BALANCING ACT

MANAGING THE RECESSION
With no real sign of the downturn easing for some time yet, rebalancing the costs/fees ratio is a priority for survival. John Toppin looks at how strategic frameworks can help

SENIOR ARCHITECTS confronted by the recession face the unenviable task of working out how to bring their costs into line with lower fees. For a significant minority of practices, who worked within operating profit margins of less than 15% in good times and have few reserves to cushion them, there is little room for manoeuvre.

How do you decide how much cost to take out of your business to survive? Which costs can you take out without damaging the firm in the long term? When should you act?

Intelligently applied frameworks are an effective way to protect the long term viability of your firm. But remember to measure the impact of your choices on cash flow – lack of cash is the primary reason for business failure.

Choose your future
The first framework could be subtitled ‘Dump the historical accidents’. You do not need to be an accountant to follow this simple, two dimensional framework which can be used for any size of practice. Historical accidents make up a large part of business practice. Common examples include a new product or service which you are not really geared up for but started to please a large client; a band of clients you can’t service profitably but stick with because they keep someone in your firm busy; a department that used to earn money but remains in place long after technology or the market passed it by. Historical accidents make your firm inefficient and uncompetitive. They use up cash and destroy your profits.

Legacy costs are only part of this two dimensional framework. The first dimension, in rank order of priority for savings, includes: legacy; not required; nice to have; adding value to the business, its people and clients; and required to operate or deliver fees.

When considering your choices, start at the top with making savings in the first dimension – legacy – and work down the list.
Be sure that, not withstanding cuts, you end up with a good balance of spending across infrastructure; delivering the existing pipeline of fees; building the future pipeline of fees.

Ensure you end up with a good balance between the three elements of the second dimension so you don’t cut activities essential to your ability to build your future pipeline.

Down to zero
The second framework is more challenging and may need a finance director to implement. It is the opposite of the common incremental process, where the new budget starts with costs from the previous period which ‘bakes’ existing activities and expenditures into the budget.

Zero based budgetting forces a rethink of the firm’s activities before resources are allocated. Every cost is questioned and existing cost structures are exposed to change. All cost headings start at zero and managers have to justify all expenditure, not just the increases.

The activities of the business must be broken down into decision packages. For example, an interior design service could be divided into space planning and product procurement. When creating decision packages consider whether one activity could be sub-contracted or ended without materially affecting another.

Compare and rank
The next step is to budget the expected fixed and variable costs of each decision package at normal levels of business and flexed up or down by say 25%, taking into account alternative methods of providing the service. Decision packages across the firm can then be compared and ranked. For example, the firm could subcontract product procurement rather than maintain the resource to deliver this internally. The budget for the business is made up of the approved decision packages.

With many architectural practices in crisis or at risk, use a framework to inform your response. Act sooner rather than later, be bold and cut deeper than you think you need.

John Toppin, founder of Nomizon Associates, provides financial management advice. Contact(JavaScript must be enabled to view this email address), tel 07834 380290. For more on managing in a recession see www.nomizon.co.uk and www.jamescookecoaching.com or visit RIBA Blogs

ILLUSTRATION | QUINTON WINTER