your bid, you should feel some level of relief in terms of securing your own costs to perform the project, which should offer you the ability to maintain some of that profitability while you simultaneously get more aggressive in your bids. The silver lining. What could be seen as a glimmer of hope during an incredibly tough time, is that most experts do not recommend massive trimmings of your workforce, or more specifically, laying off your top talent amidst a recession. If your firm can sustain the financial burden of this staff, it will ultimately leverage you for success in the years to come. The AEC industry is already faced with a massive labor shortage when it comes to securing talent for the demand of open positions. While it’s natural to anticipate the number of those open positions will start to decrease, it’s also unlikely that they will entirely disappear. What this means is that the firms who prioritize keeping their skilled workers employed and even going as far as to hiring the labor that has been laid off, will come out of the downturn with a stronger, more efficient staff. This will reduce hiring and training costs post-recession, increase the efficiency of the labor productivity during the recession, and build credibility around your brand’s reputation. Those firms who cut labor costs ahead of looking for financial efficiencies in other areas will be left chasing after talent, losing jobs due to the short-staff, and burdening their remaining workforce with carrying the weight of their lost peers. We understand that labor is one of the most expensive costs when it comes to sustaining your business, so taking some time to engage in an exercise where you evaluate your Total Cost to Operate (TCO), and looking for additional operational efficiencies such as reducing costs of pursuit or re-strategizing your partnerships can help you to understand if sustaining your top workforce is feasible for your firm. Lastly, invest time into something you already own… data. During tough times, it’s always important to look within and see what is within your realm of control. One of the areas that is alarmingly underutilized within the construction-related data is the firm’s ability to leverage their company owned data. Critical decision making only becomes tougher and more important during financial hardships. When you add your staff’s livelihood to the equation, those decisions become personal fast. Your team needs to trust that these tough decisions are being made based on data, not gut-instinct. The construction industry is one of the oldest in modern existence. Because of this, and because of the industry’s notorious reputation of being private, often family-owned businesses, tribal knowledge quickly becomes the database at which decisions are made. While tribal knowledge and experience will always be important, it’s also important that experience enriches the data being measured, rather than replacing it. Surviving recessions is a skill that is inherited through experience. Knowing what levers to pull and buttons to push doesn’t come naturally the first time. But whether this is your first recession, or your fifth, it’s important to look at your data before making decisions that may affect the future and health of your organization. Measuring points like…: What does it take to win new business? What sets apart my top performers from the rest? What is my average profit margin for X build types? What is my average sales cycle? Why are my best clients my best clients? What is my average hit rate by market? By project type? …will help you understand how your firm can fare and thrive through the downturn, while your competitors continue to rely on repeat business that may cease to exist. To learn more about leveraging your data to make better decisions and establish predictability in your firm, click here. Where to go from here. As a general practice, it’s always important to hope for the best and prepare for the worst. As the world navigates the next several weeks or months, it will become clear if we are entering the next great economic downturn or if we’ll be able to avoid the bulk of the impact. It’s possible to survive, and even thrive, through the next recession. Identifying signals, proactively preparing your firm, and having a clear path to return to normalcy will all help your firm navigate the rocky waters. Each of these lessons will only strengthen your firm if used wisely. While it may be important to enjoy the booming times while they are being experienced, it’s equally important to leverage the opportunities for success during the downturns of the financial cycles. Remember, you’re not alone. Never was there a recession that only impacted one sector, or one business. It’s important to lean on your fellow peers and trusted advisors as you continue to make critical decisions for your business. Cosential has survived the last several recessions, led by our founder and CEO, Dan Cornish for the last 20+ years. We have worked with some of the ENR Top 100 firms, assisting them with identifying their path to success, and realizing the importance of technology in during tough times. Because of this, we are here to be a trusted advisor to any firms looking for advice or assistance during these times. To book a free consultation with an AEC expert, click here. Otherwise, stay tuned for next week, where Dan will be releasing his own thoughts on how he’s survived recessions as a business owner.