So now comes the test. You're a consulting firm, and business is down (or is forecast to be down). What do you do? Let's assume that the obvious first action is to exhaust all possible avenues of generating new revenues. What's left?
Option 1:
Lay off some of the junior staff, thereby cutting costs to keep them in line with declining revenues.
Option 2:
Delegate as much work as possible and demonstrate loyalty to the juniors by keeping them busy with whatever work you do have. If necessary, have partners take a "haircut" (e.g. less immediate income) in order to sustain a reputation (internally and externally) for a commitment to people.
Option 3:
Protect the juniors and the incomes of the best partners, but cull the partner ranks. After all, firms will save more money more quickly by firing expensive people.
If the recession lingers, all groups will suffer. But who takes the first "hit"—the juniors, the seniors jointly or just a few of the seniors? We know what happens in most corporations—employees get laid off before the top executives cut their own pay. But do consulting firms act the same way?
Which option are most firms going to take? Which approach will build a more profitable firm over time? For extra credit: How much is this decision really going to be affected by firms' desire to retain scarce staff in the talent war? For even more extra credit: What about firms that have grown by aggressive policies of recruiting senior lateral hires?
I have to stress that this is not a moral issue but one of pragmatics. If one of your key competitive issues is attracting and retaining key staff, how can you have a policy of laying people off at the first sign of trouble?
I recently threw out these same options on my blog and got some interesting responses regarding Option 2. One partner argued that "at least [juniors] realize, at some level, that they're viewed as fungible. [Cutting] partners, though, cuts to the soul of a firm. It sends a clear and chilling message to every current and [more importantly] future partner: 'We're all partners. But some partners are more equal than others. And one day, there could be a knock at your door, too.'"
Meanwhile a U.K. consultant had an interesting perspective: "Established partners (10 to15 years) know that business has its ups and downs, and will trim a little, but not cut to the core of the firm. More recent partners (up to five years) seem to expect profits to rise 15 percent to 20 percent per year indefinitely—and are now demanding more brutal action to protect their immediate income. Why? Maybe they were sold a false prospectus. Maybe they borrowed heavily to buy in, and now feel very exposed. Maybe they see partnership as purely a financial relationship. It seems illogical that those partners with potentially many years to work through are more likely to risk the firm's long term health than those who may retire shortly."
Finally, another consultant said, "I would love to go for Option 2. This is what we did back in the downturn in the early 1990s. But I worry that, this time, things are different, and if we were to ask partners to take a significant haircut, then a small but significant number of partners would leave for other firms that had taken Option 1. We seem to be locked into a version of the prisoner's dilemma, where nobody dare take the sensible long term approach for fear that they will lose out to those going for short term gain. I'm not sure there's any way to avoid this."
It's in times of stress that you find out the real (often hidden) ideologies that people and firms subscribe to—their real values. So, for many firms, we're about to find out. What do you think your firm will do if the recession bites? Who gets thrown under the bus first?
David Maister is one of the industry's leading authorities on the management of professional services firms. He can be reached at david@davidmaister.com. Please e-mail your story comments to customercare@alm.com.
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