Close-Up: Live Issue - Learning the lessons of the last recession

Some of the communications industry's leading figures share their experiences of dealing with a downturn.

As income levels show signs of recovery, and the industry begins to regain some confidence in its financial condition, it seems a good time to ask some of the older and wiser heads what lessons may have been learned from the previous downturn that might be worth sharing with others.

In reality, most of us know that there are rarely any new lessons to be learned as such. It's simply that past lessons have been forgotten by some or - in the case of the younger generation of management - have not been experienced before. Nevertheless, there will always be some managers who believe they can prove that past experiences no longer apply.

None of our businessmen offered any radically new insights.

Indeed, to quote WPP Group's Sir Martin Sorrell: "There's nothing you should do in bad times that you shouldn't be doing in good times. It's just a lot more urgent and a lot more obvious."

But is it that obvious? Or, put another way, do managers recognise the so-called "obvious"?

One of the tensions impacting on the management of a creative services business during a recession is the need to maintain a positive working environment - even when the entire economy is crumbling around it - while simultaneously keeping the bank manager at bay. So there is a natural reluctance to prune back staff, partly because clients may reinstate their bigger advertising budget next week and partly because good people are hard (and expensive) to replace.

The Chime Communications chief executive, Lord Bell, thinks companies are too eager to push up the cost base in times of plenty and too slow to cut costs when the climate deteriorates. "You can't control income, but you can control costs," he says. "Since the recession, we have endeavoured to make 25 per cent of personnel costs variable. People have tried to be more efficient since doing so. The head count has remained stable, but productivity has gone up."

Aegis Group's new chief executive, Robert Lerwill, also favours more flexibility in the wage bill and counsels caution when signing up property commitments which may become an onerous burden when the next downturn comes.

"Keep your cost base lean and variable," Sorrell says. "Cherish and reward your talent."

"Batten down the hatches, keep costs firmly under control and plan for three tough years when the next downturn occurs," Creston plc's chief executive, Don Elgie, suggests. "I remember going to see one company who told me they were convinced the downturn would only last three months. History is the best indicator of the future in many respects and three years is the typical length of a downturn in our industry."

Lord Chadlington, who now heads the Huntsworth public relations group and, as Peter Gummer, built up the Shandwick International group before that, has a similar view on costs to everyone else. "Service businesses are cost-led and not revenue-led," he says. And for anyone who worries about losing underperformers, Chadlington has this advice: "If you think one of your people is no good, the client probably thinks so too!"

While managers are clearly better-placed to control costs than they are to influence revenues, this does not mean that revenues can be ignored. Just as cream always rises to the top of the jug, so too will the best performers attract the biggest share of the market. And that is never more true than during recession.

Clients gravitate towards what they feel will be the most reliable option - in terms of creative execution and efficient, cost-effective delivery.

"Service existing clients relentlessly," Sorrell advises. "And develop existing relationships before chasing after new ones. Look for opportunities in the faster-growing sectors and regions."

And don't allow over-optimism to cloud business judgment. "The industry is full of eternal optimists," Bell observes. M&C Saatchi's chief executive, David Kershaw, says: "Don't let the words 'hopefully' and 'revenue' become adjacent."

What about a company's underlying financial resources? Is it wise to rely on borrowings when history shows that the fate of many a young public company was sealed by this encumbrance in the 80s. Chadlington says debt and service companies do not mix - and he should know, bearing in mind the scale of borrowings run up by Shandwick during its most acquisitive period.

But companies do still borrow. And the major global groups sometimes borrow rather a lot. The danger comes when managements fail to ensure that they can weather a storm without their bankers calling in receivers or administrators. Would interest charges wipe out profits in a bad year?

Is the debt sufficiently long-term to avoid sudden demands for repayment? Can interest charges be kept lean?

In the past, the funding of acquisitions towards the back end of a growth cycle has often been marked by increasing reliance on debt, as stock market conditions become less favourable. But that increases the risk of a crisis.

As the economy slows down, so will profits, and the ability to service a large debt becomes more difficult.

A new trend in the marketing services sector may exacerbate such a situation, namely the emergence of highly geared management buyouts. Once upon a time, frustrated management teams walked out rather than bought out, and clients sometimes followed. More recently, groups such as Interpublic and Havas have divested sizeable businesses to their management teams or to other companies for what might be described as a "full" value. And much of that value has been funded by debt. The purchase of NFO from Interpublic by Taylor Nelson is one example. The buyout of Bounty Group from Havas is another. WCRS relied on bank support to a lesser extent for its deal with Havas. It's a trend that needs to be watched with care.

But perhaps the biggest lesson that emerges from every recession is this: do things quickly and with single-minded determination. Or as Sorrell puts it: "Respond with speed. Never give up."

And in case this all sounds too heavy, Chadlington has the final word: "If our business stops being fun - at least some of the time - you should try something else."

- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.

RULES TO REMEMBER

- Only a privately owned company with a very strong capital base can afford to ignore the short-term impact of declining revenues on an immovable cost base.

- Morale often remains higher when management is seen to be managing its staff resources downwards in recession - and thereby preserving longer-term prospects for all who remain - particularly if any underperforming colleagues are weeded out.

- Scenario planning with a finance colleague at an early stage will help managers manage with confidence. If seen to be confident in the decisions they make, they will breed more confidence among staff.

- The longer difficult decisions are delayed, the more painful the eventual consequences. Pruning 5 per cent of staff today may prevent having to prune 20 per cent later.

- Make sure the good people know they are valued and keep demonstrating that this is so. It's not just a question of pay, but of providing a wider array of rewards that convey a sense of partnership. It's also a question of keeping good people informed of what's going on and why.

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