When risk becomes reward

Where resources should best be allocated is a question which business managers constantly reflect on. When the best course of action is unclear, it becomes easy for decision-making to become paralysed, as the perceived risk of taking the wrong decision is too high. Normally, the period in which uncertainty dominates is short lived, as information emerges that provides clarity, at which point decisions can be made. However, when uncertainty is likely to prevail for a longer period of time, the danger of not making decisions is that the businesses which do take the risk and also make decisions correctly perform so well that they leave competitors in their wake.

The first question to ask is: what are the underlying priorities? For people managing lifestyle businesses the risk threshold will be significantly lower than for those who prioritise rapid growth. Insofar as growth is expensive, where in the short term it comes at the expense of profitability, the risk for lifestyle business owners is that failing to invest in the future can lead to the business being fatally weakened over the long term. Indeed, if a business is not allocating any resources to future development, that is arguably the greatest risk of all.

For businesses that are on a fast growth trajectory, the priorities are arguably revenue growth and market share. With that in mind, over-optimism becomes the biggest danger for ambitious entrepreneurs. Not pricing in risks correctly when expanding can quite literally result in taking one step forwards and two steps back, as growth is short lived and is followed by a bigger contraction. An entrepreneur who sees an opportunity can be blind to the real risks, especially if their analysis is based on a qualitative assessment.

So, how should business managers give themselves the best odds of making the right decision on allocating resources?

First, start by analysing current business performance.

• How many clients do you have?
• What is your income split by client?
• Who manages your key client revenues?
• What is your average fee income per desk?
• What is your break-even per desk?
• What proportion of your current desks are under that break-even?
• With desks that are underperforming, what is the current plan for making those profitable?

Second, make sure you are analysing market activity correctly. One danger for a boutique recruiter is the echo chamber. By circulating in a small network which is relatively homogenous, the problem is that the same opinions are constantly recycled, resulting in decisions being made on hearsay as opposed to hard evidence. Instead think about the following:

• Which are your most profitable clients once you factor in the costs of servicing them? What potential is there to scale up those clients?
• Which clients are your least profitable ones and what can you do to renegotiate terms with those clients?
• Which PSLs do you have that have not generated any fee income at all in the past twelve months?

It may be that the correct next step before investing in further growth is squeezing your existing client list by focusing on profitable accounts and reducing the resources invested in ones which aren’t profitable.

Finally, look to ascertain which roles are currently proving to be the hardest to fill. If your business can become the ‘go-to place’ for the star candidates no-one else can find, businesses which need to hire in a hurry will take a fundamentally different stance when negotiating terms with you.

From there, the risks which need to be taken in order to focus on a business model around working fewer roles, and on more profitable terms per consultant, can be assessed, and you then have a much more stable platform to scale up from.

Over the last ten years Vacancysoft has worked with recruitment firms of all sizes to help them map out market activity in order to identify changes in demand. For more information about how we can help, please contact us.