The cyclical nature of business is an ongoing challenge for engineering firms of all shapes and sizes. With high overhead and complex project demands, wringing out efficiencies can be difficult in the best of times. Toss in an economic downturn, and the situation can quickly become unnerving.
At the moment, some economic signals are flashing “recession” while others are not. In September 2022, Wolters Kluwer Blue Chip Economic Indicators reported that there was a 54 percent chance of recession in 2023. Yet many A/E/C firms continue to enjoy project backlogs that extend for months or years, and more projects are on the way, thanks to the $1.2 trillion Infrastructure Investment and Jobs Act.
Amid these mixed signals, some tough decisions are in order: Is it wise to wait and ride things out, or is it better to respond early? Is it necessary to trim staff, reduce office space spending, or incorporate other potential cost-reduction measures? Is there a way to fortify the balance sheet? “It’s a confusing and difficult environment,” says John Doehring, managing principal at business consulting firm J. Doehring & Co.
Nevertheless, he and other experts say firms can take some proactive steps to prepare for whatever ensues. “The goal should be to become a high-performance organization,” says Chuck Roberts, president and CEO of business management consulting firm Performance Management Group Inc. “This will enhance your revenue and profitability in both good times and bad times.”
Attempting to decipher the present mix of economic signals is a formidable task. “The current environment doesn’t fit the classic definition of a recession,” Roberts says. “If people are waiting for an official pronouncement and clear signals, they may never come.”
For now, firms can take tactical steps to buffer the impact of a potential recession. Colvin Matheson, a chartered financial analyst (CFA) and managing director of the A/E/C industry corporate finance advisory firm Matheson Advisors, suggests shifting a firm’s focus to the public sector, which tends to feel the impact of a recession six to 12 months later than the private sector. It’s also wise to keep an eye on a firm’s backlog burn rate and new proposal activity. “If the backlog is not being replaced with new opportunities and wins, it’s critical to balance a firm’s cost structures with the projected new work,” he says.
Finally, Matheson recommends reviewing working capital and net equity levels. “In normal times, we suggest a ratio of net accrual equity to net revenue above 20 percent,” he says. “But when times get tough, firms may need to target a ratio of around 25 percent more cushion.”
A common mistake, Matheson notes, is reacting too slowly and then experiencing a mismatch between operations and workforce and the projected workloads. This in turn can drain cash and lead to a shortage of working capital—particularly if a business also distributes its profits near year-end to avoid corporate taxes. When economic uncertainty rises, protecting balance sheets really matters. “Accounting results are a trailing indicator,” he says. “Accepting lower profits during the economic storm in order to keep the firm’s capacity intact may be necessary.”
“The current environment doesn’t fit the classic definition of a recession. If people are waiting for an official pronouncement and clear signals, they may never come.”
CHUCK ROBERTSPRESIDENT AND CEOPERFORMANCE MANAGEMENT GROUP INC.
At the same time, “No firm wants to find itself at a disadvantage if the economy stabilizes,” says Mark Goodale, principal at business management consulting firm Morrissey Goodale. He and others say that the best way to address uncertainty is to be equipped for both up times and down times—thus reducing the need to respond to specific market conditions.
“There are many factors that can create adverse business conditions, including a recession within an industry or a sector, even if the global economy remains relatively stable,” Roberts says. “It’s vital to think in broader and more holistic terms about how to operate the business.”
A starting point is to recognize a couple of key factors, Roberts says. “As inflationary pressures increase, margins may decrease. A firm may wind up as busy as ever but less profitable.”
It may also have no leverage to raise its fees, and internal conflict can occur when teams are forced to handle more work with no increase in compensation. Second, if demand for A/E/C services ebbs, firms that tend to be hit the hardest are those that lack differentiation. “They—and the services they provide—are viewed by clients as price-sensitive commodities.”
Navigating these challenges requires an organization to have insight and visibility into the overall economy as well as its internal metrics. “When the economy is up, it’s very easy to lose your discipline and get away from good business practices,” Goodale says. “During a downturn, problems become exposed, and many of the things that previously worked are no longer effective.
“This is when it’s crucial to get into good habits, like investing in the learning and development of your people, continually improving your business processes, and focusing on delivering greater value and a superb experience for your clients. You don’t want chaos, but you don’t want to let moss grow, either, or you’ll wind up losing a lot of ground in a short amount of time if and when conditions deteriorate.”
Building a recession-proof firm is contingent on recognizing a crucial fact: Companies that follow best practices are better equipped to handle whatever unfolds in the economy or within an industry. They assess the range of possibilities at any given moment and act accordingly. This requires adaptability, flexibility, and resilience, Doehring notes. “They have the toolkit to manage a vast array of events, scenarios, and possibilities.”
An economic downturn may seem like an ideal time to trim what seems to be nonessential costs. However, high-performance firms don’t skimp when it comes to these marketing tactics:
Develop a robust marketing plan. “A downturn is an opportunity to refocus on the things you do really well. This serves as the foundation for business success,” Cheinman says.
Communicate what really matters. Today, it’s vital to build an excellent website, have a social media program, and utilize other digital tools to promote a firm and its social values.
Embrace creativity. Skip the boring press releases that merely regurgitate facts and figures about a project. Instead, consistently share bite-sized chunks of information and intel that your clients will value, and focus PR efforts on the positive impact your projects have on people and their communities, Goodale says.
Demonstrate project expertise. This may take the form of e-books, videos, or white papers. The best content delivers a service: It informs potential customers and positions a firm as an expert source.
Establish a feedback loop. It’s critical to plan incrementally and incorporate metrics that offer insight into what’s working and what’s not. “An agile marketing plan helps you respond to rapidly changing conditions,” Cheinman says.
“When challenges arise, best practice companies have the tools and expertise to deal with them effectively. They’re better able to prosper through the inevitable economic cycles.”
JOHN DOEHRINGMANAGING PRINCIPALJ. DOEHRING & CO.
How can a firm get to this higher plane? “The first step is identifying exactly what you want to be and build a brand,” says Ida Cheinman, principal and creative director at Substance151, a brand strategy, design, and digital firm that focuses on the A/E/C industry. “You must communicate the things you do extremely well. When your clients aren’t clear about what value your firm delivers and how it is different than everyone else, they are more likely to haggle over rates.”
As a firm grows, it’s easy to stray from the initial focus and mission statement. “Many companies wind up becoming a decentralized hot mess,” Doehring says. “They wind up trying to be everything to everybody and take on every project.”
On the other hand, organizations with a sharp strategic focus and alignment across groups and teams can react to changing conditions faster and better. “Different groups are in sync, and it’s possible to adapt hiring, training, and even cross-functional work to fit current conditions,” he says.
“If the backlog is not being replaced with new opportunities and wins, it’s critical to balance a firm’s cost structures with the projected new work.”
COLVIN MATHESONCFA AND MANAGING DIRECTORMATHESON ADVISORS
Differentiation must extend beyond a marketing plan and a mission statement—and it isn’t created by a firm simply stating that it is a trusted advisor, a full-service company, or innovative, Roberts says. True differentiation can be achieved when a firm conducts a three-dimensional positioning analysis to identify where it stands in relation to competitors. “It’s an iterative process that involves analyzing different combinations of your firm’s characteristics, such as service level and pricing, relative to competitors,” Roberts says. “It’s key to being perceived as different from your competitors and should be a key element of your strategic planning.”
In fact, this foundation is critical for recession-proofing a firm. It helps an organization develop a competitive advantage through fundamental operational changes and internal efficiencies. “A common mistake people make is focusing on external competitive advantage, such as getting a product or service to market first,” Roberts says.
Yet this is an expensive process, and the advantage is only temporary. As others inevitably enter the market, prices drop and margins decline.
On the other hand, companies that focus on internal, operational advantages can weather economic storms and abrupt changes in the competitive landscape. “Internal advantages are difficult for competitors to detect and even more difficult for them to replicate,” Roberts says.
The right metrics provide a lens through which to view events—and can help firms determine how to proactively plan and respond. For example, rather than monitoring billable utilization, which measures the percentage of a company’s time spent on billable client work, Roberts suggests focusing on how much work gets completed in a unit of time. “The question is: How effective are engineers and others at getting work done efficiently?”
Goodale believes that this flow efficiency is a make-or-break issue. Value is only created when something is completed. Flow efficiency is a way to track how efficiently that value is being created. It is calculated by dividing the time spent on a task by the amount of total time it took to deliver the task, then multiplying by 100. For example, if a project takes a person 10 hours to deliver but they only worked on it for five hours because they had other tasks and various distractions, flow efficiency for that task would be 50 percent. The same calculation can be applied to an entire process.
Instead, many firms measure resource efficiency, which revolves around how many hours are charged to a particular project. “Most industry firms manage for resource efficiency,” Goodale says. “And that means keeping everyone busy. But what is actually getting done? Is staff working on things that add value? Or instead, is time being spent on rework, resubmittals, or responding to RFIs?
“While all of those things need to get done, they don’t add value to a project and the client doesn’t get anything more than what they already paid for. How much more efficient and profitable would a firm be if everything the staff started, they finished uninterrupted or close to it? Managing for flow efficiency is about creating and delivering value faster, and with significantly less waste.”
Other metrics can also aid in strategic decision-making—including when economic instability appears. For instance, billing multiple—which measures billings against direct labor costs—provides additional insight into staff efficiency, net revenue per employee demonstrates project efficiency, and working capital offers a snapshot of a firm’s current liquidity. With these indicators in place, a firm can adjust quickly—and understand more completely how decisions will likely play out.
“No firm wants to find itself at a disadvantage if the economy stabilizes.”
MARK GOODALEPRINCIPALMORRISSEY GOODALE
A firm’s culture also plays an important role in navigating economic turbulence. Training, trust, and accountability are critical, Roberts says. “When a firm promotes technical personnel into supervisory positions, they require supervisory skills training,” Roberts says. “This is an opportunity to enhance employee alignment and engagement—and reduce turnover. It’s a chance to build a framework of self-accountability.”
It’s also beneficial to develop a culture that revolves around critical thinking and a willingness to constantly look for ways to improve processes. Business leaders must be willing to listen and consider ideas, even those that seem somewhat threatening. This is especially true during an economic downturn. “It must be acceptable (and better yet, encouraged) to question the status quo and find the things that interfere with flow efficiency and other critical performance metrics,” Goodale says.
“You can measure what’s working, what isn’t working, and fill the gaps accordingly. You’re able to react to conditions as they occur—with the backdrop of having a strong brand that delivers on a clear set of values and capabilities.”
IDA CHEINMANPRINCIPAL AND CREATIVE DIRECTORSUBSTANCE151
Finally, firms can benefit from flexible work environments. As part of this, it’s important that teams and groups have received some level of cross-training. Then, as different projects come in and some groups end up busier than others, it’s possible to shift resources in a more agile and dynamic way. This approach helps a firm cultivate knowledge and address client needs more effectively, but it also reduces labor overhead—and the possible need for layoffs during a recession.
Goodale says when an organization boosts efficiencies, trims unnecessary costs, and builds a strategic framework around best practices, it’s better equipped to withstand economic downturns—and better-positioned to take advantage of opportunities when the economy rebounds.
Cheinman says that a focused business strategy, along with an agile marketing plan, can help a firm cope—and even flourish—in the most challenging of economic times. “You can measure what’s working, what isn’t working, and fill the gaps accordingly,” she says. “You’re able to react to conditions as they occur—with the backdrop of having a strong brand that delivers on a clear set of values and capabilities.”
Says Doehring: “When challenges arise, best practice companies have the tools and expertise to deal with them effectively. They’re better able to prosper through the inevitable economic cycles.”
Samuel Greengard is a technology writer based in West Linn, Oregon.