Turns

January 5, 2009 —

In a previous episode, I mentioned I had a seat at the last down turn.

I won’t act like this gives me any special authority to make predictions or give advice or even suggest this time is like the last. But I will say I’m very much on the side of optimism when it comes to this industry. The issues we’re currently seeing have no relationship to the demand for web services. We’re in a growth industry. I should also say, though, that things are going well for us right now, and it’s easy to be optimistic when you aren’t having to make difficult decisions.

By way of history, Electric Pulp is a web-only shop, currently employing 12 people full-time. We’re physically located in Sioux Falls, SD, but many of our clients are only vaguely aware of this fact.

At the start of the last recession (Q2 of 2001,) we were still a young company figuring out how to take advantage of demand, so we’d have been all but unaware we were moving into a recession even if the news had been reporting it. It wasn’t until later in the year that things got crazy. The September 11 attacks were scary as hell on a lot of levels. And if anyone says the last time around was nothing like this one, they weren’t running a small business with little residual income at the time. Things stopped. (Apologies if the glancing reference to the attacks comes across wrong.)

2002 brought a bunch of internal distractions for us, so it’s hard to say how much effect outside factors were having on us. We had a significant employee shakeup (another glancing reference) followed by legal and banking distractions as we restructured our corporation. I remember it being an extremely difficult year, but I don’t recall ever blaming the economy.

Our conditions were probably more consistent with other web shops later in 2002 and into 2003.

We felt web allocations being cut as operating budgets shrank. We saw leads slow and project cycles lengthen. We were bidding against 2 or 3 other shops every time we wrote a proposal. I’ll spare the period details. Just imagine yourself bidding against elance and Happy Cog every time you get a lead. And then assume each prospect is going to expect unpaid discovery work, detailed presentations, and give bonus points if you’re willing to provide spec work (unlike us.)

Maybe that overview is too grim. We still found work — it just took a lot more effort to land. And too much of that effort had to come from certain owners who’d have much rather stayed focused on production. I remember neckties being involved.

As a side note, we proved during this time that buying work (cutting rates) does nothing to glamour clients or speed up decisions. We tried often enough to consider the study scientific. It doesn’t work.

Once we landed the work, though, we were fine. We could control production and had no problem putting in extra hours. We made sure the work we were doing was good.

Collecting for that work slowed us down again. We operate on an accrual basis — which is to say we report off of receivables — so there were plenty of times we’d report a good month and still run into cash issues. Meaning we’d be out and having to rely on a growing line of credit. It also meant we weren’t always able to pay ourselves. (By “ourselves,” I mean the owners, the rest of the team was always paid on time.)

Funny story, by the way. Apparently, a bank can make each director personally guarantee a line of credit for the entire amount. Okay, that wasn’t funny. I still remember the dollar figure attached to failing at the time.

One of the things we were able to do to help speed up receivables was to rewrite our contracts. We changed the standard payment terms to 50% up front, 40% at technical completion, and 10% at *launch.* This was a change from 50% up front and 50% at completion. As simple as it sounds, it helped a lot. “Completion” had a funny way of drawing out regardless of our own efforts.

We also stopped giving priority to the wrong clients. We were seeing the same slow paying clients in our aging reports over and over. Each new project would go the same way. Turning away a few of these bad relationships made a big difference.

These were probably the most notable changes we made, but every aspect of what we do became more sophisticated during this time. It had too. And considering the extent of the changes, I’m not sure we’d have even found the time or motivation to make them without the pinch.

The single most important point I can make, though, is that the bad was all temporary. In 2004, we doubled our revenue from the year prior.

So, like I say, we made it out just fine. These things bounce.