In my last post, I shared the story of my company’s struggle and ultimate survival through a recession, and challenged you to consider this question:
“What would happen if your 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 you survive?”
In this and a follow-up post, I will share a checklist of sorts to help you assess your own business in order to prepare for the inevitable next recession.
And make no mistake: A recession is coming. Economists may not agree on when it will happen, but one will happen. What’s not assured is your company’s fate. If you take steps now, you can help shore up your firm for survival. It starts with recognizing your weaknesses.
So, consider these, and if they describe you, or your business, consider making changes — now. Today, let’s look at your overall business.
Perm (Direct Hire) focus. You are at risk if you are a permanent-only placement business, or heavily so. And it’s tempting to head that way because perm in a buoyant market is highly profitable. And we have had 10 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 gross profit ratio? 65% to 70% temporary or contract, with the remainder perm.
Vulnerable niche. Your niche specialization 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 the “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.
Vulnerable client market. Are your clients themselves 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.
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Superficial client base. You have no flagship clients, where revenue is entrenched and substantial, and relationships are deep. Rather, all your client relationships are superficial, “retail,” or piecemeal. Your company has shallow consultant relationships that are mostly transactional and not based on trust and credibility. When clients shun all but their quality relationships, you will no longer have a seat at the table.
Client dependency. You have too much reliance on one or two clients, which leaves you exposed entirely if they were to disappear. 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 are lost. This can even happen in good economic times when a recruitment business becomes too dependent on one customer — and then that deal is lost. The smart thing to do is run a P&L on your business without the GP from those clients, right now. How does that look? Pretty ugly? Take the time now to expand your “non-elite client” portfolio. The diversity of revenue streams will save you.
High fixed costs. Does your company have 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. Fancy offices in recruitment are all about ego. The owner’s ego. No one else 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.
Be smart about the details. Does your lease agreement allow sub-letting? (I have personally sublet office space on numerous occasions, halving rent as our business subsided.) Do you 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 10 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.
In my final post on positioning your firm for surviving a recession, I cover the human element: those people you choose to keep on your team as well as you and the decisions that you make that can cripple your chances.
