As we approach what many believe will be an economic slide, your actions as an agency leader will determine how well you perform through the downturn and after the economy rebounds. Many agencies assume that if the economy takes a turn for the worse, it inevitably means they will also feel the pain and therefore should take measures in anticipation of the reduction of income. However, many of the steps taken by agencies will actually increase the odds they will become victims of the downturn, rather than protect them against it.

For example, many agencies will begin to take a hard look at their expense categories and try to trim expenses for relatively incidental categories like travel, dues & subscriptions, new business, etc. With 75-80% of all expenses tied up in compensation and rent, it's clear that this course of action is futile in the long-run. Even if you could cut all other expense categories by 20%, at most you would generate four percentage points of profit. And unless you are currently wasting significant amounts of money in these areas, cutting deeply will lead to service reductions that can hurt the efficiency of the business.

More frequently, agencies become extremely reluctant to make new hires or will consider cutting staff due to reductions in client budgets. With so much of our income going to compensation, this seems to be the right approach to protect against economic difficulties. It is always a good idea to remove poor performers from your agency, regardless of the state of the economy, but those decisions should be made on the basis of performance, not profits. In the agency world, the only thing we have to sell is the time of our staff. If you have a good employee, you should be extremely reluctant to part with that person and if an excellent new hire becomes available, you should jump at the chance to bring him or her on board.

So what if you find that your agency is not growing or that you have lost some business due to budget cut-backs and lost clients?

What frequently happens is that the clients who remain get additional servicing from the account staff working on their business. The employees want to remain busy and management generally condones or encourages this overservicing in order to keep the remaining clients happy. Although understandable, this is a major mistake.

Once you get clients accustomed to receiving more service than they are paying for, it is difficult to reduce the work when you have other business for your staff to work on. You will essentially be jeopardizing the metrics that are necessary to generate a reasonable profit.

If client cut-backs create a situation where staff has available time, that time should be used for the benefit of the agency with increased marketing, strategic new business initiatives and networking. Smart agencies dedicate a percentage of time from their best employees to this effort on a regular basis and increase the time allocation during difficult economic times.

It may seem counter-intuitive to increase your outreach when the economy indicates there will be a reduction in business, but that's not true. Consider that even in good economic times, when you factor in lost clients, non-recurring projects and slashed budgets, the average agency loses 30-35% of its business from one year to the next. Assuming there is $3-4 billion in total PR budgets, this indicates that between $900 million and $1.4 billion will change agencies this year even if the industry experiences no growth. If the industry shrinks by 10%, there will still be $500 million to $1 billion in new business wins for the year.

Good agencies can grow significantly, regardless of the state of the economy. Even when the dotcom bubble burst, roughly 30% of the ranked agencies grew from 2000 to 2001, despite a significant drop in the total PR budgets across the board.

In the final analysis, if you are faced with budget reductions, don't overreact and take actions that can hurt your agency in the long run. Allocate available resources to those areas that will help you grow: develop a strategic plan to sell new products to existing accounts; increase your networking activities to increase your new business opportunities; improve your agency's visibility through enhanced marketing initiatives.

Under no circumstances should you assume that a softening of the economy will inevitably mean your business will suffer. You have far more control over your success than you may believe.

Darryl Salerno is president of Second Quadrant Solutions, an organization dedicated to helping professional services companies maximize their financial health. Reach him at: darryl@secondquadrant.com.