From the January 2009 issue of Investment Advisor • Subscribe!

The Recession Blues

Times like these are when business leaders really earn their keep

Recessions give me depressions. Those who run financial services firms know what I mean. We feel high anxiety for our employees, as we decide who will stay and who will go, who will get a raise and who will get a pay cut, and who will be able to endure through a prolonged period of no income and the probable decline of their economic well being.

Generalizations are risky, I know, but most advisors I've met are optimistic by nature--though often cautious. No quick and hasty moves in this group. Many are also conflict avoiders who revel in the validation they get from others for their compassion, sensitivity, smarts, and vision. So not only are they wracked with angst in times of turmoil, but they are paralyzed by having to make business decisions quickly.

At the risk of sounding like my Dad, who often regaled us with notable experiences from his youth, I will share an empathetic point of view with readers who must make critical decisions about the future of their business. I see my younger self in your plight. I've been around this profession since the early 1970s, when another notable market crunch and recession gripped the financial services industry. The company I worked for squashed all business travel, froze hiring, and withheld raises. I was earning $750 a month and my Chicago apartment rent took half of that. The best economic news I could hope for was a tax refund. I remember how galled I was at management for refusing to recognize my pain and suffering.

Fast forward to the early 1990s, when I took partial ownership in a company and was asked by the partners to be CEO. The timing was inauspicious. Yet another recession was upon us. The firm's clients were disappearing, the staff was suffering from serious malaise, and our fixed costs were higher than our revenue. This was my first official top leadership role and I wanted to be liked and respected. I swung from extreme to extreme, one moment showing great compassion and the next wielding my temper like a scythe. I was frustrated that my employees didn't show as much concern as I did about getting out of this trap.

Instead of making quick cuts of the nonproductive staff, I kept them on at full compensation and took the hit myself along with my partners. Instead of refocusing the business on areas that were generating cash flow, I maintained the same structure and alignment in an attempt to deliver the same services to a diminished market. Optimism was my muse, indecisiveness my modus operandi, and anger my fuel. My wife encouraged me to go with my instincts, which were contrary to my actions. The company was in a considerably altered state when we sold it five years later. My confidence as a leader was badly bruised.

With time to reflect and knowledge gained from mentors at my new parent firm, I got back in the leadership saddle many times after that--with the benefit of insight gleaned from my near-death experience. My hard-earned wisdom drove a new outlook: a more aggressive approach to problem solving and greater rigor in managing. For what it is worth, I hope my experiences lend you perspective on decisions you must make for the health of your business.

Planning & Analysis

What should be intuitive to most people in the advisory business is the process of planning and analysis. During a recession an advisory business should intensify focus on four key areas:

1. The monthly inflow and outflow of cash to the business for the next five quarters;

2. The monthly inflow and outflow of cash to the business owners for the next five quarters;

3. A worst-case scenario of business and the resources required to serve it;

4. The nice-to-have expenses including people, conferences, associations, and technology.

The temptation towards rationalization around each of these points is high, but now is the time to be conservative and critical. If you don't trust your instincts then ask an accountant, a spouse, a respected business person, or a friend to challenge you on your assumptions.

In addition, assess which of your clients are at risk. We all have them. Even if you've done what you think is right, bad times will test loyalty. Prolonged bad times will cause clients to question whether they need a middleman--especially when they think they can get the same investment recommendations from discount brokers for less cost.

Evaluate your staff (including partners) to assess who has been making a contribution and who has been lagging, who will be valuable in the long term and who is unlikely to grow, who is demonstrating consistency during these times and who is panicking.

Be frank with yourself about your own personal liquidity and assess how long you can live off your savings without additional inflow. Make sure your spouse or significant other is brought into this discussion--few things strain a relationship more than financial surprises. Distractions at home can only complicate the decisions at work.

Executing Decisions

In any book on leadership, decisiveness is always cited as a critical trait. Once you have assessed the cost/benefits take quick action:

o Freeze expenditures that don't help your business today. You may need to meet with certain clients or prospects, but watch those pennies and watch the signals you give out with where you eat, drink, and stay.

o Begin to lay off individuals who are not performing well or who require too much investment to make them productive. Do not limit layoffs to administrative staff if you have higher-compensated people who are not as valuable as lower-level people.

o Defer capital expenditures if they will not make a material impact within the next five quarters. Look at all the training programs, study groups, and conferences that you and your staff normally attend and make a decision about what is critical and what you could pass on this year.

o If you cannot afford the time or the money to stay involved, seriously consider resigning from any boards or organizations that don't fulfill you personally, benefit your business, or make the impact that you had hoped--as the flight attendants say before takeoff, put the oxygen mask on yourself before helping others.

o Make hard decisions on the compensation plan. Try not to cut regular paychecks to associates, but look at whether bonuses and incentives are still appropriate and still tied to the right things. Consider altering the bonus program to pay rewards for things you urgently need to accomplish in each of the next five quarters, such as cost cutting and acquiring new clients.

o Regroup and focus your business development activities on true needle-movers. While business strategy is a long-term venture, you need to fund that growth. Which activities will produce the profits and cash in the short term to ensure you have the resources to fulfill your bigger dreams?

What Else is There?

Don't postpone decisions. Most experts believe this will be a severe recession. Every week that you delay is money you can't recover.

Be careful about doling out excessive severance. You may feel the need to pay something to help your employee through the next few weeks, but if this amount is planned for a long time ask yourself why you are letting the person go.

Fraud, privacy breaches, theft, vandalism, and attacks on your computer security all increase during tough economic times. Don't let people linger after you've let them go and get back all the keys and credit cards quickly.

Rehearse your script, treat people with dignity and don't lie as to why you have to let them go. Offer to provide them with references if you honestly can. If you want them back, let them know you will try to rehire them when the situation improves, but don't overdo this or you will get yourself into trouble.

Manage Your Emotions

Try not to take up excessive drinking or emotional eating. Maintain your schedule as best you can and find healthy ways to decompress. It's important to hang on to your friends and keep communicating with your significant other.

Nobody likes a martyr. Be careful about what you say and do, especially in front of employees or friends and relatives who have been hit harder by this turmoil.

Dealing with clients has been quite stressful already, so tough decisions that impact the lives and livelihood of your staff could put you off the charts. Be professional, be cool, be compassionate, and maintain dignity. But don't use the difficulty of telling someone you must let them go as a reason not to. Remember, you have others (including your own family) who depend on you to make the right decisions in order to keep the business intact. You may be feeling low, but you have to show leadership when others are looking for it.

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