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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