It’s tough out there and firms are holding their cards close to their chests and their cash even closer. But the important thing is not to panic and take it one day at a time
A few weeks ago a rather self-important junior minister popped up with some rather trite words about the green shoots of recovery. You will recall she was quickly denounced as delusional at best and certifiable at worst. And it struck me how quickly things can change in business. This time last year was all about trying to cram legions of the qualified and nearly qualified into workspaces. Offices were too small and lists of potential contracts ever growing.
Now empty chairs and empty desks sum up the reality of the downturn. Friends and colleagues have disappeared into the gloom of the recession, with the possibility of more to follow. The market’s reaction to the crisis has been equivocal. We moved so quickly from having an over-abundance of projects to a decline in workload that we were all caught by surprise. This produced a phased reaction. First, those affected were surprised that the money flow was so abruptly choked. Clients mothballed schemes, cancelled future work and displayed extreme caution over projects that were due for imminent completion. And just before the end of last year, the calls came to renegotiate payment terms.
Some viewed the downturn as temporary and were keen to retain relationships. But most just wanted to hold on to their cash. Hence the view for some seemed to be: “We will pay – but only in our own timeframe,” adding rather forcefully, “and we don’t care about a continuing relationship with you because we may not be here this time next year to have one.”
Now a new attitude has crept into the supply chain. The larger clients want cost and project management services supplied but they want to tether consultants to draconian terms and conditions, with some demanding cuts of up to 40% on previously agreed fees and almost indefinite delays in payment. Sometimes a more overt approach is used, as in the case of one large client who simply called in a QS team on one job and announced that they were going to need a discount of nearly half their fee if they were ever to see payment.
Partnering and co-operation was the doctrine of more benign times. We have returned to the jungle where it is survival of the fittest
This is the uglier side of the recession, the one that is ignored by ministers and civil servants, and the one that explains the hysterical reaction to claims of green shoots in the mud underfoot.
Other methods of holding on to cash are more clandestine. Firstly the job is agreed, work on site is demanded and emails are exchanged. Then follows the need for an order number, but receipt of this seems to take forever and to gain payment the order number must be placed on a purchase order. This is also delayed. Meanwhile, 90 days have flown by and you are a long way into the project schedule without any remuneration. Then comes final settlement phase and the fee renegotiation starts.
“Where are the Latham and Egan recommendations on partnering and co-operation to which we all signed up,” I hear you cry? Was it not supposed to be goodbye and good riddance to the adversarial nature of the construction process? I am afraid this was the doctrine of more benign times and we now seem to have returned to the jungle where it is survival of the fittest.
We are already seeing some contractors returning to the days of “buying work” or working at a loss just to boost cash flow. In the world of consultancy most of our peers are discussing pay cuts and staff reductions. The situation will be critical for many smaller practices by the summer, when merger or bankruptcy will be their only choice. For those of us running the larger practices, partners are facing not only freezing profit-taking but also looking at further equity injections if the cycle continues downwards. This is the equivalent of self-funding in lieu of available cash injections from banks.
Forcing fee cuts is the uglier side of the recession, one that is ignored by ministers and civil servants
The areas that still offer some hope for work are the public sector, with education and health still functioning. But with everyone scrabbling for the same work, prices are being deflated and the government is being very careful about how they apportion work, and to whom.
Managing in this recession is proving a challenge with all options up for discussion. Even moving location to take advantage of reduced rates in the commercial office sector is an option. Now, nothing is ruled out.
At some point there will need to be a full root-and-branch examination of how we all got into this mess so quickly from such a position of strength. For now, however, it is a question of week-to-week, month-to-month survival in a market that is more like a jungle than a place of commerce.
Richard Steer is senior partner at Gleeds