How agencies can prepare for the coming recession (part 2 of 2)

What owners can do now for their businesses and their teams before times get tough.
Agency Leadership Podcast

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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.

Last week’s first part examined the economic outlook, including signs that Chip and Gini are seeing in their work, along with some relevant industry research.

This week, the co-hosts tackle what agencies can do to better prepare their business and their team members for what lies ahead.

Resources

Transcript

CHIP: We all accept that there is going to be a recession. We have no idea when it’s going to be, but let’s be smart and let’s prepare. You started touching on some of the things that you can do to prepare and the mindset that you can take going into it, but what are some of the concrete, actionable steps beyond the ones you’ve already talked about that you might want to be thinking about as an agency [crosstalk 00:16:55]?

GINI: Yeah. I would say that that one specifically about adding new revenue streams is investing in growth that allows you to be agile, so if something happens, you’re able to be nimble and flexible. It could be new revenue streams, which I will always advise, but it also could be working with contractors instead of full-time employees, or doing a combination of full-time and contractors because contractors are a lot easier to add when business is good and to subtract when business is down, and you’re not having to take on the responsibility of lay-offs and all that kind of stuff. So invest in your growth in an agile function I think is a really good piece of advice.

CHIP: Well, and that agility is, again, that’s good advice regardless of whether you’re in a recession, and more and more agencies are starting to go to that hybrid model or they’re already there as far as having in-house and contract labor. You’re absolutely right that using contract labor allows you to expand and contract with business much more easily, and particular right now where the job market is absolutely brutal.

CHIP: Anyone who’s out there from the employer side, trying to recruit talent in the PR space, unless you’re looking either at the very high-end or the very low-end, you don’t have a lot of folks to pick from because as a country right now, the US is pretty close to full employment, not quite there, but pretty close. It makes it very difficult to find the talent that you need in that middle tier that makes up the vast majority of employees at most PR agencies.

GINI: Yes. It’s funny you say that because there is a jobs board in the Spin Sucks Community, and that is the rallying cry. How do I find somebody with that five to 10 years of experience? And everyone just laughs. You can’t.

CHIP: Yeah. You can’t. You can’t because anyone in that space, they have the pick of jobs right now, and if they don’t have the pick of jobs, that’s probably a good warning sign to you as an employer that you might want to take a closer second look and figure out why that is.

CHIP: But look, that’s a piece of the puzzle, but there are other things because it’s looking at your total overall cost structure. I know in the past, you’ve talked about the change you made as far as going from an office to a virtual environment as a way to address it. Obviously, a lot of agencies have already done that to some degree. Even the larger agencies, they may have a hub office in their main city, but they’re less likely to be opening up full-fledged offices in other cities that they may be actively servicing, so they may have people who are working from home or [crosstalk 00:19:35]-

GINI: Just telling us they can.

CHIP: … at least as long as WeWork is still around because WeWork has managed to go from the multi-billion-dollar darling that everybody wanted to own to maybe we’ll be in bankruptcy in two weeks.

GINI: Right.

CHIP: And in fact, perhaps by the time you listen to this episode, they will have already declared bankruptcy. You just don’t know. You don’t know. But that is looking at all of your cost base, not just staff, and staff obviously is the largest cost for any agency, but looking at all of them, and trying to figure out how can you not necessarily just reduce costs, but how do you make it more flexible so that you can scale it up or down as needed? This is everything from office space, to software, to services. All of that kind of stuff, you want to have as much flexibility with as possible because the flexibility is really what helps you [crosstalk 00:20:24].

GINI: I mean, I go through an exercise once a quarter where we look at fixed costs versus variables. We say, “Okay, do we really need to be spending money on that?” And, “How important is it to be spending money on this?” The fixed costs include things like G Suite and some of the software that you use, and your web host, and if you have office, your lease, all that kind of stuff, so the stuff you have to have in order to run your business.

GINI: Then what are the variables that are nice-to-haves but not necessarily have-to-have? Keep a running list of that stuff. I have a running list of it all, and then we can look at it quarterly and go, “Okay, it doesn’t make a lot of sense to have this in here. Let’s get rid of that.”

CHIP: Particular, I always advise that folks need to look at their software subscriptions.

GINI: Yes, me too.

CHIP: I’m as guilty as anybody else. It’s so easy to subscribe to these platforms.

GINI: Yes.

CHIP: And then pretty soon, you look at the credit card statement, you’re like, “I didn’t realize that I still had that account.” And the larger your agency gets, the more likely you have these things just floating around out there. So you do, you need to take a look at them from time to time and say, “Hey, are we still using this? We subscribed to this webinar platform. Are we still using that one?”

CHIP: Often times I talk to agencies, they’ve got multiple webinar platforms that they have for use either because clients only like one particular one, or maybe they use one in-house, or they were experimenting and forgot to cancel it. There’s a lot of these things out there. Do keep an eye on them because while in and of themselves they’re not huge expenses, they do add up as you combine them all together.

GINI: Yes, they do. It might be $100 here or 100 bucks there, and all of a sudden, you’re $2,000 a month on stuff.

CHIP: Senator Everett Dirksen said, “A billion here, a billion there, and pretty soon, you’re talking about real money.”

GINI: Oh, to live that life.

CHIP: Actually, I think he said, “A million here and a million there,” but because he was a senator back 40, 50 years ago.

GINI: Right, so we can inflate it.

CHIP: Yeah. If you don’t say billion, then it doesn’t sound very interesting.

GINI: Right, right.

CHIP: Pretty soon, it’ll be a trillion here, a trillion there before it adds up to anything. That’s another point. Things do add up, and so one of the areas you really need to keep an eye on are your accounts receivable. Again, do this at all times, but it’s the kind of thing where, as you pointed out in the preshow notes, this is an area where folks are going to be signaling their own internal problems more quickly.

CHIP: If they start slowing down their payments, you now know that they’ve got some kind of an issue. It may just be staff inefficiency. It may be that they’ve let some people go and so things are going slower, or it may be they’re actually having a cash crunch. That’s something you really want to keep an eye on because A, you need to make sure your own cash flow is in good shape, but you also want to make sure they’re not building up large [crosstalk 00:23:10].

GINI: Not only that, but I also think that’s a leading indicator of a down economy too because they’re slowing down payment, which means… It could mean they’re trying to hold on to cash as long as they can.

CHIP: Right. Right, but the only thing to be cautious of there is they could be doing it out of the same fear that you have.

GINI: Right, right.

CHIP: So then, you’re just feeding each other’s fear, and there’s not really anything going on, but you all of a sudden think there is because you’ve made each other believe it. But either way, you want to make sure your receivables are in good shape, so there’s no downside to pushing to get it where it needs to be. Of course, if you’ve got your clients paying on time, what does that lead to? Cash reserve.

GINI: Cash is king.

CHIP: And cash is king. Cash is good. This is something, just about every agency I look at does not have nearly enough cash reserves.

GINI: It’s funny. I think pretty much every accounting expert in the world will tell you three months, and that just is not comfortable to me. I want to have more than that. [inaudible 00:24:06].

CHIP: It depends on three months of what, right? Because there are different ways you can look at it. It can be either three months of your expenses less any expenses that you have direct to clients. It can be cover your whole payroll, it can be cover just your core operations. There’s a lot of different ways to look at it. Bottom line is you ought to have enough that if your clients just stopped paying you straight up for three months, you’d be okay.

CHIP: But the reality is, most agencies are not in a position to do that. Ideally, you want to do that out of cash itself and not lines of credit or those kinds of things. At a minimum, you want to make sure that you have those lines of credit so that if all else fails, you can at least weather the storm. Obviously, you need to be careful about how you use that because you can overuse lines of credit. That’s, again, another topic for another day probably. But you do want to make sure that you are positioned to take any short-term impact that you have to.

GINI: Yeah. I think it’s good advice for life in general because you want to do that on the personal side as well. The reason cash is king is a mantra is because it’s true, so save as much as you can.

CHIP: Right. Of course, a lot of this comes down to having the relationships with your clients and just saying, “Hey, how are things going?” And if you’ve got a good, strong relationship with your clients, they’re going to be fairly candid with you. Or if they’re not, you can read between the lines because you know them. Again, this is an area that a lot of agencies get in trouble on because things are going well with their clients, they don’t necessarily feel the need to check in as often. Maybe they’re checking in mostly with the squeaky wheels, and so you need to make sure that you’re making that time available to talk to all of your clients and understand exactly what’s going on.

GINI: Yeah, and stay top-of-mind because I think it’s a lot, lot easier when a client is sitting in a conference room with his or her internal team, and the CFO is saying, “Okay, we got to cut X number of dollars,” and they’re going through line by line, it’s a lot easier to cut an agency when you’re not top-of-mind constantly.

CHIP: Right, which means you need to be able to not just stay top-of-mind, but also explain your value. We talk a lot about measurement and analytics in the agency space. That’s something that you need to really focus on right now and make sure that you’re providing the ammunition to your client contacts so that they can continue to sell it upstream as the pressure comes, and so everybody understands what is the value that you’re providing. It’s not just that warm, fuzzy feeling. It’s you can actually point to some data that says that you’re being effective.

GINI: Yeah. I mean, if you do your job right, then they’re sitting in the conference room, and the CFO says, “We need to cut so-and-so agency,” and the chief marketing officer, or the CEO, or whoever it is that you’re working with goes, “No freaking way. They have been able to generate X number of dollars for us this year.” That’s ideal.

CHIP: Right. Right. Yeah, and that is absolutely critical to be able to understand that yourself because if you can’t communicate that to the client, then they’re not going to be able to communicate it to whoever the budget makers are within their own organization. The other thing that this brings up is you need to not only know your client, but you need to know that industry within which you’re operating or the industries within which you’re operating so that you understand what are the sensitivities there.

CHIP: Obviously in the agency world, everybody talks about the importance of niching down, and being focused, and all that, and I completely agree that you need to have a focus. You don’t necessarily have to zero it in on just a very tiny industry or anything like that. In fact, that’s probably not a good idea, but you need to balance out how closely targeted you are with what your understanding is of their economic situation and how you de-risk yourself, perhaps by expanding to parallel, adjacent industries, perhaps by solving the same problem for a different group that maybe is a little bit more recession-proof.

CHIP: Think about how you’re positioning yourself so that you are still able to identify yourself as unique in what your expertise is, but not so unique that you’re going to get hammered because your industry is the first to go down.

GINI: Elder care and pet care, both recession-proof industries.

CHIP: God. I can’t imagine having [crosstalk 00:28:32] one of those. But yes, if you would like to be recession-proof, then those might be areas to look at. Obviously, some people prefer pets far more than I do.

GINI: And old people.

CHIP: And old people, yeah, or people just generally.

GINI: [crosstalk 00:28:49]. Or people.

CHIP: Or people, yeah. Whatever. Yeah, certainly be thinking about those kinds of issues. Speaking of people, agencies are made up of people.

GINI: They are indeed.

CHIP: In fact, they are made up not just of you, the agency owner, which we’ve focused on largely so far because, well, you’re the listener and we do want to cater to your needs. But at the same time, it’s not just about positioning the business for the recession. It’s also thinking about your workforce. It’s thinking about your teammates, and how do you position your agency to be helpful to them as we go through a period that will be just as challenging for them as it is the overall business?

GINI: It’s interesting because one of the, I can’t remember which, if it was the research… I think there was an HR article you sent me, and it talked about a couple of things that I thought were really interesting to help your employees. One of them was providing financial wellness. It talked about how not only are you providing the information that they need to have personal financial wellness, but you’re also providing opportunities for them to pay back student loan debt or other types of debt, and you’re giving them the tools that they need to be successful on the financial side in their personal lives.

GINI: I thought that was a really interesting perspective because I’ve never worked anywhere where they’ve given me tools to be financially secure on the personal side of things. I thought that one was really interesting, and especially because of the school loan debt that so many people face, and it becomes crippling. How do you offer tools, not necessarily pay it back for them of course, but how do you give them the tools that they need to have success on the personal side of things so that they in turn are more loyal, you’re building a better culture, the morale is really high because you’re helping them succeed more than just at their job?

CHIP: Yeah. I thought it was a really interesting article. It was in HR Daily Advisor, and we’ll include a link in the show notes. I will say it is a little bit biased because the author is someone who has a company that provides financial wellness benefit software for employers for their employees. But that said, it’s still good ideas, and trying to think about how you provide services, how you educate them, how you help them navigate everything because look, the workforce is much different than it was 30 or 40 years ago.

CHIP: 30 or 40 years ago, you jumped in, you had a job. You pretty much had all the basics taken care of by your employer, whether that was healthcare, or a pension, or those kinds of things. Now, employees are much more on their own with these things. Just about everybody is now on defined contribution plans, 401k-type things, or IRAs, so they’re responsible for their own retirement. They are responsible for doing their own savings programs. They’re increasingly responsible either for a portion or all of their health costs and choices, and so a lot of that is putting additional pressure on, and as you mentioned, obviously the student loan debt is a huge thing at the moment. So trying to understand what the challenges are that they’re facing, and how you as an employer can help provide them with some resources is, it’s really smart.

CHIP: Frankly, it helps you with your other problem that we were talking about a moment ago, which is it’s hard to find talent out there. Well, make sure you’re retaining your best talent because you’re providing them with the tools so that their stress levels are lower, so that they appreciate what you’re doing. It doesn’t necessarily mean you have to spend a ton of money or write them giant checks. A lot of it is just increasing their knowledge and pointing out where the resources are for them to take advantage of.

GINI: Which leads to another point. I think it was Daniel Pink’s Drive that talked about how money is not a motivator for human beings.

CHIP: Right.

GINI: Of course, we all need to have our basic necessities met, and we have to be able to make our rent or our mortgage, and buy groceries, and all that kind of stuff, of course. So money has to be involved, but it’s not what motivates people.

GINI: What motivates people is giving them growth opportunities, or finding new things for them to do, or projects for them to be involved in, or see that they’re making a difference inside the organization. I mean, you should do this in general anyway, but now is a really good time to start bringing in those kinds of opportunities for them. It doesn’t necessarily mean there has to be a raise or a title promotion, but giving them new opportunities to expand their skillset, to grow to see that the work that they’re doing is affecting the growth of the organization.

CHIP: In addition to that, in addition to empowering them and giving them those opportunities, you also need to be open and transparent with them. I think this is an area where particularly when a business, but particularly agencies head into economic challenges, the immediate instinct of the agency owner is to close the door, hide behind the door, and just kind of hope and pray that everything is going to work out. It means that you’re not out there communicating with your team and saying, “Hey, look. Here’s the reality. We’re experiencing some contraction. We’ve got clients who are cutting back. They’re putting more pressure on us from a price standpoint.”

CHIP: You need to be open with your team and help them understand the challenge that you’re facing for two reasons. One, they have a right to know because if there’s some instability there, they ought to be aware of it. But second, and more importantly, much more importantly, they will have ideas.

GINI: Yes, yes.

CHIP: They can help you get out of it, but they can’t do that if they don’t know. They cannot read your mind, and particularly if you say, “Oh, it’s all fine. It’s all fine,” up until the moment when it’s not. They need to be part of the solution. They can sit there and say, “Hey have we thought about this as far as a business development effort? Or have we thought about this from a cost-saving standpoint?” Or whatever, they will help you think creatively if you only let them.

GINI: Yeah. I will admit freely that some of the best ideas that we’ve had, some of the things that we’ve launched externally to the agency owner community have been because of me saying, “I’m lost, and I need your help,” and my team just rallying around and saying, “Well, have you thought about this?” Or, “I thought that what you did over here was really smart. Let’s expand that.”

GINI: I have a really good friend and agency owner client who says, “We’re supposed to be the smartest people in the room, and so it’s hard for us to say, ‘I need some help,’ but having the courage to be able to do that, and getting the help from every level inside your organization, is one of the bravest things you can do.”

CHIP: Mm-hmm (affirmative). I will tell you, and I’ve said this before on the show, your employees will fill the information vacuum. If you don’t tell them what’s actually going on, they’re going to imagine it, and they’re going to imagine it much worse in most cases than it actually is because guess what? They know when clients are cutting back or canceling. You know why? Because they’re the ones who do the service.

CHIP: So if that client no longer calls, guess what? They know they’re no longer a client. If you’ve got vendors who are harping on you because all of a sudden you as an agency are paying late, guess what? Your team knows that. It’s not just the finance team because those vendors don’t complain just to the finance team. They complain to the actual end users, and so everybody knows, and they’re just going to fill that vacuum if you don’t talk with them and if you’re not open with them.

CHIP: If you have these challenges, just open up. I’m not saying you need to hand out your checkbook and have everybody have full access to it, but frankly, I would tell you that the more trouble you’re having, the more transparent you should be.

GINI: Absolutely.

CHIP: Because the more likely they are to be able to help you.

GINI: Yep, 100%, totally agree. It’s very uncomfortable, I speak from experience, but it’s one of the most valuable, and to my friend’s point, courageous things you can do.

CHIP: It’s not just your team. Take advantage of, if you’re in the Spin Sucks Community or part of a group like that, take advantage of those locations to be able to get feedback, suggestions from other people who are in similar situations because guess what? If indeed we do hit a recession here soon or whenever we do hit it, there are going to be lots of other agency owners who are going through the same thing.

CHIP: You can share your experience, they can share theirs. You might get some good ideas from that as well, and if nothing else, you’ve got people who are going through the same challenge. That can just be, from a stress standpoint, really helpful to talk it through with people and know that you’re not alone.

GINI: Yes. That’s one of the best things is just to get it out in the open, say it out loud, and get some help.

CHIP: Right, because if you don’t, it doesn’t mean it’s not happening.

GINI: Right. Fair.

CHIP: If your business is about to go belly-up, it doesn’t matter whether you talk about it or not. It’s still going to happen.

GINI: Yes.

CHIP: In fact, if you talk about it, it’s less likely to happen because maybe, some opportunity comes along, or some idea comes along because you opened up.

GINI: That’s the whole point of The Secret. Put it out there, and the world will reward you.

CHIP: Right. I think the other point here is, since we’re just at this point anticipating the recession, it’s not actually here yet, you still have an opportunity to invest in your team in order to upskill them in order to make it, so that the services that you’re providing clients are more sticky, so that they’re better positioned if indeed you do have to make cutbacks so that they can land somewhere well on their own, and that then brings good karma back to you, and hopefully builds a network for you. I’ve said repeatedly on this show you doesn’t view employees leaving as a bad thing. It’s actually an opportunity as long as you’re not hemorrhaging staff.

CHIP: Help get them smarter and better so that they can help you today and someone else tomorrow. It’s really sensible to be investing in professional development leading in to a recession so that everybody’s on solid footing.

GINI: Yeah. This is one of the things, and I’m speaking just from a PR perspective in general, not every agency, not every industry, but PR for some reason is not accustomed to investing in themselves. Sure, there are conferences that they may send people to, but I think that’s different than investing in professional development.

GINI: What are the skillsets that you need your employees to know? Where do you need them to grow? Where are their strengths? Where are their weaknesses? We’re in a world today where you can find almost any sort of training anywhere online, so let’s get them the training they need to help you grow to the next level, recession or not.

CHIP: Invest in yourself too as the agency owner or the agency leaders. If what you’ve been listening to over the course of this discussion, if some of these concepts are new to you, or if you’re saying, “Jeez, I don’t really understand how to do financial management properly,” or, “I’m not quite as well versed in some of these talent management things as I should be,” find ways to learn about them, whether it’s listening to podcasts like this…

CHIP: You’ve obviously as a listener taken a great step forward because hopefully, we’ve given you one or two useful things over the course of this that you can use. But absolutely find ways to expand, whether that’s going to events, reading things, listening to podcasts. Expand your own knowledge base so that you are better prepared and you’re in a much stronger position when the tough times come.

GINI: When then, I will add a little self=promotional thing. You and I both do coaching with agency owners. There are ways that you can get the professional development you need and, and be held accountable, and work with peers and people who have been in the trenches and know where you are, do what is best for you, and 100% start at the top by investing in your own professional development.

CHIP: Absolutely. Obviously, it does seem self-serving when we say these things, and I don’t care because at the end of the day, my goal is to help people, to help other agency owners in figuring out the path forward as I know it is for you as well. Look, whether that means working with you or me, or it means working with someone else, or joining a group, it doesn’t matter.

GINI: Right.

CHIP: Find ways to get the support that you need to be effective because when times get tough, you can’t just lock yourself in a room and go it alone. You need the help of your team. Yeah.

GINI: Sometimes, I’d like to do that, but all right.

CHIP: Usually, I’d rather lock someone else in a room. Look, you have to take advantage of all the opportunities that there are out there today. It’s really never been easier to find help in whatever form works best for you. If you’re better at learning on your own, if you’re better at working with a coach, if you’re better in working in a mastermind group. There’s all sorts of different ways you can do it, but get the help that you need as an agency owner, give the help that your employees need, and those are the things that will help you be better prepared for the recession, whether it’s next month, next year, or next decade.

GINI: Amen.

CHIP: With that, that will draw into a close this episode of the Agency Leadership Podcast. Hopefully you’ve learned a few things. Hopefully you’ve got a few things that will help you get better prepared for the recession. That’s all I’ve got. Anything else you’d like to add, Gini?

GINI: That’s all I have as well. Be prepared. Forge forward.

CHIP: Excellent. In that case, I’m Chip Griffin.

GINI: And I’m Gini Dietrich.

CHIP: And it depends.

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