One of the most frequent questions that Gini and Chip receive from agency clients is “how do I prepare for the recession?”
In this two-part episode, they explore the question of whether/when we should expect an economic downturn and what agencies can do to prepare themselves for it. As important, they also discuss how to help their team prepares for any challenges that lie ahead.
This week’s first part examines the economic outlook, including signs that Chip and Gini are seeing in their work, along with some relevant industry research.
In the conclusion, the co-hosts tackle what agencies can do to better prepare their business and their team members for what lies ahead.
- Recession Outlook (Promethean Research)
- Whether or not a downtun is coming, the time to prepare is now (HR Daily Advisor)
CHIP: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.
GINI: And I’m Gini Deitrich.
CHIP: And we are really well prepared today, Gini. In fact, I don’t think I have ever had a show with you where we have been this prepared.
GINI: I would like to say that me working early in the morning, after you send me some links to review and me spending some time at six o’clock in the morning, it actually is effective.
CHIP: Well, sadly when you sent me the email at 6:30 in the morning or whatever it was, I was already four hours into my day because-
GINI: Right, because you’ve got the international…
CHIP: Well, yeah, and I’ve really managed to screw up my sleep schedule now. I’m generally up now between 2:30 and 3:00 in the morning, even though I don’t need to be. But I’m just wide awake, and so what do I do? I go sit at my computer and I start working.
GINI: Well, that’s what I would do, too. I don’t have that problem.
CHIP: I had so much accomplished by the time I got your email in, and I’m like, “Wow. This has already been a great day, and now it’s getting even better.”
GINI: The best part is you responded immediately, and then we had a whole conversation that early too.
CHIP: Right, right. Well, hopefully that preparation will show in this particular episode.
GINI: I feel like you totally just jinxed us. Thanks.
CHIP: Well, possibly. Possibly. But the irony is we are well prepared for a conversation about being prepared.
GINI: That is rather ironic, yes.
CHIP: Yeah, so it’s not even one of my really butchered, horrible segues. It’s a semi-natural one. The topic today, and this is probably the question that I get asked most frequently by agency owners these days, which is how do I prepare for the coming recession?
CHIP: There is a near obsession with it amongst agency owners. It’s in the business community more broadly as well, but I think particularly amongst agency owners. We’ve got some tactics in mind, but I think we first should start with is there really going to be a recession? Are we just accepting the inevitable because that’s what the buzz is, the conventional wisdom, or do we really see it coming? I think this is one of those ones where you can point to almost any evidence that you want of good or bad. What are your thoughts on this, Gini?
GINI: Well, I will say a couple of things. The first is, for those of us who lived through the Great Recession, we are freaking out about it because I know for myself, I don’t want to have to go through that again. It was not fun. I’m also not an economist, so I will put that out there, nor am I a fortune teller or can I see the future. But there are a couple of things, now having lived through the dot-com bubble and the Great Recession, from a business perspective, there are a couple of things that I see that are making me worry.
GINI: One of them is that companies are starting to take agency services in-house again. This is very cyclical, and it usually is a leading indicator of a down economy. It’s usually about a year before that happens. We’re also starting to see that project work is plentiful, but retainers are starting to dry up, which is another leading indicator. I saw it both in 2000, 2000, and 2007, 2008. But the biggest thing I think just from an overall economic standpoint that we’re seeing is there’s the big thing about WeWork now where they actually had to pull their IPO because their S-1 showed that they had overinflated things.
GINI: Peloton went public, but didn’t do as well as they had anticipated based on what their projections were. Uber of course isn’t doing that well. So we’re seeing the, I would say this is almost mirroring the dot-com bubble burst where you have these darlings that aren’t actual companies, and they’ve overinflated… I’m a Peloton user and a Peloton fan, so I would sort of take them out of the darling factor that’s overinflated things. But we’re starting to see that in the gig economy, these companies that aren’t really making any money but have overinflated in order to go public are starting to bust, and that’s usually an indicator of something bigger to come.
CHIP: Mm-hmm (affirmative). Like you, I am not an economist, but that has never stopped me from opining about, well, anything. I mean, I’m not a doctor, but I have plenty of medical advice too if people want it. Look, do I think that it’s likely that we’re going to have a recession? Yes. Do I think that it’s likely to be in the next six to 12 months? You know, I don’t know.
CHIP: I agree with you on some of the things that you’ve cited, particularly taking a look at some of the IPO launches, but at the same time, the IPO market has been… It’s been in a weird place the last number of years. There’s been a decline overall in the number of IPOs that are out there, and so there’s been a pent-up desire to get IPOs moving. In some of the particular cases that you have with both WeWork and Uber in particular, you have some more substantive issues with those companies, shall we say.
GINI: Right, right, right.
CHIP: To me, I look at those as a little bit less evidence of overall froth like we saw back in the big dot-com burst slash 9/11, which it was really that one-two punch that is what whacked everybody then.
GINI: Yeah, it really was.
CHIP: And like you, I lived through both of those. I had businesses during both the 2000, 2001 time period as well as in 2008, 2009, and it was not comfortable. It’s certainly not-
GINI: Putting it mildly.
CHIP: Yeah, but at the same time, it’s not the end of the world, either. Later on, we’ll talk about how folks can address that and how they can prepare themselves. Going back to the question of are these indications that something is really going to happen, I don’t know, but my biggest concern is that it almost becomes a self-fulfilling prophecy because the more people talk about the looming recession, the more likely it is that they’re going to start reining in their own spending, and that of course fuels a recession.
CHIP: This is a point that was made by Promethean Research, which is a research firm that looks in particular at the agency space from an economics standpoint. They put out a report in August where they took a look at some things. They’ve got a what’s to come paragraph that I just want to read for listeners because I think it captures both sides of the coin.
CHIP: It says, “Our proprietary economic model currently shows a low probability of recession. While several indicators are flashing warnings, we have not reached the required threshold to give us serious concerns. Our base and best-case scenarios both show no signs of recession during the calendar year,” and that’s the 12 months starting in September through next September. “Risks to our outlook include the slowing global economy and the end of the Federal Reserve tightening cycle, which have historically led to recessions. However, we are more concerned with the consumer sentiment and personal consumption expenditures falling to levels that would jeopardize the overall economy.”
CHIP: It’s that last point is the one that has me concerned because it’s the consumer sentiment, or in our case as agencies, the business sentiment, that I think really can have a damaging effect and lead to that downturn in spending. We may even be experiencing a downturn in spending even without a recession just because of the fear of it. You don’t necessarily have to have a full-blown recession before it actually impacts the businesses they’re listening to.
GINI: Yeah. Exactly right, and like what I said at the start, which is we are definitely seeing, and some of the big trade publications are starting to write about how many companies are taking agency services in-house and how project work is still there, but the retainers are drying up. Those definitely indicate less spending.
CHIP: Right, and the overall agency space has a ton of pressures on it right now. You’ve got the businesses that are taking services in-house, you have the consultancies that are playing in the game.
GINI: Yep, yep.
CHIP: You’ve got general economic concerns. I think some of what we’re seeing as far as more project-based, less retainer-based work is not necessarily this time cyclical, but more people starting to think, is this really the new model, which is something to consider as well. So I’m not sure that it’s exactly the same as it was in the past where it was purely a cost control structure. I think some people both on the agency and the client side, frankly, are experimenting with that approach to see if it’s a way to get a better relationship going. That’s a subject we can have on another episode as to whether it’s truly effective or not, but I think there are other factors in there that go into that particular portion of the mix.
GINI: Yeah. I mean, like I said, I’m not an economist, but I have lived through a couple of these. I’m definitely watching. I was pleased to see the report that you just mentioned that said, “We don’t see it in the fourth quarter or quarter one of next year,” which is good because I was fearing that it would happen sooner rather than later. There are also global things and things happening in Washington, DC that we can’t control that could affect it as well.
CHIP: There are things going on in the world and in Washington? I’ve missed those. I did hear there’s some new prime minister over in the UK. Yeah, no. We’re not going to go down that path. But you’re right. There is a tremendous amount of uncertainty in the global environment overall, and uncertainty is the enemy of good business, generally speaking.
CHIP: Particularly, big business doesn’t like it, but that’s another point too that I think it’s important for listeners to consider, is there are going to be some industries that are going to be hit earlier and later when there is a recession, because there will be one, so this discussion isn’t is there going to be a recession. It’s really when is it going to be. We’re not going to go the rest of our lifetimes without a recession.
CHIP: It’s always good to be thinking about it, but you do need to look at your own particular niche that you’re in and understand, where are you likely to be on that continuum? Are you in a space where you’re servicing mostly businesses that are particularly sensitive to economic downturns, and I’m thinking particularly if you’re servicing mostly people who are doing optional consumer goods, for example, so not the must-haves, but the nice-to-haves. If those are your primary clients as an agency, you’re probably going to have your clients get hit first, which means you’re going to get hit first.
CHIP: On the flip side, if you’re doing something like healthcare, okay, you’re probably going to get hit a lot later in the cycle in general because that’s something that is less discretionary, shall we say.
GINI: Yeah. I think to your point, we are going to have a recession. We don’t know when it will happen, but the best thing that you could do is be prepared.
CHIP: Well, and the good news is that the things that you do to prepare for a recession are really the things that you ought to be doing anyway.
CHIP: No, seriously, and this is a point that I make to a lot of agency owners, that it’s not so much preparing for the recession. It’s really taking a look at your business and seeing what isn’t really working optimally right now and how do you address that because, look, when economic times are good, that covers up a lot of mistakes.
GINI: It does, yep.
CHIP: It covers up sloppiness. Really, if I look back at my own businesses and what happened after the last two events that we talked about, yes, a lot of revenue got washed out. But as I looked at it, it was largely revenue that probably should have been washed out. It was revenue that perhaps was at too high a margin, or was itself a little bit frothy in the kind of business that it was. There’s a lot of things that go into the mix, and obviously, any time you lose the business that quote unquote deserves to be lost, you lose other stuff as well, so I’m not saying that it’s all fine and dandy, and that you’re only going to lose the stuff that wasn’t really set up correctly. But it does tend to emphasize the business that was not running well, and that’s the stuff that you lose first.
GINI: Yeah, and you know what’s interesting about the recession of 2008, 2009 is, of course hindsight is 20/20, but now that I look back at it, I think you’re exactly right. We definitely lost the revenue that we should have, but we also kept the revenue that… We had and still have some clients that understood how this would affect their business. They understood what was coming, and they also understood that if they cut off all marketing and PR altogether that they would have a harder time catching back up later.
GINI: So while they didn’t go away entirely, they did reduce their budgets, but they did it in a way that they could still keep all of that moving so that when things started to turn around, they were already on top of their competitors.
CHIP: Yeah. It’s one of those things where if you take a look at that business, if you are doing work that is helping them grow their business or keep it under control during a turbulent time, they’re going to still pay for that. In fact, because a lot of our listeners tend to be with smaller or more boutique agencies, a lot of you folks listening, you actually have a real opportunity in a recession. So if you’re able to get your business in shape leading into it, you can then go in and pick off business from the more bloated agencies out there who haven’t got their act together. They don’t have their pricing right because they don’t have their costs right. Those are the kinds of things where you could actually come out of a recession stronger if you go into it with the right mindset.
GINI: Yeah, I think that’s exactly right. I also would think about certainly working, because your budgets, and your overhead, and all of those things aren’t as high as a global PR firm or agency in general, but I also think there’s an opportunity for you to look at additional revenue streams.
GINI: When this all happened to us, I was not prepared. I was young, I was naïve, I was an idiot. I lost a ton of money. It was a very painful experience for me. At the time, I remember saying to myself, “You need to create at least seven more revenue streams.” So that’s what I did. Every year, I set a goal to create one more revenue stream. 10 years later, we’re at the point where we have those, which is great, and it helps us keep eggs in all sorts of different baskets. But at the same time, you have to be thinking about that.
GINI: What other revenue streams can you add that will support the loss of a client, or will support a recession? When things are outside of your control, what do you have that you’re also doing? That might be online courses. It might be a webinar series. It might be in-person workshops. It might be strategy sessions. It might be books. It might be speaking. Whatever it happens to be, have other revenue streams that you can keep going when there is a loss of a client. I think that’s good advice regardless of a recession because we lose clients outside of our control all the time.
CHIP: That’s true. I think in this case, one of the advantages that everybody has is because everybody’s sitting here saying, “Oh my God. There’s going to be a recession. Oh my god. There’s going to be a recession,” it tends to mitigate against what I think was one of the biggest issues in both 2000 and 2008, which is it caught people by surprise. So as a result, since they were just getting whacked upside the head by a 2×4, they’re like, “Okay, I got whacked by the 2×4, but it’s going to be okay. I just have to weather it. I just have to wait it out.”
CHIP: The longer you wait it out and the longer you try to wait out a recession, the more likely you are to get hurt. There’s a fine balance to be struck here because you don’t want to panic, and cut back too far, and become too cautious at this point, but at the same time, because you’re anticipating a recession, if you start to see the indicators, you’re going to be less likely, hopefully, to sit there and say, “It’s going to be fine. It’s just a bad couple of months. We’ll be good.” And instead, react appropriately to [crosstalk 00:16:20].
GINI: Yeah, I think you’re right. That’s the good news is we’re not all going to be blindsided this time. That is the good news, so prepare, prepare, prepare.