TL:DR

• Those that shifted their service mix and adapted to a changing market grew 78% faster than average.
• Make sure you have a stable cash position, a solid team, and quality leadership before a downturn happens.
• When a downturn does happen, adopt a balanced approach where you mitigate key risks but where you also pursue new growth avenues.

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I heard the sky is falling

Uh oh, the media hivemind is writing about recessions again!

We’ve been hearing about economic uncertainty since mid-2018. As the old joke goes, economists have predicted 19 of the last three recessions.

If you’ve run an agency longer than a year, then you’ve managed it through uncertain times.

And, if you’re anything like the 100+ agency owners we surveyed last month, you were probably pretty damn successful. The default for digital agencies operating over the last few years has been 15-20% revenue growth and 10-15% net margins.

I’d call that default successful.

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Thriving in uncertainty

If the default is success, why’s anyone interested in yet another article about prepping for doom and gloom?

…because some shops weren’t just successful in a shifting market, they absolutely thrived.

• They grew 78% faster than average.
• They commanded massive pricing power to raise their rates 4x faster than average.
• And they earned 19% higher net margins.
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They did this by adapting to their new environment.

Agencies that adapted to macro events by shifting their service mix outperformed the average by a long shot.

There’s the idea that if a recession is coming, you should play pure defense, batten down the hatches, and weather the storm. Leaders taking this approach will focus on risk mitigation and fiscal prudence with an eye toward near-term indicators.

My research shows that a defensive-first strategy leads to subpar growth, middling margins, and weakened pricing power. I’d recommend looking at a more balanced approach.

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Prerequisites for a balanced approach

A more balanced strategy manages risks but also actively seeks growth opportunities.

Be fluid with your service mix and industry focus, and find the path of least resistance. This is a huge part of what I help shops do with our Custom Strategy Creation service. These are the digital agencies that are taking advantage of market changes and using them to fuel growth.

There are some prerequisites to do this successfully:

• Cash. You have to start from a position of financial strength. Otherwise, your decision making will be clouded by short-term cash needs. About a year ago, I wrote about building cash reserves from the average of ~3 months of OpEx to ~6mo. That feels like the right place for them again.
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• Team. You need the right people in the right seats before you can successfully execute any kind of nimble strategy. Too many shops hold on to people who aren’t culture fits (The No Asshole Rule https://www.amazon.com/Asshole-Rule-Civilized-Workplace-Surviving/dp/1600245854) who act as anchors that prevent the firm from pivoting. Another common issue is the overpromotion of untrained managers / directors. What shops save in training budgets, they lose in turnover.
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• Leadership. Shops need strong leadership that can clearly communicate their vision, manage shifting goals, and secure team alignment. The clear vision part is the most common issue I see with the team alignment issue not far behind.

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Learning to love uncertainty

Once those prerequisites are met, you gain the ability to play a bit of offense while everyone around you focuses on defense. So let’s take this opportunity to examine what that looks like.

There’s a lot to manage when the waters get choppy, but focusing on these three will allow you to pivot your firm more easily.

• Market knowledge. Most leaders will have a fantastic understanding of their immediate space. The pros and cons of various strategies and implementations for their services and adjacent services. The specialized ones will even have a fair bit of insight into their client’s industries. This is fine when the water’s calm, but it’s not enough when waves appear.
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  As economic uncertainty rises, different sectors feel the effects in different ways. Some lead the recession (financial services in ’08), others lag (commercial construction in ’08), while some are seemingly unaffected (, and others get a major boost (ecommerce in ’20). In 2020 we even saw huge variations in the relative impact on small companies (large impact) vs. large firms (smaller impact) source.
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  Even a high-level understanding of the macro environment can help you make better decisions during turbulent times.
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• Decisive decision making. It takes some courage to make a call when your visibility is limited. If you stay up on your market knowledge and you have a good understanding of your services and your adjacent services, it should become easier. Having a capable team and strong leadership also improves your odds of success. A sizable cash cushion will give you more chances to pivot. Regardless of if you act or not, the market will eventually make your decisions for you. The worst thing you can do is waffle about and over-analyze while your ship is sinking.
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• Effective implementation. This is all on leadership and the team. It’s why it’s so absolutely critical to have the right people around you. Once decisions are made, they need to quickly be put into action while also monitoring and course correcting as necessary. You can’t effectively do that with inadequate personnel.

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Inaction isn’t a strategy.

Whether or not we’re in for another downturn and how severe that downturn could be, there are ways to prepare. Our approach to these changing times should be to manage challenges while also seeking opportunities. We’ll inevitably face new challenges, but those will also come with new chances to innovate and adapt.

For what it’s worth, my view is that the economy will experience slower growth with a softish landing through the end of the year and then a muted election year that’ll be highly dependent on your industry exposure. It’s less important to be right about the timing/severity of a recession (which is damn near impossible to do anyway) than it is to be prepared and flexible. Those that can adapt best to the new environment will be the ones that thrive.

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