Friday, October 10th, 2008

Is the sky falling?

Is the sky falling?
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I bought a house in 1995 for $98,500. I was 22, and living in my hometown, Prince George. In my mind it was an investment; strangely, however, it never struck me that there was any possibility of not making money from the purchase. In the years that followed I decided that I wanted to move somewhere more metropolitan and I learned just what an anchor a house could be. The market was flat, and no one wanted to buy a home.

Eight years later I sold my house for five-thousand dollars less than I had originally paid. (This is minus the ten-thousand in renovations I had put in.) That being said, I was lucky. My brother, Mark, took it off my hands and this allowed me to relocate our business, which I still believe to have been a good long-term move. Incidentally, Mark sold the house six months ago for around $175,000–netting quite a tidy profit for buying when few others would have.

The insanity which was the Vancouver Real Estate Market

By the time that I arrived in Vancouver, I was very happy to be mortgage-free. I rented a small apartment which ate-up nearly half of my monthly take-home, but it came with very few headaches. There were no repairs, no taxes, and none of those pesky surprises that come with home-ownership.

By the time that Amea and I married and Oscar was born things changed. We started thinking about how nice it would be to buy something. Wouldn’t it be great to have a little space for Oscar to run around? Wouldn’t it be amazing to paint a wall the way we wanted? Unfortunately, the Vancouver market was going bonkers.

We knew it was bad, but we reasoned that we’d buy something and hold for ten or twenty years. We asked ourselves, “How can you go wrong if you hold for that long?” But as we looked more, buying something seemed increasingly unwise.

Last fall I finally had had enough. We were looking at a nicely decorated two bedroom apartment that Amea quite liked. I was “unsold” though. They were asking nearly $400,000 for the unit, which would have left us with a monthly payment (including strata and taxes) of approximately $2,500/month. It was barely large enough to fit our growing family, it backed out on a rather sketchy alley, and it was below ground level. It finally hit me: we were going to buy a “pretty” basement suite for more than half of our collective monthly earnings.

Now, I don’t always agree with my Dad, and sometimes he’s just plain wrong on things, but when it comes to real estate his observations are typically quite sound. At the time I’d call home talking about how, “we have to get in before it gets worse”. He’d try to politely slow me down. He’d come back with sensible thoughts, and just asked me to consider how madly prices had gone-up in recent years. He continued to remind me that everything goes down, a fact that people tend to forget in such markets. Ultimately we decided to hold off on our purchase. In retrospect, it was probably the worst time we could have possibly bought a house.

The strange thing is that at dinner parties and get-togethers, I found that most people seemed to think that we were completely bonkers for not “getting into the market”. They’d remind me that Vancouver has limited space and that we’re not as closely tied to the U.S. economy as we are to Asian markets. A lot of people explained that it might “slush out” but it would never drop. Ever.

Keeping a level head at such times is very difficult. Nevertheless, I continued to hold on to the reasoning that prices were simply too unaffordable, and that at some point things would have to go bust. I kept thinking that we had to reach a point at which people would say, “screw it–let’s just move somewhere else.”

I tend to believe that we’re all sheep. When it’s going up, we can’t imagine it ever going down, and vice versa. I continue to fall victim to this, and the last few weeks have proven no exception.

Economic collapse, depression, and general doom (or, not so much?)

Since the beginning of the month, Apple is down 40 percent, Google is down 20 percent, and Microsoft is down 10 percent. Ford and GM are nearing junk-bond territory, and it seems that this plummeting may continue. It seems that the word “recession” may be too generous. Some (including TIME) are making references to the Great Depression. We may escape this, but at the moment it’s hard to imagine us bouncing back to where we were last fall.

On the flip-side I’m left asking if this is simply equally erratic behavior to the housing madness that seemed normal just a year ago. Are we in that spot where we’re so wrapped up in a “doom” scenario that we’re blind to the long-term picture? I’m not asking you to put money on this bet, but mine is that those who buy Google in the next few days will be smiling in eight months time.

Perhaps we’re entering another Great Depression. Maybe it’s the collapse of the global economy. (Incidentally, I started a topic on MakeFive if you need to inject a moment of levity.) But what it if we’re just in the midst of a massive (and overdue) correction? It may be that we’re all being consumed by the worst kind of short-sightedness: the sort that results in knee-jerk reactions that will later prove to be destructive.

I keep thinking about the fundamentals. What does all of this really mean? Are we going to stop buying cars? Will we no longer need toilet-paper or orange juice? Will we stop using Google for search? When will tumbleweeds start tumbling through our city streets? Of course, the newspapers and media certainly love to report with such dramatic overtones, but isn’t that just the kind of thing that sells newspapers? (If people still read actual newspapers anyway.)

Now, don’t get me wrong; I’m very concerned about all of this turmoil. Many companies do foolish things in such times, and we’re by no means immune to the fallout from this. I find that the first thing that is cut when times are tough is often marketing. In my mind this is rather perverse, as marketing is typically the life-blood of a company. If anything, this is the time to step-up an organization’s marketing efforts. This is the moment to put the foot on the gas and really push through. The competition for consumer dollars is going to be much stiffer, and it has never been so important to illustrate the value that your company provides.

At the same time, it’s a good time to think very carefully about which efforts generate the greatest yield for your organization. In my mind, traditional media looks far less attractive at times like these. The web is a great space to work in when dollars are limited and increased speed and agility (not-to-mention metrics) are needed. And frankly, if you’re buying your websites and digital marketing from an agency or interactive shop with really neat perks and expensive office space, I’d think about looking for a group that’s a little more practical.

Getting back to my point

But, I digress. Allow me to move away from plugging smashLAB and what awesome value we afford (shameless plug… shameless plug…) and get back to the point of this post. What I’d like to talk about is our firm’s survival strategy given the current financial climate. (I know that this likely has little bearing on what you’re doing, but at least it gives you something else to do while watching stock prices tumble.)

We run very lean at smashLAB. I think that comes from having started our company when the local economy was bad and right after the dot-com bubble burst. For the first three months of our operations I generally only ate potatoes with cheese and salsa for dinner. (Sometimes I splurged on veggie hotdogs for lunch though.) There were times when we considered an $800 logo a “big sale” and it was hard to imagine things getting much better. Thankfully, it finally did and we had learned some valuable lessons. The nice part about starting in a lean economy is that after doing so a boardroom full of Aeron chairs will always seem sort of ridiculous (even after the cash starts to flow). You simply can’t forget that it’s not just what comes in, it’s what goes out.

Over the past months we’ve moved closer to how we were at that time (although not quite so extremely), in order to keep our projects like MakeFive (and the super-secret “other one”) in development. This has made the past few months a little tougher. We’ve been working like crazy to ensure that existing clients are happy with what we’re creating for them. (You can see these projects here: The Green Report Card, Tourism Langley, Borealis Offsets, Ascent, illumivision, and more…) but every other moment has gone into working on MakeFive.

The reality is that we’ve built a company that gets good “fuel economy”, but there are certainly some drawbacks. I suppose one way of looking at it is that we sometimes have to “get out and push our car up the street”. I was up at 4:30 this morning and I generally feel like I’m going to collapse at the end of the day. Some days Eric Shelkie looks a little like he’s going to blow over. (His wife writes notes on our office blackboard asking to him to “come home and see his family”.)

Even though we’re running lean, we still need to have some money moving through the place. As people start to axe marketing budgets, which they certainly will, I expect that we’ll feel the pinch a little. Realistically, we still need to keep a certain minimum number of dollars moving in order to keep the company alive. This won’t be as easy in a couple of months time as it once was.

The last thing I want to do is have to lay anyone off and I also don’t want to go too many weeks without a paycheque. As such, the reality is that we’re going to have to tighten our belts even a little more, concentrate on survival, and get creative about squeezing every last drop of revenue out of existing properties.

Like I said dude, “every drop”

First of all, we have to focus on the numbers and billable efficiency in a way that we haven’t in a while. In some respects I think that we behave like artists here (both our designers and developers), which means that we often sacrifice profits in order to do the job right. This sounds admirable, but it’s not. It’s simply stupid.

On our last project we wrote off $76,250. (I kid you not.) It wasn’t that we screwed-up on the execution, we just bid the job overly tight and it turned out to be a monster of a project. Getting slaughtered like this isn’t as hard as it seems. Pretend that a client comes to you with a two-hundred thousand dollar development project. Sounds exciting, doesn’t it? Hard to pass up? Well, the cold truth is that if it costs you even one dollar more than that 200k to produce it, you’ve lost money. In the meanwhile, you may have very well put all of your efforts into that one project and passed on other, smaller and more profitable ones.

Now, you might think that I’m simply re-stating the obvious here, but I believe there’s more to it than that. In my mind designers often fall in love with exciting projects, and in this intoxicated state fail to examine what these projects really mean to their bottom line. At times like these, such tunnel-vision may prove lethal. Of course, you’ll have to do what you think is right, but I can tell you this: we’ll be watching our burn on projects in a way we haven’t in some time.

Additionally, we’ll work to generate even a modicum of revenue out of properties that we’ve to-date allowed to sit untapped. For example, this blog will start to have actual ads on it and we’ll start to push sponsorship models through MakeFive a little earlier than we had planned. Although I don’t expect either of these initiatives to generate much in revenue at this time, it seems foolish to not start collecting where we can.

And, of course, we’ll keep costs to the bone and we’ll work harder than ever to stay the course.

Altitude makes a lot of difference

A few weeks ago, Devin (a recent hire at smashLAB) and I were talking about the market in general and how we’re doing at smashLAB. I think he was a little concerned given all of the doom and gloom in the air, and this resulted in him asking how stable we are. I don’t know if I reassured him or not. I noted that we look good, in part because we manage our costs well, but that everyone is always vulnerable.

It’s easy to be lulled into thinking that a big operation is safer than a small one, but in my experience this is hardly the case. Everything scales. The big guys take the hits just like the rest of us, but the impacts are often more visible. I guess I see it as being an issue of how close to the ground you are. A fall from a foot or two is manageable, from a storey it will hurt, and from a skyscraper it’ll probably kill you. When you’re burning a hundred thousand a month in payroll you can’t go too long before your reserves are depleted.

Then of course, the perspective in such places changes as well. In a firm like ours it’s incredibly painful to lay someone off. In fact, we’ve never done it–even when it’s come at our expense. (Eric Shelkie and I have on occasion gone a few months without taking any pay, in order to ensure that our staff is covered.) On the other hand, my guess is that managers of global networks don’t feel nearly as bad about turfing a few people they’ve never even met.

In a small shop, everything’s closer to the ground. Lease rates are typically lower as we’re in C-Class buildings instead of those nice air-conditioned new ones. At smashLAB we have no Creative Directors with $250k/year salaries and no one has ever even dreamed of having a credit card for “expenses”. In fact, when we go for lunch with clients, we typically split the bill. Smaller shops are often rougher around the edges, but we may be better equipped to weather a storm for that very same reason. Frugal thinking might be something to admire in the people you choose to contract.

Regardless of what happens in the days and weeks to come I get the feeling that all of this may separate the wheat from the chaff: Some studios are going to dump people who might not have pulled their weight. Flimsy start-up ideas won’t get off the ground as VCs have their beer goggles off for the first time in years. A few firms might not be left standing. And… even design-obsessed people like me are going to think a lot more about profitability than ever before.

Parting words

As a teenager I spent a little time canoeing. In the limited time that I did this, I learned one thing, which is that you don’t stop paddling. Most people seize up when they hit a couple of waves; as such, the odds of the canoe tipping over are increased. Instead, you have to aim for the waves, paddle as you were and everything will be fine.

Just “keep paddling” friends.  :-)

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Comments & Trackbacks

  1. Psiplex says:

    Always pays to be centered in who you really are, your true self. There will always be storms blowing across the lake at the surface, down close to the bottom of the lake, everything is still and functioning as it is.

    Uncertain times call for a certainty of self in which arises the courage, confidence and knowing to overcome what needs to be overcome and drop that which is superfluous and false.

  2. md says:

    If mccain is elected, im sending you my resume. I'm serious. I will be job hunting in vancouver.

  3. md says:

    I mean, i know you are belt tightening. but still, just going to send my resume everywhere. haha.

  4. Great post, Eric. We started in summer of 2001 with an initial investment of less than $100 (registering a domain name). We've grown very slowly and only in the last few years have we spent money on things like office space, furniture, other staff, accountant services, etc. When times are healthy it's good to think about what we can spend money on that will make life easier and let us focus on what we're best at, but when times are tough it's good to know we can be super-lean.

    Yesterday we heard from a client we'd been talking to for 6 months that they finally acknowledged the economic situation and had to put their (very exciting and global) project on indefinite hold. I don't know whether to see it as an omen or not, will more of our clients tell us this, or will the smaller more immediate projects we've been focused on continue.

    I don't know!

  5. Toby says:

    Eric - it always was and it always will be .. giving clients value at a fair price is what it takes to grow and sustain a business .. long term. Especially in today's world that value and price strategy have to be tightly aligned.

  6. Hi Toby,

    I understand what you're saying, but I feel that it may be a little overly simplistic. Good value/price was never in question. I think we're seeing today is something kind of different than anything we’ve experienced before.

    It strikes me that a lot of good companies that do exactly what you say are still incredibly vulnerable right now and many will collapse. Good value and price aren’t going to cut it. (You needed that in the first place.) What I fear is a widespread economic paralysis setting in. If this happens the issue becomes how long companies can continue to run at a deficit before reserves are completely depleted.

    Cheers,

    Eric

  7. Craig Hooper says:

    Eric,

    Brilliant article. This is your best yet—I don't think I am alone on this one either. I think many of us in this web design/development/new media/social media/we-make-original-web-properties realm will relate, and relate in a big way.

    A lot of our (Analogue) business is US-based, and I would be a big, fat, liar if I told you I wasn't concerned. I am (concerned).

    I think we are seeing a genuine "crash" happening right before our eyes. Not of Wall St—because the stock market is NOT the economy. I think we are seeing a meltdown of our entire system—and it sucks. The oil that lubricated the gears seems to have dried-up. The dominos are falling, and sadly, it's all more connected than it ever was (those dominos I speak of) .

    With respect to our industry, Eric is bang-on: 1st thing to go is the marketing budget and advertising campaigns. Let's not beat-around-the-bush: we are in the advertising industry, whether we want to believe it or not. SmashLAB is in the ad industry. Analogue is as well. We create communication vehicles for other people. We take people's visions (for their products, services, ideas), and translate them—only we do it for the computer screen (for the most part), and we do it in a very, very unique (and new) way.

    If you want to take the pulse of the industry (and if this firestorm keeps a' burnin' at the rate it is), watch firm's like BBDO—big boys like this employ 100's and 100's globally (if not 1000's). When BBDO, or CP&B, start to hand-out the pink slips in large numbers, then it is safe to say the firestorm that is raging has reached us.

    Let's just hope that we've seen the bottom (or will soon). I don't want to look back in 3 years, and say that 2006-08 were the greatest of years, because, although we've had some decent years in business, we certainly don't have our top-hat, monocle, and cane yet...

    Keep grindin'. When it (if) seems really, really, really dark, think: at least I'm alive...

  8. Zinni says:

    great article, I have ben having a ton of the same with my professional contacts.

    I just wanted to say in regards to your description of the housing market, that I recently read a quote about the purchasing behavior of people.

    "when you run with the crowd all you see is a bunch of asses." --was in newsweek

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  10. Thanks for the comments all.

    BTW Craig: at least we can tell our US clients that they're getting great value given how the loonie has sunk over the past week. :-)

  11. At my company we're in a good place precisely because we never could get a big loan. Even when I tried, the banks insisted on me signing over my house, which I refused to do.

    That leaves us in a good place right now, I think, because we aren't as vulnerable to the credit crunch. Clients can leave - we're vulnerable there - but at least we can't get shut down by a cranky bank.

    Great article, Eric!

  12. Agreed--that's why we've avoided bank loans entirely. I'd hate for those guys to "own" us.

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  14. As a colleague keeps reminding me, there are two options in the current climate: cut costs or add revenue. I'm personally trying to be as creative as possible about both, thinking differently, aiming for a fresh perspective.
    Yes, economies are in a precarious place, but most organizations are still conducting their daily business as always (albeit more cautiously on the cost side and perhaps more aggressively on the sales side). They all still need to get customers' attention, serve those customers well, and bring in revenue. If we as creatives can provide services that help them to reach their goals, then we have opportunities. Martha Rogers (1to1 guru) reminds people to ask themselves, "What would your customers be willing to pay for that's not available right now at any price, and that you could deliver for them." (Her personal example is that she'd pay to reserve the overhead bin right over her seat when she flies.)
    If I can find new ways to bring value to our customers--as well as deliver on our existing promises--then I think we can navigate these rough waters and be in strong position on the other side.

  15. Toby says:

    Eric - if not for value and price what else do you have to work with in a business environment? it may sound simplistic but it really is quite complex. what was of value yesterday may not be today nor may the price be as well. so how can an enterprise regroup in this economy and satisfy their customers while making a profit? better understanding needs, better service, costs and value aligned with the economic situation? what does it take to do that? how do you cut costs without cutting product value? do you 'right size' staff? move to less expensive offices? cut employee benefits? increase marketing? build stronger relationships? better service? do ou offer smaller sizes?

    i still say .. bottom-line .. it goes back to a price/product value which some may call "brand." what will I sacrifice for your brand? what will you sacrifice for my purchase? why you and not your competition?

  16. David Airey says:

    Insightful reading, Eric.

    Having just moved across the Irish Sea to Northern Ireland, I'm glad I'm renting a property for now, and that I don't have that headache of home ownership during the downturn.

    I like that quote from Zinni:

    "When you run with the crowd all you see is a bunch of asses."

  17. Oscar says:

    I was only yesterday discussing the theory that this doom and gloom is fueled in part by the media and peoples fear - a self fulfilling prophecy etc so it was nice to stumble upon this blog randomly and read something very similar.

    I'm based in the London and on our morning program this moring on the BBC the presenters were talking in sombre tones about the doom that is cast over the country and discussing ways to be cheerful in these depressing times - what??

    If you listen enough to the news services, you start believing that all is doom. And if you do, you start reining back on everything and in doing so help pull the economy down (over simplification I know but you get the idea!)

    I'm generally composed and logical in my reasoning but can't help myself pointing the finger at the media for accelerating the economic downturn (not the cause to be clear).

    But then, I can't help but wonder if the confidence that the media injected at the growth in the housing market (i.e. do up you house and make a profit, how to ake a million buying and selling kind of programs) fueled people's willingness to take out more credit.

    Common sense needs to be handed out in these times.

    If you thought that borrowing 5 times your salary was ok when histroy dictates that 3 times was the maximum you should risk... then oh dear.

  18. frankosonik says:

    We have been through difficult economic times before and come out stronger. This time shouldn't be any different, although the journey might be longer and tougher than ever. The market will change in ways that might make the big agency business model go the way of cassette tapes.

    Those who are quick to provide creative, efficient answers will pick up the scraps that the wasteful have left behind. I have this feeling that there are a bunch of little opportunities for success hidden in plain view. If we could just turn off CNN for a bit and start sketching some ideas...

  19. Sam says:

    Nice post

  20. Times like these presents a great opportunity for the little guy. With smaller budgets and watchful spending firms may be forced to look at us more closely and hopefully like what they see ; )

  21. Devin says:

    Being a graphic designer myself, I am an avid reader of your blog; I stumbled across it when doing a google search for inspiration a little over a year ago, and have returned biweekly ever since.  I feel a tad guilty that I have waited this long to compliment you on your great editorials, especially those that have provided me with the motivation to get past working with indecisive cliental.  Your website consistently greats me, every time I have the opportunity to check it, with both informative posts as well as those containing designer oriented humor.  Being that I enjoy your content so much, I felt that I would inform you of one of the sole fun and informative design-related posts that I found outside of your website.  On the aptly named blog Coffee and Celluloid (pertaining to a university film school), is a post about this years top 20 movie poster designs.  The post can be found at: http://coffeeandcelluloid.com/2008/10/26/20-amazing-movie-posters/  Thank you again for providing your great content, and I hope to hear from you soon.  Keep designing!

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  23. Moojj says:

    Your logic is amazing. You would have made the same profit your brother did -- Instead you decide to move into someone else's house to pay their mortgage.

    Who got the better chromosome set there?

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