Growth in a Downturn - Revenue or Cost Driven?

It's results time again, when the legal press focus in minute detail on short-term results - thereby increasing lawyers' focus on results in the last 3 months, 6 months or 12 months, all of which are too short term.

The news this time round is continuing revenue falls in some of the big players, headed up by Simmons who posted a 16% fall in revenues (see the full story here). A&O also show a fall - Norton Rose and Lovells are expecting flat results. All of these firms have been cost cutting, and it will be interesting to read the results of the mid tier firms where cost cutting has been the most savage. The evidence would seem to suggest that cost cutting hasn't helped enough - or perhaps they will suggest that it was going to be much worse. By focussing on cost cutting, some firms will have dropped the ball with regard to business development, which, I suggest, is the real way out of the downturn.

It's not been all bad news. Dentons posted a 3.5% rise in revenue in the same period (see here) - for which they thanked not savage cost cutting, but rises in international revenues.

The message has always been - the best way out of a downturn is a focus on revenues not on const-cutting. This article gives an interesting take, and sums up by saying "...do not sacrifice the future [by one-shot cost reducing savagery]" and encouraging firms to concentrate on cash efficiency and revenue growth. In another part of the same article, the author tells firms not to retreat - no matter the temptation, do not hide from the storm, but instead aim to work hard to grow your revenues. The author quotes a Harvard Business Review article which states:

Of the firms that made major gains in revenue or profitability during the last recession, more than 70% sustained those gains through the next boom cycle. The corollary was also true: fewer than 30% of those that lost ground were able to regain their positions.

Growth in a downturn is driven by revenue, not by cost cutting. I am not suggesting that any firm should ignore costs. Have a sensible policy to manage costs sensibly - but have the lawyers doing what they do best which is to provide high quality business advice, manage their clients, find new clients and find new work. Costs are important, and client & matter partners must have a very good understanding of their costs in order to be sure that their work is profitable - but their responsibility is to drive forward the revenue side of profit, while letting the managers of the business manage the cost side of profit.

Manage the costs, but work for the revenue - it's the only way forward.

News, information, data and decisions

I have been looking with interest at the way that the various news agencies have been reporting the Mexican flu outbreak. Let me give you a few examples:

The deadly swine flu virus can no longer be contained, says a WHO official, as the health agency raises its alert level - from the BBC's UK News main page, Tuesday 28/04/09

The first British victims of swine flu were named today as Scottish newlyweds Iain and Dawn Askham, from Falkirk. They flew back from Cancun in Mexico last week. - Daily Mail, 28/04/09

World Health Organisation raises threat level posed by disease to unprecedented 4 as the first cases emerge in Britain - The Times, 28/09/09

First UK swine flu cases confirmed. Pandemic worries dent stock markets - Financial Times, 28/04/09

From reading these headlines - and I have deliberately only taken the headlines at the moment, it would appear that we could all well be at danger from a pandemic the size of that in 1918 which killed tens of millions.

Those were the news agencies - now let's try to dig a little deeper. Actually it's not hard. A more careful read of the items above does give a slightly different picture:

Two quotes from today's FT - Professor Neil Ferguson, a member of the WHO’s pandemic influenza taskforce, said 40 per cent of the UK population could eventually be infected if the country was hit by a pandemic.

Prof Ferguson, of London’s Imperial College, said cases were likely to die down within a matter of weeks because the UK was moving out of the normal season for flu infection, but there was a risk that the disease would flare up again once the summer was over.

He told the BBC Radio 4 Today programme the 152 deaths in Mexico probably made up a relatively small proportion of the total number infected, who might run into tens or hundreds of thousands.

“So-called bird flu - H5N1 - was a much more dangerous virus,’’ he said. “We are not in the same ballpark. But we can’t at the moment answer the question ’Is it comparable to 1918 Spanish flu, which killed a lot of people, or is it much more like Hong Kong flu?’.’’

and...

Alan Johnson, health secretary, said the UK had “established a stockpile of enough anti-viral drugs to treat more than 33m people,” or more than half the population.

I'm not sure what the opposite of alarmist is, but that would describe me. Thirty-two million people in the UK? I believe there are two reported cases at present, both of whom were in the affected area in Mexico and both of whom are responding well to treatment. That sounds a lot less alarming than describing people responding to drugs as "victims" which, perhaps only to me, implies death.

I decided to go to the source - the World Heath Organisations site. I was concerned about the threat level referred to in the "Times" and wanted to understand the scales used. I found this great graphic (see here):

Now, level 4 does look a little scary. The full text of the release from the WHO, however, stressed that the move to phase 5 was as likely as a return to phase 3 or below. The important thing I learnt from a short period of research is this: it is too early to state the extent of the outbreak.

It is a modern malaise that information is demanded so quickly. Compare the news of a flu outbreak with the on-going story of the recession. "A flu outbreak - my God. It could be pandemic. Is it pandemic - is it, is it?" we demand of scientist through our media, just as we did (and continue to do) regarding the recession "Is it worse. It's over, isn't it. House prices have gone up - we're all safe. The recession will just get worse" and so on and on. I'll repeat - it is too early to say. Both about a possible pandemic and the recession. One of the main drivers is the negative question. No credible scientist of any flavour can respond to the question "So - will you confirm that this is not a pandemic?" with anything other than a bland answer. No-one would ever say "yes" to that question because it is too early to know. Everyone knows it is too early, and yet we continue to ask. Journalists and reporters will even preface their questions with "It will be too early to say, but..."

This demand for early information and early action can be seen in business too. I spoke with a client the other day and, over a very pleasant lunch, discussed the recession and actions his firm could take. Over a particularly fine glass of wine, I explained my theory about the dangers of precipitate action and the need for good information. He generally agreed with me and then laughed and said "But you couldn't say that - either as a consultant or a CEO". I know what he meant. Organisations generally call on consultants for action and advice (or to take the blame for decisions, but that may be a different entry) and so advice consisting of "do nothing too serious yet and let's get more and better information" is unlikely to go down too well.

It is important to remember, however, that a decision based on quality information will be a quality decision. I acknowledge that one can never have perfect data and that most business decisions have to be made with a deadline in mind. Wait where possible is my message of the day.

Protectionism - or not?

Over the weekend, an article on the FT's website particularly caught my attention ("Renault revives protectionism fears" by Nikki Tait, Ben Hall & Peggy Hollinger).

I thought it was very interesting on a number of levels.  I'm sure we can all understand the need for politicians to be seen to be addressing unemployment in their own country. There is no difference, from what I can see, between the actions of Renault, supported by M. Sarkozy, and Mr. Brown's "British jobs for British workers" statement (one that I'm sure he wishes he had made now, but it's too late for that).

It was equally interesting to see the cross-border politics which appears to be going on. Firstly there is the rather expected response from the EU who certainly give the impression that they knew nothing about it and who warned France that protectionism would imperil EU loans. The Slovenian response (Renault are transferring production on one model from Slovenia) was very measured - they certainly hadn't been caught unaware. "It's all completely normal" is the quote attributed to the Slovenian prime minister. Finally there was the international statement from M. Sarkozy that France "would not take a single job from our Slovenian friends". Interestingly this statement was not well publicised in France so far as I have seen (I'm in France at the moment).

Digging a little further, it is apparent that the Slovenian plant is running at full capacity and so Renault are transferring production on one model back to France allowing the Slovenian plant to continue - at full capacity - working on another. 

This all sounds very sensible - and not at all like protectionism.

The final interesting point for me is how a completely normal business action is shown in a number of lights. In France, the government are quite happy for their voters to think that the move is protectionism since that will be popular. The EU are happy to be seen to be working against protectionism, and the Slovenians are happy that they have a car plant working to full capacity.

So - no protectionism at all then? Not at this point, but of course the possibility remains, and the Slovenian prime minister is right to be a little worried. Protectionism should be expected on a national level. After all, this is all that individual companies are doing as they shed contractors (Our jobs for our staff...?). At a national level, the impact can be very damaging - spoiling international relations for many years. So the EU should remain vigilant, but expect that individual countries will what to spin a story in different ways for different audiences. 

My statement about there being no protectionism in this case may be mistaken. Perhaps, however, it is more "EU jobs for EU workers". 

Positive Economic News

Carrying on from my post earlier today, I googled (or should that be "Googled" with a capital, I'm not sure) "Positive Ecomonic News".

The first thing to notice was that there were 279,000 results. Well that has to be good, surely? I then started to follow some of the links. The first result to catch my eye was Hexus Channel which had the wonderful idea of a slow-down in "crappy economic news", which I liked. The article discussed three indicators - the DRAM eXchange, the Halifax house-price index, and the Baltic Dry index. I'm enough of an economic nerd to have been aware of the first two, but must admit to having missed the Baltic Dry. The general tenor of the article was that there were three indicators suggesting that, at the very least, the slow-down had itself slowed - and that it might be possible that things are improving.

The FT reported good news - that UK inflation had dropped to 3%. OK, it had only dropped from 3.1.%, but it was nevertheless down. That's a good thing too - although I will admit it may be more of an indicator that the supply of money is still too tight.

There is good news out there. Try it yourself - and keep thinking positively.

Positive Mental Attitude

I hope that these posts will become a useful source of information (and occasional inspiration). While I'm setting the systems up - how about a starting thought?

Is it really all that bad?

I know that new news each day seems to be full of doom and gloom, but it can't all be bad, surely? There was good new last week in the FT (see http://www.ft.com/cms/s/0/7caf2c14-fa23-11dd-9daa-000077b07658.htmlLong), but, my goodness, you had to search for it. Is this fondness for bad news a self-fulfilling prophesy? As I understand it, one of the best drivers of recovery is confidence. So come on - let's all start to have a more positive (if careful) attitude. It might help.