Awake at 2 o'clock?

A friend of mine occasionally shares his copy of EcoTrends®. This research newsletter tracks 41 different economic indicators. Since I’m not actually a subscriber, I refer you to their site if you’re interested in the details of their analysis.

The Institute for Trend Research (the publishers of EcoTrends®) divides economic cycles into four phases. In Phase A economic signals indicate a strengthening. The economy, or at least that industry, is generally on the upswing. In Phase B most indicators are strong: the economy is peaking. In Phase C indicators are falling and a softening of the economy is occurring, whether GDP numbers have indicated it yet or not. In Phase D an indicator is falling and the economy is in recession, at least for that industry.

In the May report, there is precisely 1 indicator in Phase A. There is 1 indicator in Phase B. Twelve indicators are in Phase C and 27 indicators are in Phase D. Of course the question at this point becomes “How many of these recession indicators are nearing the bottom, and preparing to enter back into Phase A?”

The irony inherent in any recession is that while the economy is at its worst, it is the best time to be a buyer. In Phoenix, for example, families whose homes are scheduled to be foreclosed and auctioned on the courthouse steps receive visits from buyer’s agents that morning. These agents compete to arrange leasing deals for the families to stay in their houses, if the buyer purchases the foreclosed mortgage. Unless the Phoenix market falls even more from its current dramatic decline (over 40%). These buyers are leveraging their financial strength into a great income opportunity.

I have two clients, both from excellent businesses. (Actually I have many more than that who run excellent businesses, but these two are my focus today.) They both track leading indicators in their industries, and saw huge declines in the fourth quarter of 2008. They acted aggressively, cutting discretionary expenses, trimming underutilized staff, and freezing or reducing compensation packages while their companies were still enjoying record sales and profits.

They acted aggressively long before most of their competitors or colleagues in the industry. They managed profitability, hoarding the cash from the good times against what they saw coming. Because of that, they have not had to reduce core capabilities, and enjoy somewhat reduced but still respectable profits in 2009.

Now they find themselves with resources in excess of what they expected in mid-2009. At this point in time, opportunities created by the weak economy are becoming more and more obvious. The ability to negotiate terms on capital expenditures, space, and services are as good as it’s been in the last 20 years.

The question is: If moving aggressively to adjust to the downturn has proven to be such a wise move, is moving aggressively in anticipation of the next upswing equally astute?

On the other hand we have an old saying in Texas. “It’s easy to tell who is a pioneer. He’s the guy laying flat on his face with the arrows sticking out of his back.” Moving too quickly, if the recession continues longer than anticipated, can leave you in a situation as bad or worse than if you hadn’t made adjustments in the first place.

In the cases of these clients, they have decided to take some risk, but to hedge it in case they are acting a bit too soon. The first wishes to expand geographically. They will use the softened real estate market to negotiate a favorable lease on new space in another city. To staff it, however, they will use existing personnel. Although the people will be establishing a footprint in the new region, most of their time at present can still be utilized by doing work remotely that’s associated with their existing position.

The second client sees an opportunity to add services based on normally hard to find talent. In their case, they will negotiate aggressive compensation packages, to be brought up to customary industry levels once the new employees have proven that they can generate enough new work to justify it. They will not add new infrastructure or support until that time.

When we interview prospective sellers in business brokerage practice, we ask “if you were taking over this company today, what would you do to rapidly increase your business?” Every business owner knows the answer. There are opportunities that he or she just hasn’t had the time, the resources or the energy to address.

If you acted aggressively on my January blog “Preparing for the Strategic Triple Threat” you might be in better shape than a number of your competitors. It could be time to show a little courage in preparing for the next upswing. I’m not calling the end to the recession. Current conditions will continue for at least a few months and perhaps through the beginning of 2010. The rate of descent, however, is clearly slowing. You should consider what you would do right now if you knew that we have bottomed out.

To those clients who have been holding off on replacing or filling a key position, I’m suggesting that they begin a leisurely search for the absolute best person who can be hired on the best terms to fill it.

If you need new space or equipment, consider the lifespan of what you’re buying. If it is something you intend to utilize the next five to 10 years, whether you’re holding it a few months earlier pales in comparison to the savings of locking in a low price or a low rate all the way through the next expanding cycle.

Ask yourself “What would I do if the phone started ringing off the hook again today?” It isn’t going to happen in the next month or two, but it will happen eventually. You don’t want to be scrambling for talent or other resources after everyone else has started doing the same thing.

There is a risk to being out in front. Like a bicycle racer, your way is much easier if you have someone taking on the headwinds in front of you. But in order to win, you’ll eventually have to lead the pack.