Chip and Gini put this talk off for as long as they could, but many listeners have come to them during the past few weeks asking if they believe a recession is likely and what they should do to prepare their agencies for one.
The truth is that the things that you should do to prepare for a possible recession are the same things that you should be doing to run a successful agency during the good times.
The only difference is that you might want to be slightly more cautious and build in just a little more flexibility. That’s it. Don’t go overboard investing in the good times or cutting back in the lean ones.
In this episode, Chip and Gini share their perspectives, including what has gone wrong for them in the past — and how you can make sure that you are communicating effectively with your team, clients, and prospects during turbulent times.
- Gini Dietrich: “Really look at your staffing. One of the things that I repeat over and over again is have a nice mix of employees and contractors.”
- Chip Griffin: “It’s essential that you overcommunicate with your team right now because they are absolutely seeing these same things and they are worried. Fill that vacuum with information so that they don’t fill it with speculation.”
- Gini Dietrich: “The phrase “cash is king” exists for a reason. So have as much cash in the business as you can have. Six months is better than three months. Three months is better than nothing.”
- Chip Griffin: “You will see if the economy turns down, in the early months it will be the agencies that are relying on debt and equity that will have to make the biggest cuts the soonest. Don’t be one of them.”
- Let’s talk about the “R” word (SAGA article)
- Should your agency hire contractors or employees? (Agency Leadership Podcast)
The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.
Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.
Gini Dietrich: And I’m Gini Dietrich.
Chip Griffin: And today we’re not gonna depress you, but we might recess you. Right after this.
Gini Dietrich: Boy, I missed your segues. That was, that was special.
Chip Griffin: Did you have a good vacation?
Gini Dietrich: I did. Thank you.
Chip Griffin: I’m glad to hear that. It’s important to take time off but that’s not what we’re talking about today. We’re talking about something much more stressful and yes, probably a little bit depressing for some of you to think about.
I’ve been asked. And I know you’ve been asked Gini so many times by agency owners in recent weeks about the possibility of a recession, the R word. People are, some people are freaking out. Some people are just wondering about it. Is it gonna happen? What should we be doing? And so we tried, we’ve talked about having this as a topic now for the last month or so we kept putting it off.
And I don’t think we can do that any longer because the curiosity and concern is rising to a level that we just can’t ignore it anymore.
Gini Dietrich: Yeah. I think the Jamie Dimon doing the rounds calling it an economic hurricane probably does not help matters because I have a friend who called me and was like, what does this mean?
And I was like, it’s okay. It’s it’s okay, wait, it’s cyclical. We, it’s our turn. It’s okay. We all survive. It will be okay.
Chip Griffin: Right. Well, I, I think that’s the thing, I mean, from, from the outset, you have to enter this with the idea that whatever happens, you’re gonna make your way through it. Particularly if you, if you’ve been around for the last couple of years as an agency and, and you’re still around…
Gini Dietrich: Right. And you’re still around, you will be fine.
Chip Griffin: You’re gonna be fine. You, you know, that you can take even the most outlandish of setbacks and power through them. And so if you, if you start with that mindset, it helps a lot. But there are things that you can and should do to make yourself more resilient in the event of a recession and, and neither you nor I are an economist.
And as I said, in a recent piece, I didn’t stay in a Holiday Inn Express last night so I am no expert on the economy or anything like that, but you see enough news stories that you start to say, well, you know, maybe, maybe there’s something to this. But there are things you can do to better prepare yourself, but those are things that would help you no matter what.
So whether there’s a recession or not, these things are going to help you. And they are things you ought to be doing anyway.
Gini Dietrich: Yeah, for sure. And you’re right. You should be doing this stuff anyway. And some of the things that you noted in your article are things like keeping three months of cash. You should do that anyway. You know, one of the things that I always do is make sure that credit cards and any outstanding debt on my line of credit is paid down or off paid, paid off entirely. If you don’t have a line of credit now is a good time to do that because the banks are going to be more willing to give you money now, before everything falls apart, then they will be when everything falls apart.
So there are things that you can be thinking about, especially from a cash perspective. And remember the, the phrase “cash is king” exists for a reason. Cash is king. So have as much cash in the business as you can have, as you possibly can keep. Six months is better than three months. Three months is better than nothing. And, and really work toward finding ways for you to alleviate your cash crunches while you’re waiting to be paid by clients.
Chip Griffin: Well, and that’s, that’s really key. I mean, the having cash or having, having anything that gives you flexibility is important. And cash gives you that flexibility so that you can make more intelligent decisions. You don’t have to make rash, sudden decisions because you’re concerned about meeting payroll next week.
Right. And so the idea is that at all times within the agency, but particularly when there’s the potential for an economic downturn. You want to be able to, to think things through clearly and have an orderly transition plan to whatever that next stage is. And cash is one of the things that helps you get there.
Gini Dietrich: And I think also, you know, continuing to demonstrate the value of the work that you do, you know, I think this is really hard for especially communications PR professionals. It’s really hard for that type of agency, because so much of the work that we do is, is built on brand awareness. And you know, clients – we’re always the first to go.
And I think you mentioned this in your article as well, that RGA just laid off a bunch of people because they’re seeing they’re reading the tea leaves as well. Our industry marketing, digital marketing, web, PR, whatever happens to be. It’s a big budget line item on the P and L and it’s easy for a CFO to go and just cut it off.
So protect yourself. Protect yourself with things in your contract that don’t, don’t allow them to, to email you today and fire you by the end of day. Like you should have, you should have clauses in there that are 30, 60 or 90 day termination clauses. You should have, you should be being paid upfront 30 days in advance, at least so that when these things happen, you’re not caught with, you know, sort of holding the bill in your hand.
So there are lots of things that you can do to prepare for downturns from this perspective.
Chip Griffin: Absolutely. And, and how vulnerable you are depends in large part on the kinds of services that you’re providing. Sure. Because as, as you mentioned, you know, if you’re providing traditional media relations, you tend to be on the chopping block a lot faster, unless you’re doing crisis coms, because those are the kinds of things that it’s harder for executives to understand and apply a tangible value to, which is why you need to be consistently reporting it at all times. But certainly anytime you see the handwriting on the wall, that budgets may be getting a closer review. The closer your work is though to direct revenue generation – so if you’re an agency providing e-commerce services, you know, managing someone’s Shopify platform, driving direct sales leads through advertising to a store or something like that. Those are the things that are gonna be a little bit more resilient typically, because everybody’s trying to figure out how do I preserve my own revenue.
So you need to understand what’s specific to your agency, the services that you’re providing, and also the people that you provide them to, right. Some sectors are going to do better or worse depending upon what happens. Absolutely. So, so to assume here that all agencies are gonna be equal in a recession, we know that’s not true. We’ve been, you and I have been around the block a few times. We’ve seen a few of these things and it is not at all equal. Even two years ago, when everything shut down, not all agencies felt the pain in the same way. In fact, some thrived because of the switch from brick and mortar to digital and things like that.
So you need to really have your ear to the ground and understand what’s going on with your clients, with the industries that you serve and the services you provide. Yeah.
Gini Dietrich: And then I would say, really look at your staffing. You know, one of the things that I say that I repeat over and over and over again is having a nice mix.
And we’ve talked about this too. Like it, should we have, can we build a million dollar agency with just contractors? Should we have a mix? Should we only have employees? And I think having – and we did an episode on this recently, but I think having a nice mix of employees plus contractors gives you the ability to scale up and scale down.
And the very first thing you can do is, and unfortunately, as a contractor, you’re the first to go, in these situations because it allows you that that flexibility to, to scale down when you lose a client or two or 10, because of the economy.
Chip Griffin: Right. And that elasticity helps you. And it, it helps you at all times, again, as we’ve talked about, it helps you during the growth times, and it helps you during, the belt tightening times as well.
And so you want to build that into your model overall, and it’s, it’s that mixture of making sure you have the right agreements with contractors and vendors, having that cash reserve, with having the right mindset, all of these things give you that runway to make smart decisions.
Gini Dietrich: And one of the things that you don’t have in your article, but we have talked about is having more than one revenue source. And I, you know, that’s the, that’s the biggest lesson I learned during the great recession was we lost 90% of our clients and there was no revenue. That was it. Like just, just fee, we’re selling our time for fee and that was it.
So I really looked at it and I thought, okay, how do I build this business so that we have multiple revenue sources so that when this happens again, if we lose 90% of our clients – and it happened in 2020 – we’re losing 90% of our clients, we still have other revenue sources that will help keep us afloat.
Now we certainly weren’t in 2020 didn’t do what we did in 2019 from a revenue standpoint. But it also didn’t crush us because we had all the, all the different revenue sources.
Chip Griffin: Right. And I, and I think having revenue diversity in a lot of different ways is useful. So different, different offerings that you might have.
Certainly you wanna avoid the, the whale clients that, that weigh you down and that you’re more likely to over service and make bad decisions or have to make really horrible decisions if they go away. Right. So make sure that you’ve got diversity in all sorts of different ways in your revenue streams, and that will help you to, to be resilient, flexible, and elastic.
Gini Dietrich: And then the last thing that I thought was really interesting that you brought up in your article is, just communicate, you know, have honest and open conversations, not just with clients, but with prospects and with your, your team to say, Hey, listen, we’re all reading the same news. We all think this is gonna hit.
We don’t know what it’s gonna look like. We just came through the pandemic. We, we don’t know. So let’s be as open and honest as we can be. Let’s find different ways to work things out. I mean, I’m having a, a conversation with a client right now about how to create different scenarios, you know, for plans, A, B, C, D, and E and F in case something does happen.
What does that look like? And what are the triggers for those plans?
Chip Griffin: Yeah, it’s absolutely essential that you overcommunicate with your team right now because they are absolutely seeing these same things and they are worried, they are concerned. And, and for you to, to sort of say, well, you know, it’s all fine for us, so I’m not gonna say anything right now.
I don’t wanna jinx it or, you know, why even put this on their radar screen? It’s on their radar screen.
Gini Dietrich: Right. Yes it is.
Chip Griffin: And so it is better to be honest with them. And that that’s true even if things start to look worse for either the economy or for your agency in particular. Communicate with them about what it looks like. Because they’re gonna notice. If you start having clients cutting back or canceling, they’re gonna see that happen.
Don’t just, you know, say, well, I don’t, I don’t really wanna talk about this. Right? It’s not, it’s not comfortable, but you need to, because they will almost always assume things are worse than they really are. So don’t –
Gini Dietrich: Oh, for sure.
Chip Griffin: So don’t let them go there. Yes. Fill that vacuum with information so that they don’t fill it with speculation.
Gini Dietrich: This is a total aside, but it reminds me of the time that my business coach said to me, so why do you close your door during the day? And I was like, what do you mean? And he said like during the day you get up and you close your door for several hours of time. And I said, yeah, so I can get work done uninterrupted.
And he said, okay, but do you know what that’s doing to your team? And I was like, no. And he said, they’re freaking out. They think you’re on the phone creating plans to fire them. And I was like, I’m just working. But that’s what they do. So that, that proves your point. That people, they do make it much worse in their heads than it actually is.
So if you’re communicating and you’re communicating openly and you’re saying, listen, Jamie Dimon just called this an economic hurricane. I don’t know what to expect. Right now we’re okay. But here are the things that, that we’ve done to prepare for it. Here are the things that we do all the time, regardless, and let’s work together to figure out, you know, if we lose one client, what does that look like? If we lose three clients, what does that look like? Let’s work together to do that.
Chip Griffin: Right. Well, and that tangent that you went down, I will share that I had similar feedback over the years.
So, so what I actually started doing was I closed my door for every single meeting. And I made a big deal about the fact that I closed the door for every single meeting because that way nobody could ever tell when I was having a true closed door meeting. Right. Versus when, I mean, cuz if someone just came into chit chat, I’d be like close the door and, and they’d be like…
And, and so it just became that was my natural habit. And so, so when I did need to have a true closed door conversation, either with them or on a phone call or nobody, nobody thought anything, cuz it’s just this weirdo.
Gini Dietrich: Nobody freaked.
Chip Griffin: He closes the door all the time and you know, whatever. Right.
Gini Dietrich: I literally was like, I’m just working.
Chip Griffin: Right. And, and so, but you have to be aware of those things, right? And, find ways, you know, whether it’s by keeping the door open all the time, or by closing the door all the time or whatever, find those things that, that help communicate effectively to your team to alleviate their concerns as much as possible.
And if they should be concerned, frankly, start telegraphing that. Right. If, if you think, think that you’re at a place where you might have to be making some cuts in a month, start telegraphing it. Don’t let the first time that they have any inkling that there’s a problem be when they walk into your office and you say buh-bye.
Gini Dietrich: Yeah. Right. I learned that lesson.
Chip Griffin: You can’t do that. You have to, if things are going bad, let them know. Telegraph that we’re looking at it. We’re trying to figure out how to get through it, but there are gonna be some tough decisions to be made, because again, you know, nobody likes surprises. Right? Right. People don’t like good surprises.
They don’t like bad surprises. That’s right. Most people want to, to know what to expect. And so if you can, can drop hints and communicate with them in such a way that they can see the big picture before action is taken, you will generally get a better response when the time comes.
Gini Dietrich: Absolutely. And I learned that lesson really, really, really the hard way, because during the great recession, to be perfectly frank, I was completely blindsided. I mean, I was reading everything and the economists were saying all this stuff, but I was so inexperienced and naive that I didn’t understand what was actually coming for us and I wasn’t prepared. And so we lost like I said, 90% of our clients between December 22nd and January 2nd, 2008, 2009.
I mean, lost them all. And so on January 3rd, I had to go back into the office, you know, after everybody came back from the holidays and, and I had to let everyone go. And I remember somebody saying to me, and it really hurt my feelings at the time, but I remember she said to me, why didn’t you ask us for help?
We would’ve helped. And I was like, I didn’t know. Like I didn’t, I didn’t know. So please listen to us and ask your team for help.
Chip Griffin: Right. And I, and I think, you know, just because we’re telling you that you need to be paying attention to this, you need to be making plans, being flexible and all that kind of stuff.
It doesn’t mean that you should be paralyzed by fear of what, what’s potentially coming. We don’t even know what’s coming. Right. Right. So, I mean, at some point the economy will turn down. Whether that is, you know, next week or next year, or in five years, who knows. Right. And we’ve, we’ve said this before, we’ve had a recession episode, even pre pandemic where we talked about some of these things, but you know, one of the things that you need to make sure is that you’re continuing to make the right decisions based on the best information that you have available. So don’t sit here and say, I’m just gonna freeze hiring cuz something might happen. Right. You still need to run your business intelligently. And so should you be a little bit more cautious?
Perhaps, should you at least be thinking about, okay, what’s the next step. If I do make this investment in a team member or a project, you know what happens if I do have to pull back in three months, do I have a course of action or have I boxed myself in. So think about those things, but don’t, don’t act in that, in that way, where you start making bad decisions because you’re concerned something else might, you know, another shoe might drop.
Gini Dietrich: Absolutely. Yeah, yeah, yeah. You just be prepared, right?
Chip Griffin: Cause that’s also, when you start over servicing clients. Yeah. Right. Bad all the time. Bad idea. Something that when, when you start getting worried about revenue, what do you do? You over service. What does that do? It makes it much worse, much. You will not help yourself by over servicing clients to keep them.
Gini Dietrich: It does not help.
Chip Griffin: So stop it. Don’t think that way.
And also by the way, if your agency is continuing to do well and the economy has a downturn and you’re still doing well, that may actually be an opportunity for you. Right. So particularly because we’ll see a lot of, some of the, the higher flying agencies, shall we say, not always large, but you know, just the, the ones who have been very aggressive in some of the moves they’ve made in recent years may find themselves in a position where they have to let some real talent go if the economy turns down. If you’re running things well, and you’ve got things still firing on all cylinders, you can start picking up some real good talent on the market if you are. Absolutely. If you are smart and you’re having that flexibility built into your plan.
Gini Dietrich: It’s kind of like buying stocks when the market crashes, because you have the flexibility to be able to do that.
So yeah, absolutely. You should be doing that, looking for that because you know, if, if the economy tanks and like you said, it might be tomorrow, it might be five years from now. It will. There will be layoffs. And when that happens, if you’re ready and you’re prepared – and you should be prepared regardless of how the economy is, you should be prepared. Having, having cash, having access to a line of credit so you have some, some flexibility, using contractors for the work that you wouldn’t normally do. Having open, honest conversations with clients, with prospects, with employees, all of that stuff is going to help you be prepared. Make sure that your contracts are solid so that they can’t call you today and you’re gone by tomorrow. Like there has to be some, some room in there for them to give and for you to give. So do those things and you, you will be prepared for whatever comes.
Chip Griffin: Absolutely. And I, I do wanna throw one caution out there, because you’ve mentioned line of credit a couple of times and you and I both agree lines of credit can be very helpful.
They can also be insanely damaging if you don’t know what you’re doing. So I, I strongly encourage you if you have a line of credit that is for short term cash flow deviations, it is not for investing in the business. It’s not for putting off tough decisions about reducing the size of your staff or reducing other expenses.
Right? It’s literally short term. It’s this client is just a little bit slow to pay and we need to bridge that gap. That’s what you use the line of credit for. Yep. Yep. I’ve I’ve seen way too many agencies who think I’ll get a line of credit and I’ll use it to invest in the growth of the agency. I’m gonna hire this person because I know that if I’ve got them I can generate business. Don’t do that. That is not, you should not be using debt. You should not be using equity to grow your agency. Grow organically, and you will have a much more solid footing. In fact, you will see if the economy turns down in the early months, it will be the agencies that are relying on debt and equity that will have to make the biggest cuts the soonest. Don’t be one of them.
Gini Dietrich: Yep. Learned that lesson the hard way too. So don’t be me.
Chip Griffin: Excellent. Well, on that note, we’re gonna wrap up this, not depressing, not recessing, but hopefully informative episode of the Agency Leadership Podcast. I’m Chip Griffin.
Gini Dietrich: I’m Gini Dietrich.
Chip Griffin: And it depends.