Dear Dr. Pete...

Dear Dr. Pete:

In the current economic climate, I know we have to be more competitive. I guess it's just a case of dropping prices, right?

Acosta Kutter

Dear Acosta:

Well, you could do that and no doubt you would win some business. However, you need to take the bigger view and take a real hard look at the internal workings of your company before you decide on price cutting as a course of action.

Let's assume for the moment that you have to keep your dollar profit figure where it is. Delivering less profit is often the fastest route to the dole queue in my experience, but you have to look at both sides of an equation.

As you all know, the Doctor likes to keep things simple. So let's just say that profit is revenue minus costs.

If you reduce prices across the board and do not increase the number of projects you sell then your revenue will fall. How can you go about increasing the number of projects that you win? You can get more bids or you can win more of the ones that you do get. To get more bids, you are going to have to increase your marketing or sales effort. Increased marketing is going to mean increased costs. Increased costs mean even more revenue is required to maintain the same profit level and on it goes.

To win more of the bids you get, you can reduce costs. Or, you can do a better job of pitching for the ones you want, taking more time and putting more effort into your proposal. This might require you to turn away those projects you don't want - but this might not be a bad thing.

So, what about the cost side? In good times (and take it from me the last few years have been good times) it is easy to get sloppy on costs. When profits are easy to come by, it really doesn't matter if a few bucks get spent here and there. When the money stops rolling in, it's time to take a look at what you are expending.

Easy targets are marketing and advertising spend, but you need these to maintain or increase your revenue. Another easy target is travel expenses, but your sales team needs to get out there and see clients. The hard target is productivity. Productivity is just how hard your people are working. You can ask them to put in extra hours without extra pay but this is not sustainable in the long run and doesn't address the issue. They will be just as unproductive but for longer each day.

It's time to take a good long look at your business processes. The key question is always "why do we do this?" The answer "because we always have" is not acceptable. If you find yourself asking people "who are you and what do you do?" then it's time to look at your staffing (and your own ability as a manager!). Some staff reductions may be inevitable. If you employ two people to do the job of one, then one really has to go.

Before you go pruning staff to reduce your cost base, consider also what you actually do as a business. In research we often position ourselves as adding value and providing insight. At the same time we price our projects on a "cost +" basis. If you reduce your research staff, then the ones that are left are going to have to spread themselves more thinly across your projects. This may be the right thing to do if they have capacity (that productivity thing again) but if it results in less "insight" being delivered, have you really done yourselves a favour?

A final thought about this insight thing. If we really are all about delivering insight and adding value, how do we square this with cutting prices? Offering "value" is not the same as being cheap. Make sure your client knows why they are getting the project at the cost they are offered, what will be included, and (more importantly) what won't. You will probably end up having to provide the same full service you did before anyway but you'll feel better for it!

Good luck
Dr. Pete

P.S. Delivering the same dollar profit as you originally budgeted for is not guaranteed to keep you your job. Accountants (in my humble experience) would be happier with a $1 profit at a margin of 99% than a $99 profit at a 1% margin. You can tell there's a good reason why I'm a researcher and not an accountant!

P.P.S. If it's your own company and you can afford to cut your dollar profit, then you are going to be "quids in" during this recession. There are always winners and losers in any situation.