Financial Health

Guide to Recession Planning for Firms

Guide to Recession Planning for Firms

“Live for today, plan for tomorrow.” This old adage is an appropriate way to think about architecture economics, albeit a bit vague. It’s great to enjoy a healthy pipeline of work during a strong economy, but when the inevitable downturn occurs, it’s important to have a plan in place for your firm. Rather than dreading what you can’t control, follow our tips to feel secure by understanding how to increase your value, strategies for cutting or shifting expenses, and the types of clients and services to focus on to make your firm recession safe.

Table of Contents

  1. A Brief History of Recent Recessions
  2. Predict Recessions Using Economic Indicators
  3. Recession Safe Strategies for Employees
  4. Is My Best Good Enough?
  5. Firm Leaders: Create a Plan for Recessions
  6. Trust Your Plans Over Emotions
  7. Combine Research with Real-World Experience

A Brief History of Recent Recessions

Many of us generically think of a recession as a long-term economic slowdown that results in bankrupt business and increased rates of unemployment. The technical definition that is agreed upon by many economists is “two consecutive quarters of declines in gross domestic product (GDP), which is the sum of the value of all goods and services produced in an economy.”

Let’s take a quick look at the causes and effects of recessions going back to the 1970s:

  • OPEC Oil Embargo
  • The OPEC oil embargo of 1973 created “stagflation”, or a mix of economic stagnation and inflation. As architect Duo Dickinson remembers, “In the insanity of those economics, this translated into mortgage rates in the high-teens. A lot less design happened because far fewer buildings were financed.
  • Dot-Com Crash
  • As the PC and internet gained household popularity in the 1990s, investigators began placing too much faith in information technology, often investing in companies with a “.com” in the name that never generated profits. Bankruptcies caused by the growth-over-profit strategy, accounting scandals at large tech companies, and a recession in Japan sparked a 78% drop to the NASDAQ-100 between its peak and lowest point on October 9, 2002.
  • 2008 Housing Bubble
  • As housing prices declined in 2006 after a boom, banks would not refinance homes with values less than the mortgage and foreclosed on them instead, while owners defaulted since the loans they took were optimistic at best. The greed of financial institutions, investors, and insurance companies, coupled with deregulation of some of their worst practices, led to significant residential architecture unemployment during the Great Recession.

Predict Recessions Using Economic Indicators

Some predictable and observable themes of the recessions above include inflation, overvalued investments, and greed. Less predictable is how companies will react to government policies, triggers from the global economy, or natural disasters that affect a large economy.

There are those who make a profession out of following and making predictions on the economy. You should take the time to understand the basics as a way to keep an eye out for signs of a looming recession.

The Architectural Billings Index (ABI) is just one of the many tools that you should observe. This measurement from the AIA is used to forecast non-residential construction spending in America nine to twelve months into the future.

The ABI has it limits, but is still a useful indicator of overall construction spending, which is linked to overall economic health. By learning how to use the ABI, you can plan staffing, prepare for a fluctuating market, and make decisions on long-term projects affected by the market.

Recession Safe Strategies for Employees

As an employee, the distilled advice is to make yourself invaluable to your firm. How does one do that, and what happens if that’s not enough?

  • Designers
  • In addition to your projects, follow contemporary trends in your specialty, take a daily peek of ArchDaily or similar, and read the architectural magazines of your choice. Become a reference point for material and product selection for others in your office.
  • To go a step further, take on a role as a thought leader in the industry: Become an adjunct professor, give lectures on various topics whenever you can, and publish articles where possible.
  • Project managers
  • Use your planning skills and emotional intelligence to exceed the expectations of people inside and out of the office who rely on you for expertise, coordination, and communication.
  • If you find a software, app, or other technology that makes your tasks more efficient, study up on it, bring it to the attention of firm leaders, and volunteer to test the product on one of your projects.
  • Project architects
  • Take note (literally) of how your excellence in Construction Documents and Construction Administration has led to accurate pricing documents, smooth permitting processes, and strong relations with contractors and tradesmen.
  • Designers may get the hype, but good project architects will bring in repeat work and might hear of leads from contractors. It’s important to maintain relationships with the construction industry; new leads will be invaluable to the firm.

Is My Best Good Enough?

Unfortunately there are circumstances where firms have no choice but to lay off even the best employees. When the writing is on the wall, you should schedule a review with your superiors to address what you can do to help the firm through turbulent times.

Be flexible in what you are willing to offer, and what you are willing to learn. The more diverse your abilities, the more situations an employer can find to place you.

As a last resort, it is not unreasonable to discuss how your hours may be limited with a reduced salary, so that you can ride out the storm. This is always a tricky line to walk - be careful not to undervalue yourself as you will not be doing anyone any favors.

Firm Leaders: Create a Plan for Recessions

As an owner or principal, you have the responsibility of ensuring your own livelihood as well as others. Recessions are inevitable, but a rational response can make a big difference.

Let’s analyze how to plan for recessions, what to do during a recession, and how to react in the aftermath.

  • Create a large pool of leads
  • The question of whether to be a generalist or specialist in architecture will always be a debate, but one unarguable con of specializing is that it limits the amount of leads for your firm. That doesn’t mean you should switch your firm’s focus from residential to healthcare overnight - that strategy won’t work anyway.
  • Instead, take note of the skills you and your office have. If you have a residential Project Architect that has five years of prior experience in healthcare, it’s something to lean on to increase the size of your sales funnel.
  • It’s critical to have multiple lead sources, at least ten according to the Architect Marketing Institute, so that you can always consider a variety of projects based on latent abilities of your total firm.
  • When the pipeline of your specialty work is strong, you can filter out peripheral work. When the economy slows, you’ll be able to chase projects that your employees have actually worked on before.
  • Account for a variety of scenarios
  • Recessions vary in severity and length, and can affect industries differently. That’s why it’s important to be recession safe for mild short-lived recessions as well as more dire circumstances.
  • The basic strategies in tough economic times are to increase revenue, reduce expenses, or a combination of both. As an example, you may plan to reduce expenses by tiers:
  • 10% Expense Reduction
  • Ideally your first step does not affect the livelihood of any employees. This is the time to consider competing for jobs that you and your employees have past experience with.
  • It’s also a time to stay on top of money owed by clients, asking as many times needed for past-due invoices.
  • 15% Expense Reduction
  • Rather than laying employees off, it’s possible to reduce hours at reduced pay, such as every other Friday off. It doesn’t need to be the entire office; only you will know based on your circumstances if it makes sense to relax hours for design, technical, or support staff.
  • 25% Expense Reduction
  • Layoffs are tough for all parties, so it’s best to treat those that must go with respect and dignity. You might be able to hire them again when conditions permit, or they may become a client in the future.
  • To increase revenue, you might shift some expenses to marketing and public relations. Rather than putting 100% of your effort into the work you have, spend time and money to increase your sales funnel.
  • Keep cash on hand
  • With at least six months of cash reserves, you can keep your employees and demonstrate to leads and clients that you are able to get work done at full capacity. This is not just recession safe advice, but advice for any storm you may weather.

Trust Your Plans Over Emotions

Architecture unemployment during the Great Recession was felt differently by firms based on their size, region, and specialty, but firms who were prepared were better suited to ride out the storm.

  • Use your premeditated plans
  • Since it takes two consecutive quarters of declines in (GDP) to define a recession, you will have some time to decide whether or not to implement your expense-saving strategies. Don’t drag your feet; commit to the plan that you’ve reasoned through without emotion.
  • For example, if your plan involves chasing past-due invoices, you may need to start operating differently: the design or technical employees who have more frequent contact with clients will have to start asking about payments, which is outside of their wheelhouse. This might require a degree of interpersonal training to deal with these uncomfortable subjects.
  • If layoffs become a necessity, treat people with respect. Rather than giving an hour to clean out and creating an off-limits office, consider a more favorable dismissal like offering recommendations to other firms, providing resume and interview training from a consultant, or offering them a guest desk for a limited time to help with their job searches.
  • You might be able to hire those people back in the future without bad blood, or they can end up as clients or representatives that recommend your firm.
  • Expand on services to existing clients
  • Recessions are a critical time to nurture relations with previous and current clients and contractors. The majority of the average firm’s work comes from repeat clients, and the percentage only increases as sources of new work dry up.
  • Imagine your firm specializes in corporate interiors: A recession can feel scary because designing trendy new offices for growing companies does not go hand-in-hand with a slowing economy.
  • But think of the flip side: companies may downsize or reorganize, and they need help doing that. If you have a strong relationship with a client, it’s time to jump in and offer expanded services related to your specialty like Strategic Planning for corporate interiors.
  • Your leads will appreciate a client-focused mindset and catered questions about their unique problems over simply selling services. As clients start to sublease portions of their office as part of their downsizing, a good relationship with the client might lead to a recommendation to the new tenant.
  • Shift focus from work to wins
  • While it seems like 100% of your focus should be on satisfying clients, you really need to focus on increasing your sales funnel. While you are cutting expenses, there are some areas that you should increase expenses.
  • If you don’t have a marketing or public relations employee or consultant, now is the time to consider one or beef up the efforts. As a recession drags on, the salary of a design or technical staff can be shifted to ensuring a greater revenue stream.
  • Hone skills and accreditation
  • If you find yourself twiddling your thumbs, improve yourself or your firm. It’s a good chance to catch up on things you had been promising yourself - learn a new software, become a LEED AP, or upgrade your website.
  • Those that have been laid off should find ways to make their resume more robust. When firms begin hiring again, they will prioritize those who have found ways to add value in their time off.
  • Use space efficiently
  • As clients downsize, you might find yourself downsizing as well. Landlords and owners might be more sympathetic to negotiating a lower rent, especially if the alternative is your firm moving to another location while they struggle to find tenants.
  • Sometimes all you have to do is ask! If there are penalties for terminating a lease early, see if the landlord is willing to forgo these during tough economic times.

Combine Research with Real-World Experience

As the economy strengthens, you will be busy ramping back up your firm. When the dust of a recession settles, it’s time to compare how your carefully laid-out plans have succeeded or failed.

You enacted a plan to reduce a four-day work week with reduced pay - Were all projects properly attended to? Did the reduced expense allow you to strategically improve business development?

You hired a marketing consultant - Did your sales funnel increase or decrease? Did you end up taking on projects that are a new typology for your office?

Recessions have been happening about every four years since 1990, so everyone is going to be forced to deal with them eventually, either as an employer or employee. But we can learn from the past and plan for the future.

Become a student of financial indicators. Work with an accountant to create plans A, B, and C. You will be busy keeping clients happy and vetting leads, but don’t forget to treat employees well so that you can all have a fulfilling future career together.

Architecture economics are at the mercy of the local, national, and global economy, so it’s important to be recession safe for a variety of situations. With the tips above, we know you will survive the tough times and thrive in the good times.

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