Press Room

Sept 7th, 2010 - Economic Recovery from Two to Four-ever
Playing by a new set of rules

For the past three years, with an economic downturn that arguably rivals our great depression, business owners have been forced to learn to play by a new set of rules.  Some have been more receptive to the new rules of engagement than others.  The results speak for themselves.  To this point, I recently read about a local business that became another casualty of our crippled economy.  This regional business closed its doors for good after a highly successful and profitable run that spanned nearly three decades.  From what I read, the owners did everything they could to avert the failure of the business. But in spite of these efforts the business failed.  The consequences of this failure are far reaching.  Over 200 employees have lost their jobs.  A large number of customers have paid substantial deposits for services that were never performed and now they have no idea how to recover their deposits or get their work completed.  As for the business owners, they poured a lot of personal and borrowed money into the business to try to bridge their financial woes, unfortunately that did’t work so they now face financial ruin.
We have all observed a lot of businesses that struggled in the current economic climate.  Those companies that failed to react either correctly or quickly enough to the new set of rules that were forced upon us in 2007 typically end up as a casualty of the economic crisis.  There are many still out there which are stuck in this trap, where the owners suffer in silence sensing their business is in a death spiral but not knowing what to do to remedy the situation.

Fortunately, there are a number of business owners that have figured out the new rules of engagement and their companies are doing a good job of weathering the storm.  These business owners have taken risky, bold, and often gut wrenching steps to survive and even thrive in the economic downturn.  One of the interesting things Bob and I observed about this group of business owners is what we call “Two to Four-ever”.  Rather than figure out how to survive their businesses for the 2-4 years the business pundits were preaching as the timeframe for things to get back to normal, these business owners chose to assume things would not return to normal.  Instead they assumed we were looking at the “new normal”, a time of slower growth and tighter margins.  There would be no return to the unprecedented growth in business and personal wealth enjoyed by so many in the ‘80’s, 90’s, and the first part on this current decade -   at least not in our lifetime.  That party was over and the new normal required a new type of business planning and execution.

Surprisingly, this “new rules of engagement” turned out to be straight-forward and fairly simple to define.  Not surprisingly these new rules also turn out to be much more complicated and risky to implement and execute. So let’s take a closer look.  The new rules are actually so old they are new again.

First the easy part.

Rule #1:  Control Expenses.  In uncertain or declining economic times, businesses must relentlessly (even ruthlessly) identify and eliminate unwise and unnecessary operating and administrative expenses.  This means among other most difficult choices, employee layoffs, and cuts to benefits and G & A expense.  Operating Principle: Business expenses must be brought in line with realistic projections of revenue.  You cannot spend money that you hope to but probably will not recognize or earn. 

Rule #2:  Develop Strategies to Grow Revenue.  Proactively employ key strategic principles to increase top line revenue.  My partner Bob has written his article on the basics for growing revenue.  Beyond that business owners must think outside the box and look for new ways to grow revenue, such as new products or new markets.  Further in this article I’ll give you some ideas how other local businesses have done this.  Operating Principle: Find and exploit new opportunities by redefining your business model and in some cases entering into new business opportunities from the ground up.

Now the hard part.

When it comes to expense reductions, no business owner wants to suffer through the negative emotions and feedback that are the byproduct of it.  Nobody likes to announce wage cuts, permanent layoffs, the reduction or elimination of employee perks and fringe benefits like health insurance.  It is very difficult for anyone to face the reality of feeling hated or being despised by employees because of the decision to eliminate these types of expenses.  But the new rules of engagement will not allow any business owner to hide from the truth –as we see with the high number of businesses currently struggling and ultimately failing.
Note to reader: With no end in sight.

Neither Bob nor I welcome the task facing this cruel reality of reducing expenses and the personal hardships of employees that result, yet we have worked with numerous owners over the past three years identifying and implementing these types of expense reductions.  We found however, that beyond the shock and despair associated with these most difficult new rules of engagement, several businesses on the verge of thriving with healthy revenue growth and tremendous profitability. 

As for the hard part of growing revenue, most of us suffer from inertia.  We don’t like change.  That’s why Einstein made the observation that doing things in the same way, but expecting a different result is insanity.  Companies must find ways to grow revenue so change is inevitable and should be relished.

Here are a few emerging encouraging and inspirational stories.

#1  Leading up to 2007, JM Keckler Medical was firmly entrenched in the sales of capital equipment to the hospital market.  But with the economic downturn, hospitals elected to freeze projects and delay equipment purchases. In developing a strategy to deal with this shift in the business climate, JM Keckler did two things. First, they cut expenses to levels that were consistent with anticipated revenue.  Second, and this is an important one, they decided to shift their business to servicing hospital equipment.  They assumed the hospitals planned to use the existing equipment to the maximum of its useful life which would result in the need to have the equipment properly serviced. Since Keckler already enjoyed a trusted relationship in these hospitals, the addition of service was a natural.  The strategy paid huge dividends within the first year and now the frozen hospital budgets are thawing and capital purchases are returning.  Keckler Medical is a regional leader in both capital equipment sales and service today.

#2  In 2008, ABS presort faced declining sales revenue and profitability as their huge customer base tightened their direct mail and advertising budgets.  The market was also becoming more crowded as regional and national competitors began to expand into the local markets.  Additionally other local businesses in search of new revenue were branching into the sorting and fulfillment business.    Their response was to face the reality and move swiftly to eliminate expenses and to downsize the operation until it was profitable.  Next was to refocus on operational effectiveness and customer service by identifying the three critical success factors that had to go right every day for the business to thrive. Next they worked collaboratively to rebuild the selling system, followed methodically implementing a comprehensive hiring system to identify the best and brightest sales professionals. Finally they recruited and hired an accomplished CEO to complement the family owners and manager’s skill sets.  The result is steady top line sales growth and profitability…and increasing the number of employees who work for the company.

#3  EarthCalc provided engineering support services to the heavy construction industry for several years.  In 2008, EarthCalc’s faucet was turned off almost overnight when the construction industry came to a crashing halt.  Since EarthCalc’ sole service depended upon the resurgence of the construction industry, the business owner, Mike Moridian had to identify another market or business opportunity.  Mike found a niche in the home inspection business and developed a new company called Peace of Mind Inspection Services.  Mike wisely assessed his trusted personal and professional relationships with people in the mortgage and real estate business and that there were still a huge number of properties that were changing hands. All of which required inspections.  This new revenue provided a nice living and helped keep a slimmed down EarthCalc in business until opportunity returned.  Today both Peace of Mind and EarthCalc are experiencing steady growth of top line revenue and profitability.  Additionally the Peace of Mind Inspection business has expanded in the Pest Control business because of the request of their customers in reaction to the outstanding customer service they provide in Inspection Services.  While Mike is not a client of NextStep, his story is inspirational and must be shared.

#4  Sean Carroll is the owner of Ross F. Carroll and General Engineering and Paving Contractor.  His business was adversely affected by the massive decline in the economy and the disappearance of most major construction and development projects.  Sean took on the incredibly difficult task of reducing expenses and eliminating divisions whose time had passed.  Sean was determined to reduce expenses until he could reliably match the revenue he could realize with the expenses he would incur…not the revenues he hoped to realize or the expenses he hoped he wouldn’t need to eliminate.  Along the way Sean saw an opportunity to expand into a new division providing millwright services to companies where he also enjoyed trusted business and personal relationships.  Through the acquisition of a struggling company, Ross F. Carroll has moved successfully into this fertile market and is generating top line revenue and profitability for the company.  The slimmed down general engineering business is operating at a reduced but profitable level until the construction and development projects return.

These are a few examples of companies that are surviving in the new normal.  These business owners view the economic recovery as “Two to Four-ever”, building their businesses to withstand whatever challenges the new normal throws at them.  They are taking the bold steps to not only survive the economic downturn but to actually thrive today, tomorrow and for years to come. Bob and I have yet to find any business owner who has eagerly run towards these operating and financial economic realities.  But to resist these truths is actually counter intuitive and in many cases only delays the agony and despair associated with failing to change direction by setting a new course.

Pete Herrmann