How Professional Service Organizations Can Apply the Lessons of 2008 to Today's Business Environment
As we all try to navigate through the impacts of the COVID-19 virus, it’s important to use any historical context we can as we try to make the best decisions for our business. You’re already working from home, dealing with event cancelations, and trying to establish a new normal. But what’s next? What should you prepare for? Time will tell how deep this event impacts various industries, but it’s a smart plan to get a clear picture of what’s happening today and prepare for any challenges.
While scale and impact of the COVID-19 crisis is unprecedented, there are some lessons that may be helpful from past crises. When the market crashed in 2008, I was working with professional service organizations across the country. Through that difficult period, I found that there were 7 best practices many organizations instituted that provided tangible results, and I still incorporate lessons learned when I speak with companies today. So, what should you expect and how can you prepare?
- Focus on your people first. For professional services organizations that are built on the value of their team, address the human and emotional impacts of the COVID-19 outbreak. Your team and your clients are experiencing an angst in their personal life as well as their work that is very difficult to account for. Working from home, especially with small kids, can be a huge adjustment and contribute greatly to stress. Stock market losses and fear of layoffs weigh on many people’s minds. It is critical to communicate often, acknowledging the changing reality and expressing the company’s support and flexibility in these tough times. Beyond the obvious human element, reducing fear and anxiety in the team improves morale and productivity.
- Prepare for delayed or canceled projects. You may need to adjust revenue schedules and recognition of revenue as your clients’ behavior begins to change. This was a significant challenge for companies in 2008 that relied on rigid financial systems that didn’t allow for fast adjustments. This led many to underestimate the impact of those delays and cancelations. As a result, when the final numbers were tallied, companies found themselves much further behind than they realized. Today, financial teams typically have financial systems that enable more control over revenue recognition and project costing so they can keep up with the fast changes and hopefully be proactive instead of reactive when issues arise. It’s important to be as nimble possible and keep your data reflective of where things are at any point in time.
- Know your financial exposure on all of your projects. You will want to pay close attention to your AR aging, and Work in Progress (WIP) balances. If you start to see delays in payment, or your vendors are invoicing you earlier, it could be an early indication of a project going south. In 2008, clients started to push out payments and eventually stopped paying altogether as they dealt with their own challenges. This left many service providers carrying bad debt that impacted their overall financial health. Real-time dashboards and reports enable your management teams to closely monitor these key areas. If we’re headed for difficult times, your organization will need to be vigilant from top to bottom to identify at-risk customers and projects which need proactive intervention so you can avoid any unwanted surprises.
- Change your billing frequency to help limit financial exposure. It is very likely that you will see longer AR aging and delayed payments. In 2008 Days Sales Outstanding (DSO) was reported to average 48 days across professional service companies, much higher than a target of 30 days for a healthy business. This resulted in massive strains on cash flow. A good practice to help mitigate this risk is to change the frequency that you are billing for your work. That way, if there is a dispute or a delay, the impact is significantly reduced if you’re looking at a weekly invoice vs. a monthly. You can also increase the number of billing milestones you use if that is your billing method. The idea is to shorten the period between invoices as much as possible. Prebilling is also an option but not always available depending on the nature of your business. You also need to be careful in how you manage retainage and other complex financial agreements as projects begin to delay.
- Enforce daily time and AP entry. You need to know what is happening on all of your projects in real-time. The only way to get that, is to ensure your team is entering time on a daily basis. Vendor invoices for project expenses also need to be processed as soon as possible so your project managers are fully aware of their project exposure at any point in time. In the past this could take days due to manual processes or disconnected systems. Today many companies automate AP processes, which helps keep administrative costs down during these challenging times, but it also ensures their project managers are always informed of the precise status of their projects so they can confidently make financially minded decisions.
Prepare for the Future
- Get serious about project financial management. Many of us just talk about it and try to stay on top of our project managers, but in difficult times, bad project financial management will have a massive impact. In 2008 this was a huge problem because the economy was strong just before the crash, and project financial management was an afterthought. Once the pipeline dried up, poor financial decisions by project managers resulted in severe revenue shortages. Getting real-time data in front of your managers with dashboards and reinforcing best practices with weekly meetings is a must. Track the estimated percent complete from your project managers and compare that to the total contract you’ve burned through to see how you’re progressing. You need to make sure you are delivering the value that you’ve contracted to, and there are no surprises as you near the end of your project. Using the physical percent complete for tracking your job progress is a technique called earned value management and it can be a very helpful tool when times are tough.
- Try to understand the impacts to your corporate financial projections. Budgeting and planning has already taken place for 2020 and we are all right in the middle of executing on our plan. But of course, plans change. In 2008 just about everyone was using Excel to manage their budgets and as things turned south, many didn’t put the effort into making adjustments to their plan. In times like these you need to pay close attention to the changes impacting your corporate budgets and planned expenditures. The ability to run multiple scenarios and easily make adjustments, on a daily and even hourly basis, can be essential to keeping your business on track so you can strategically navigate the waters as they continuously change.
In 2008 many companies were not prepared to institute many of the practices discussed above. Implementing these seven best practices may seem like a lot to do now, but they can be phased. Start first by stabilizing your business in the next few weeks with lessons 1-3. Then blend in adjustments of lessons 4-5. Finally, with lessons 6-7, start to prep for a post-COVID-19 world, which may be weeks away.
Today, whether it be through technology or experience, companies are better prepared to quickly adjust to changing environments. In times like these it’s important to focus on what’s in front of you first, and continually reassess as the environment evolves. One key performance indicator you can’t monitor on a financial dashboard is morale. Be as open with your team as possible and communicate with them often regarding any changes, or even just a reassuring message. If you can maintain solid fundamental business practices and closely monitor all aspects of your people and projects, you can have confidence that you are making the best decisions for your business day by day.
The health and wellbeing of you and your team is always the number one priority. Be sure to take care of those around you, as we all work to understand how the coming days and weeks will take shape. If there are any additional topics you would like to hear about, please let us know.
Brian Siefkes is the Director of Professional Services Industry Marketing at Sage Intacct.