Facing an Existential Crisis?
As we are hearing about more firms that are closing during these challenging times, David offers some guidance to help cut through the confusion when our worst fears in our business become reality.
Links
"Facing an Existential Crisis" article by David for punctuation.com
Rory Sutherland's LinkedIn post
Transcript
Blair Enns: David, our topic today is a post you wrote about recently. You also posted on LinkedIn. There were a lot of comments about it, a lot of likes. The topic is "Facing an Existential Crisis?" As I do with most of the topics you choose, I ask you, what was the impetus for this one?
David C. Baker: Wow. Just this sense that I get from a lot of firms that they wish things were a little better. Again, it's still a mix. There are a lot of firms that are doing really well. Actually, I think there are probably more firms doing really well than we know because they feel cheap talking about it because it just feels like they're boasting. There are a lot of firms that are doing well. Then I'd say most firms are just there. It's not existential crisis. It's just not the best time they've ever had in their business. Then there's a bunch of them that are really facing an existential crisis.
I actually had written an article that was almost done. Then Sunday morning, I thought, you know what? I need to write about this. I need to write about the existential crisis. I just sat down and just let it flow. It's not fun. I started out the article telling people, "This is not fun to read, and it's not fun to write either." I feel like there's 20 of us doctors that are practicing at this hospital, and my only job is to tell people they have stage 3 or stage 4 cancer, and all the rest of them get to do normal doctor practice stuff. It's like, "This isn't fun at all."
I just felt duty-bound to speak into this. Assuring people, if this doesn't apply to you, then don't read it. It's like, this is disgusting, discouraging stuff. The same is true for listening to this episode. It's like, if this doesn't apply to you, if you don't think you're facing an existential crisis, then you need to go take a walk and have fun and don't let me drag you down with all this stuff.
Blair: I read it fairly quickly because I largely ignore your content. Then a friend said, "Oh, my God, this article that David just wrote." He said, "I haven't even read it yet, but it's already very good." I clicked through and I read it, and I texted you, and I said, "I think this is one of the best things you have ever written." You have written a shitload of content in the last 30 years, books, posts, whatever. I'm just imagining the people who are benefiting from this. Anybody listening, if you feel like you are facing an existential crisis in your business, please do search for this post and find it. It's posted on David's website, punctuation.com. There will be a link in the show notes. You want to talk about who you wrote this for?
David: Yes. Before, when you heard me talking about how firms are doing, did that strike you as matching your experience, or am I too negative or too positive there?
Blair: No, I think it really seems to be this clearly bifurcated market where-- We had a training workshop a couple of weeks ago, and afterwards, it occurred to me, "Oh, nobody in the workshop was in rescue mode." All the firms in that virtual room were doing well. You and I are so used to hearing communication every day from others like us who also serve the space of a piece of bad news pretty much every day, another firm going down, another firm going down, or another firm reaching out because they're really struggling, where these pipelines have just turned to concrete.
There's just a whole bunch of no decision. There's a whole bunch of reason for it. In the midst of all of this, I've had many conversations with firms who are doing really well right now. It is a strange time.
David: It is strange. We don't know what to do with it. It also feels fragile. If you're doing well, you don't feel like it's any semi-permanent status. It feels like that could change pretty quickly, and the opposite could be true as well. All of a sudden, a big client could come along and rescue what otherwise looks like a bad year. It's just a weird time to be running and owning a firm.
Blair: Rory Sutherland had this great post in LinkedIn that I found this morning, read, and commented on it. He's just so brilliant at mining models and metaphors from other parts of the world and bringing them into marketing. He was talking about in biology, there's this idea of high-K creatures and low-K creatures. K is a function of how many offspring you produce. I have a friend who's a grizzly bear biologist, as you know, so this stuff isn't new to me. Those who are higher up the food chain are higher K creatures, meaning they have fewer children, they have fewer offspring. Those who are lower down the food chain have numerous offspring on the hope that some will survive.
Rory says, "At times of uncertainty like now, it's better to behave like a low-K creature where you're spreading seeds all over the place." He's talking about lead generation. He says, basically, high-K creatures, they pick something, one or two things, and they just repeatedly do these one or two things. His point is sometimes, in times like now, it makes sense to drop down and just do a whole bunch of different things from a lead generation point. I made the comment that in times of business uncertainty, it's almost like the predator-prey relationship gets scrambled or even inverted, and the tadpoles start eating the bears. Does that make sense?
David: I would just sit with that image for a second.
Blair: It's just weird times. The tadpoles are eating the bears in some places.
David: Where I thought you were going to go with that was all the people who were laid off, like those are the new offspring, and they're all fighting to survive as well, fighting against us.
Blair: That happens. This sector gets cleaned out a bit. A bunch of businesses go out of business, so you think, "Okay, there's fewer firms, so there's more work to spread around." No, because so many people who are working in these firms start their own firms. Not because the market needs it but because they don't know what else to do.
David: Yes. It's every three or four year cycle it seems to happen. I think psychologically, there's also something that's happening too in that things aren't going well. We're not exactly sure what to do. Psychologically, we do a lot of things so that if we go down, it's like, "I did everything I could. Maybe some of it wasn't effective, but I did everything I could." I think that's actually a pretty good instinct. You don't want to get frozen and say, "I'm not sure if that will work. What should I do?" It's like, "No, do lots of things." Then, once you start to see the turnaround happen, what got you there isn't going to take you to the next place. You need to focus again. That's another mistake that people don't do.
Blair: Yes, I agree with that completely. Hey, you tell us a great story about going to Harvard Business School and being impressed with the professors in theory and disappointed in practice. You wrote about this in this post. You want to just tell that story?
David: Yes. First, everybody who's groaning is like, "He went to Harvard? I've heard him talk. I don't think he went to Harvard." I went for a two-week study course. Somebody gave it to me, and I thought, "Oh, that'll be fun."
Blair: Maybe this will help.
David: Yes. It was free, so everything was paid. You're staying in the dorm. In fact, one of my suitemates was Karen McGrane. That's where I got to know her. I really love Karen and the work she does. She's one of the smartest people I know. Anyway, we're there for two weeks. This is with the graduate school profs. You have your assignments, and you're up late at night studying as a group in your suite. Then you make presentations the next day. They critique your logic and your presentation. Then, there's a break for lunch every day, and you're just in the cafeteria with the same Harvard graduate professors.
I was so looking forward to talking to them. The whole purpose of the two weeks was using the typical Harvard case study approach, where you say, "Okay, here's what happened in 1994, this was a situation, these were their options, this is what they chose, this is why it was a good choice, this is why it wasn't, what would you have done, and so on." It's the case study method that Harvard is so famous for. At lunch, though, instead of talking more about that, I wanted to ask them, "Okay, what would you do with this real-life situation right now? What would you do if you were in charge of Apple and you were unduly dependent on China?" On and on, I just make up these things.
What struck me immediately was how they had no answers for those things. This sounds really arrogant. I don't mean it arrogant. I just mean it's true. It's like I was thinking circles around these people. Now, I didn't go to Harvard. It's not like I'm smarter than they were. I realize there's such a big difference between facing a real-life situation with your business right now versus studying a case study for the decisions that somebody else made in a very specific situation in the past. Nobody has written our case study yet. We're living the case study that hasn't been written.
Harvard's not going to save us. There's tradeoffs in these decisions, and they are not clear. That's what turns an existential crisis to an even worse existential crisis because you feel frozen, you're not sure what to do. I didn't even have that story in this article. Afterwards, I thought, "Oh, I need to put this in here because people need to understand that this is not as easy as it sounds. It's not as easy as the advice I'm giving people." I'm just saying, "Okay, here's some guidelines. You still have to make a tough decision, but Harvard's not going to save you in this case."
Blair: On that note, you've got some guidance on what to do. First, talk to us a little bit about the timing. You made some really interesting points about the value of knowing when to do, not just what to do. I said to you before we started recording, I said offhandedly, you've given me a lot of advice over the years, most of which I've dismissed only to later look back and think, "I should have done that."
David: Yes. Can you record that statement?
Blair: I'm just giving you credit everywhere, man. This better come back to me.
David: Yes. Think about the three main financial statements that we use to manage our businesses. You've got cash flow statements, you've got profit and loss statements, or P&Ls income statements, also known as that, and you have balance sheet. When things get tough, you typically will revert to studying your cash flow. Nobody looks at cash flow when things are going great. There's just no point. Really, what you should be looking at is your balance sheet because what you want to be doing is making sufficiently tough decisions so that you're not losing ground.
Maybe you're not gaining ground, but you need to be at least 200 feet above the ground if you're an airplane or something like that, if you want to use that image, or climbing. You don't want to be losing altitude. Your balance sheet is the best way to look at that. If you are staying in business and you're not losing ground, consider that progress. Who cares if you're making money? Profit, to me, it's optional. It should happen most of the time, but there's no reason it has to happen all of the time. Just like with clients, every client should be profitable, but every project doesn't have to be. You want to look at whether you're losing ground or not.
If you're holding steady or climbing, you're probably going to be okay, but make sure you're not losing that little bit of altitude you have. In an airplane, when something goes bad, altitude is your friend because if something happens when you're just a little bit above the ground, there's no time to think, no time to recover. When you lose altitude in your business, by that, I mean cash cushion on your balance sheet, then somebody else is going to start making decisions for you. That is a really bad place to be. You've still got to retain the ability to make decisions. That means you have to watch your balance sheet.
Blair: When you say somebody else, you mean suppliers?
David: Suppliers, the court-
Blair: Creditors.
David: -your clients, your employees, everybody but you.
Blair: Yes. The obvious thing to cut in an existential crisis is to look at your staff overhead and think about reductions. You've got some suggestions here.
David: Yes. The first one is to be active and not passive. The reason is because if you let the team make that choice, the most employable ones will leave first, and you'll be left with the least employable ones. I heard somebody critique what's happening at the federal government this way. It's like, offering everybody eight months of severance means that the people who are most likely to be employable by somebody else will gladly take that. It's like, "I can find another job." The ones you're left with are the ones who are not as employable, not as confident that they can find work. It almost has the opposite effect.
Be active and not passive so that you can choose what's happening. Your best people want to know that you're being active and not passive. They do not want to work for a firm where decisions are being made about big things by somebody else. That's the first. The second one is to cut entire positions. It's pretty easy for us to transpose our own experience and say, "Okay, I need to miss a paycheck. I can do that. We've got savings." Most of your people are living closer to the edge than you are. They're making less money. They're maybe at a different stage in their life where they're trying to buy a home and so on. Maybe yours is paid off.
Saying, "Okay, everybody's going to take a 20% cut," that squeezes a lot of people in a way that they can't. It seems nicer to not have anybody lose their job, but it's actually not something that's all that sustainable. I don't think this is always universally true. Sometimes it's okay, including your middle management people who have a little bit more cushion probably. Generally, you want to cut entire positions and not just say, "Okay, everybody's going to take a pay cut across the top for eight weeks or something like that."
Blair: Yes, I'm sure that this is going to divide the audience, but your point is pretty clear, and it's hard to push back against this. I've seen this before. Some owners think the egalitarian thing to do is to spread the pain. "All right, everybody. We're all in this together, 20% off the top for everybody." Most people can't take a 20% pay cut. Some can, some can't. You don't know what their personal situation is.
To your point about the best employees, the ones who are looking in the mirror thinking, "Listen, I'm creating value here. I understand that these other people maybe they should get a pay cut or they should go, but you should even give me a raise in the face of this." The high-value creators, these are the ones you're going to push out that way.
David: Yes, I always think of science class, where you get paired up with three other people and the four of you do a science experiment, it's like, "Oh, shit. I'm stuck with these people. I'm going to be the one doing all the work." [chuckles] A little arrogance in there, obviously, but the difference in people's performance is highlighted during tougher times. You don't want to do that. You also want to take one decisive action because when the really bad news, and it's really bad news, this hurts people's lives, when this comes down, you don't want people wondering, "Okay, what's going to happen next week?"
There's no promise because the business isn't stable, and it could get worse before it gets better. They need to have some rough assurance that, "Okay, we measured twice, and we cut once. We're not going to just chop a leg off one inch at a time." It's like, "No, it's going to be right here. We think this is the right place. We may make a little bit of a mistake here, but no, we think it's the right place. Communicate that without a promise, but one decisive action without a promise.
Blair: Fairly common advice, never do it late in the day or late in the week.
David: Yes, because you want to be around to answer questions. You don't want people going into a weekend and all kinds of chatter between them in a way that you can't correct any misunderstanding. You always want to do this early in the day, early in the week. It's just a minor thing. It's not nearly as important as some of these other things, but it's just a point that a lot of HR people will tell you.
Blair: You make a point that when you're cutting, do not forget the management team. Talk us through that.
David: Oh, yes. This one's really hard because it's the management team that you spend time with. There's a natural, tighter bonding with these people. You know more about their lives personally and their kids and so on. You work with them, and they're the ones who have enabled you to have the sort of life that you have right now. They took something over from you after you tried to delegate it to lots of people and it didn't work, and finally, you found a really strong management team, and they keep you from having to be involved in the day-to-day stuff.
It's pretty easy to unfairly cut people that are not as close to you, that weren't as hard to find, that don't take over things for you. What you end up with, and this happens everywhere. I'll bet everybody who's had to do this sort of thing has seen their own mistakes. I certainly have when I went through a tough time in an earlier business, where you end up with this top-heavy team, and they may not even be the people who bill as much to the client.
You don't overcorrect and cut just from the management team. You have to cut from the management team, too, because if you're a 20-person firm and you have, like, I don't know, four people on your management team, you wouldn't have four people on your management team if it was an 8-person firm or something. You just have to think through that, too.
Blair: Yes. There are more points here under the banner of staff reductions, but I'll get you to speak to one then we'll move on. Talk us through the idea of using severance as a mental trick.
David: There's not as much confusion about what we need to do. I think there's more confusion about when we should do it. The trick that can make it easier for you, and it's using your own empathy as a way to prod yourself into making a better decision, is to say, "Okay, if I let these seven people go now, I could probably give them-- I don't know, let's just say two months severance. Maybe I should do that. I don't know. I'm not absolutely certain I should do it yet. Maybe I should wait a month. Okay. If I wait a month and I can only give them one month severance, what's the better thing? Now with two months or in a month with one month?"
It's just a mental trick to use your own empathy to lead you to a better decision because the better decision is usually sooner. It's like at the end of this, when you're doing a debrief-- I've never heard anybody say, "I wish I'd waited longer." Never once have I ever heard anybody say, "I wish I'd have waited longer." Sometimes, that was the right timing. Most of the time, "I should have done that a little bit earlier."
Blair: Yes. I often hear, "I should have done it the first time I asked you about it or the first time I thought about it." Do you want to get into the worst-case scenarios here if the firm does fail? You make the point that your clients are going to find new sources of whatever you do, and your team members, they're going to find new places to work. All that's going to work out, but you're going to have to clean up a mess.
David: Yes. This is where your job as a leader becomes way more complicated than anybody else's because you can talk the right game about, "Okay, team, we're doing what we need to do to recover. This is the good news. Here's the timing. Here's why we're doing it, and so on." In a corner of your mind, you have to be preparing for the possibility that this doesn't turn around. You don't want to talk about that. This is just your own private planning. You have to be schizophrenic, so to speak, intentionally so that you have most of your efforts focused on the turnaround.
There's one eye over here on the corner that says, "Okay, but if this doesn't happen, then this is what needs to happen." I've got three different suggestions here about how to limit the damage if this existential crisis actually turns out to be existential and the firm closes. The first one is to just distinguish between any of the obligations that your firm has that are just guaranteed by the company, the corporation, and those that are personally guaranteed. All credit cards are pretty much tied to a person, unfortunately, even company credit cards. Then, of course, a line of credit, or it could be an EIDL loan. For our US listeners, they'll know what that means. It won't make sense to anybody else.
If that EIDL loan-- Those were offered during the pandemic. The payback is 30 years, so a lot of people took them, and almost everybody who took them, it was a mistake. If it's $200,000 or more, then that's personally guaranteed. The business might fail. If the EIDL loan was $30,000, then the business can't pay it, and bam, so what? The government doesn't get their money, you're scot-free. Anything that's personally guaranteed like that, or line of credit, or credit cards, you're going to be on the hook for that. You want to start favoring what things you pay back so that the debts that you leave unresolved are the ones that don't have a personal guarantee. That's the first step.
Blair: I'm just imagining people taking the $200,000 in EIDL loans and having that on their personal books. That's a big load.
David: Yes. It's like there's student loans, taxes, and EIDL loans are not commuted in a bankruptcy. Even if there was a bankruptcy, and there seldom ever would be, honestly, because there's no point in your corporation filing bankruptcy. This leaves these obligations unpaid, even if there's a lawsuit, and very seldom would it ever spill over to you personally, too. Anyway, so distinguish between those and pay off as much as you can of those loans that are personally guaranteed. The second is don't screw with taxes or unremitted retirement funds.
If you've got a 401(k), or a SEP, or something like that, and employees have deferred their own money to go into this, but you haven't yet sent it in to whatever the company is that you're using, Schwab or something, don't mess with that because you'll be on the hook for that stuff personally. Then the third is-- This one, obviously, you're going to need to talk to attorneys here, but if things get ugly, a judge can reverse transfers. Now, they can reverse transfers that are personal all the way up to a year.
Blair: Property transfers?
David: Yes, exactly. If you're worried about a personal bankruptcy, and so you transfer a piece of property you own to a cousin, or a spouse, or something like that, that can be reversed up to a year. If it isn't to a related party, it can be reversed up to three months. Just be really careful with that stuff, and of course, talk with an attorney first. If you're going to do something like that, make sure it's not illegal. Make sure that the clock runs out on it. I hate talking about this stuff, but it's just I want to save some people some heartache here. Distinguish between personally guaranteed ones and ones that aren't, don't screw with taxes or unremitted retirement funds, and property transfers need to be done very carefully.
Blair: That's under the banner of the worst-case scenario things that you should be thinking about and doing, not doing, in the final stages, or if things are getting very, very tight, you're going to have to deal with these things. There's some serious don'ts in there. You don't want the government coming after you. You don't want to take on the personal obligations more than you have to. Then let's close by talking about what happens if your worst fears are realized, the firm does go under.
David: Yes. Don't walk away from it. I can't imagine any scenario where you would walk away from it. You might merge with another firm, where they might even take over your obligations. You don't get any money for your firm, but at least they cover the debt, or maybe you get acquihired. In the email that went out yesterday, my weekly email that goes out to tens of thousands of people, there was a blurb at the top that said, "Here, there's this 11-person firm, they're not in good shape, they're not making a profit, but they're in a place where they could be absorbed if you're in health tech or finance tech."
That was a client that I worked with, I think, four years ago, something like that. Things have turned in a negative way for them. We worked out an arrangement where we just ran that ad for them, and we just transfer any interest to them. The goal is, okay, let's not lose several hundred thousand dollars, let's at least find a home for our clients, let's find a home for our team, and let's limit disruption and limit any cleanup that we have to do personally.
You would never just walk away from your firm. You would always do something with it, even if it means transferring the client relationships to your team, and maybe they get it for free or maybe they pay you some override based on how much business they get over the next couple of years, or maybe they take over some debt or something like that, or take over the lease. In worst-case scenario, you're still going to limit the damage by at least thinking creatively.
Blair: All right. We're talking about "Facing an Existential Crisis?" That's the name of the post that you wrote. It's on punctuation.com. We'll post a link in the show notes. You also posted it on LinkedIn. There's some interesting discussion there. Again, I think this is just such a valuable piece to people who are in crisis. One person's crisis, somebody else can sleep at night.
We've all got this different level of dealing with anxiety and crisis. Even if you've got some worries and you need to think through the opportunities that you have in front of you-- One of the things I skipped over, I didn't get you to speak to, I'll just list them here. You talk about four critical keys in basically thinking about all of these things collectively. First is, don't lie to yourself. Come on, be honest.
David: Yes. Calibrate how you react. Do you typically overreact? Take that into account. Do you typically underreact? Maybe you should react a little bit smarter this time. Just calibrate how you normally act.
Blair: Yes. Second, ignore what other people are going to think. That's got to be a big one for some people. Pride gets in the way of doing what needs to be done. Third, which we've gone into in detail, is cut staff and cut deep. Basically, get ahead of this on the staff overhead front. Fourth, simultaneously prepare for success and failure. We were talking about that in the limiting damage and if your worst fears happen. Is there anything else you want to add before we close on this?
David: Just an apology for having to talk about this, but it feels like, man, somebody needs to, and I like to take care of healthy patients and sick patients. This is like I'm speaking to the sick patients here, hoping that the damage is okay. Really, if your firm goes through an existential crisis, your clients are not going to have any trouble finding another firm. That's sad in itself, honestly. Your team, the competent ones, are going to find. There may be some temporal sort of pain, but they'll find. You'll be fine, too.
Anybody that started and runs a firm like this is a very capable individual. Going through some of this stuff, it's not what you would wish on anybody, but you're more resilient than you think. People love you more than you think. It'll be fine. Don't refuse to look at the truth of a situation because of shame or embarrassment, because anybody who hasn't been through something like this is lying to you. [laughter] They're just young. Give them some time. Yes, just face it. It's okay.
Blair: David, on behalf of creative entrepreneurs everywhere, thank you for the work that you do, including this excellent article.
David: Thanks, Blair.