I ask all my clients to consider this question at Board level. And it always shocks them.
“What would happen if our permanent Gross Profit (Net fees) dropped by 50%, and temporary/contract GP by 25%? And the drop occurred in a month and did not recover for two years. Would we survive?”
And I usually raise it when the going is good, and profits are at record levels. Like right now, for most of them. Because that is precisely the time we get complacent. We start to believe in a world of never-ending fat years. No thought is given to surviving the lean ones.
If you read my previous blog, ‘A recession is coming. And you will not survive’, and you should, that scenario is clearly not far-fetched. Indeed, it could be worse.
And the point of that question and the ensuing conversation is to test our fitness to adapt to a new world. Also, to ensure we are making decisions and building structures that allow for much lower revenue.
Here is a handy checklist for your business. Remember I am not saying a recession is about to hit. However, it will one day, and recruitment history is literally littered with once highly-profitable recruitment businesses that had feet of clay, and that crumbled when the dark days descended.
So, consider these, and if they describe you, or your business, consider making changes, now.
You are a Permanent-Only placement business. And it’s tempting to head that way because perm in a buoyant market is highly profitable. And we have had ten years of growth, pretty much. So, it feels good, and makes good money, and we love it, and things will never change, right? The only problem is it can drop 80% in a recessed environment. You have no ongoing annuity revenue stream, such as a substantial temp or contractor business. That is a big problem. The ideal GP ratio? 65% to 70% temporary or contact GP. The remainder Perm
Your niche specialisation is highly vulnerable to economic downturn. You are recruiting in a ‘bubble’. This is problematic because niche and being deep in a vertical can be good. It positions you as ‘expert’ and gives you access to networks of hard-to-find candidates. However, it can also be dangerous if you are too niche and that niche gets massively disrupted. Where do you go then? Evaluate and assess.
Your clients themselves are vulnerable. In other words, if you are exposed to some types of banking clients or other businesses that are hit harder than others when the economy tightens.
You have no flagship clients where revenues are entrenched and substantial, and relationships are deep. All your client ‘relationships’ are superficial, ‘retail’, or piecemeal. Your company has ‘shallow’ Consultant relationships which are mostly transactional and not based on trust and credibility. When the flight to quality occurs, you will no longer have a seat at the table.
You have too much reliance on one/two clients, who if they disappear leave you exposed entirely. Maybe 50% of your GP comes from one or two clients. This seems so obvious, but I have seen it happen countless times. The P & L of the business looks great. However, in reality, it is being propped up by one or two ‘super-clients’ which while fabulous to have, often soak up all resources, all the focus. The business is exposed as very weak once they ‘go’. This can even happen in ‘normal’ economic times when a recruitment business becomes too dependent on one PSA/PSL customer. And then that deal is lost. The smart thing to do is run a P and L on your business without the GP from those clients, right now. How does that look? Pretty ugly? Grow out your ‘non-elite client’ portfolio. The diversity of revenue streams will save you.
Your company has high fixed costs like real estate, job board advertising or other supplier contracts that you cannot reduce quickly as your revenues fall. I have seen this cripple businesses many times. It does not even take a recession to do it, merely a softening. I have said it before, and I will repeat it. Fancy offices in recruitment are all about ego. The owners ego. No one cares. Your clients rarely visit you, and frankly would be horrified to see their fees consumed by your marbled reception area. All you need are respectable offices that make your candidates feel confident and your staff comfortable. It’s dead money otherwise and a noose around your neck in a revenue-drop scenario. And be smart about the detail. Does your lease agreement allow sub-letting? (I have personally sublet office space on numerous occasions, halving rent as our business subsided). Do we need that much space in the first place? (Better to have five interview rooms full all the time, and one candidate being interviewed in the coffee-shop downstairs, than ten interview rooms which languish empty most of the time). Is it better we pay slightly more per square meter for a 4-year lease, that we can get out of, than do that super-deal on a 10-year lease that we rue all the way the liquidator’s office
Your company relies too much on 1 or 2 Recruiters. We are proud of our 10-person business that generates annual GP of $2.5 M. But the reality is we have three admin staff, and two of the recruiters bill 1.5 Million between them. The market drops, one of the big billers leave, the tiny billers become almost zero billers. Turn out the light and shut the gate
This is harsh, but you have to be realistic in your assessment. Are your recruiters lightweight? Flat track bullies? In other words, they survive, even look good, when the orders are flowing, and the times are merry. But in truth, they have no depth of relationship. They are order-takers and resume-flickers. They can’t sell, network, or open doors. You need to evaluate this now. If that revenue dropped as described, who would have to go? Who would you keep? Would anyone be able to survive the post-apocalyptic recruiting world?
You have a fat layer around your belly. Lots of non-billing managers on high salaries, doing….. what is it they are doing again?
You don’t read the signs. History has taught us that speculation and bubbles are the prelude to collapse (Dotcom crash, US housing crisis as recent examples). I am not suggesting you can ‘time the market’ to perfection. Or that you should be economic experts. But be aware. Sniff the air. Be paranoid.
You are seduced by the good times. You never talk about the possibility of a recession. You send me emails saying I am being unnecessarily pessimistic and fear-mongering (FFS, it’s your arse I am trying to save here!). You don’t run scenarios like the one I describe. No downturn cash flow projections prepared. You don’t consider your strategy. You sail on merrily, until you fall off the end of the earth.
You get seduced by revenue growth over profit, and most importantly you forget the importance of cash. Remember what I told you before. Revenue is vanity. Profit is sanity. Cash is reality. You allow your debtors days to blow out, when in fact you should be managing this like a rabid honey-badger on crack.
You have too much debt. You borrow merrily because you have the profits and the cash to service the loans. You talk earnestly about a balance sheet that has good cash reserves as being ‘lazy’. You even borrow money to pay dividends (God help us!)
You act too slowly. This is where you see revenue dropping. The signs are there. However, you convince yourself it’s a ‘blip. You tighten the belt a little and let one person go. Two months later it’s getting worse. You chip away at the expenses again but hold on to ‘nice;’ people who you know can’t bill in a downturn. The next month it’s worse. We are haemorrhaging money. But still you believe the worst is behind us, and you change the Friday beer from Asahi to VB as a nod to frugality. This is death by a thousand cuts. It destroys morale and, in the end, you are chasing your tail, never getting costs down low enough. A quick, deep cut, a real restructure, while painful, will get you fighting fit and believe it or not, is better for morale. Not the day it happens of course. But once done, and explained, we move on leaner and better equipped to thrive in a world of less money.
So smart recruitment owners always build a company that can reap significant profit in an upswing but can hunker down fast in a downturn and is highly resistant to revenue falls.
But prepare now.
Next week’s blog is my final article on ‘recession proofing’ your business. “How to manage in a downturn”!
- Posted by Greg Savage
- On November 5, 2018
- 10 Comments