Professional Services Firm Turnaround

A professional services firm with roughly ninety employees, $32 million in annual revenue, and three offices engaged CMBG at the end of a difficult year. Two of its largest accounts had walked, new work had slowed, revenue was down approximately 22% year-over-year, and cash on hand was under four months at the firm's current burn rate.

The leadership team understood that something had to change. What it did not have was an honest read on what, how much, or how quickly. The firm was still operating with the cost structure of its growth years while the revenue base had already reset.

Professional services firms are especially vulnerable in this situation because people are the product. Payroll often accounts for 60% to 75% of total operating expenses, and when revenue falls, fixed people-cost does not fall with it.

Three issues surfaced immediately. The firm was carrying approximately a dozen roles created during its growth years that were no longer essential. Most were defensible on paper, but none survived a clear-eyed review of productivity and revenue contribution.

The compensation structure was almost entirely fixed. Senior people held high base salaries with very small variable components. That structure was acceptable in a strong year, but in a down year it locked in cost the firm could no longer afford.

Several deferred and accrued liabilities, including unused vacation, earned but unpaid bonuses, and a small unfunded retirement obligation, had not been built into the firm's cash flow model. Leadership's view of runway was overstated by months.

CMBG delivered a fixed-scope diagnostic and turnaround plan: an honest mathematical read on the firm's current position, followed by specific recommendations and the ongoing oversight required to execute them.

The highest-leverage move was converting fixed compensation into variable compensation tied to results, especially at the senior level. In a recovery year, total compensation could exceed the prior structure. In a continued down year, the firm would carry materially less fixed cost.

Overhead beyond people also mattered. Lease changes, software contract terminations, and insurance re-marketing produced approximately $400,000 in annualized savings before the broader cost reduction was fully reflected.

Receivables were another immediate source of working capital. Within ninety days, days-sales-outstanding declined from 78 to 51, freeing several hundred thousand dollars of working capital the firm previously had no visibility into.

Throughout the engagement, CMBG kept the leadership team focused on the issues that most often turn a survivable downturn into a personal-liability problem: payroll taxes, unfunded retirement contributions, D&O insurance, accrued vacation, personal guarantees on corporate credit, and disclosures to lenders and late-stage investors.

None of those items saved the firm money in the short run. All of them protected directors, officers, and partners personally, which is a core responsibility of any serious turnaround engagement.

Twelve months after the engagement began, the firm was operating at approximately $4.2 million per year in lower fixed cost. It had retained approximately 88% of its key people, preserved all three offices in some form, and returned to profitability on a smaller revenue base.

The senior team was on a compensation plan that paid more in a growth year and less in a continued down year, aligning leadership economics with the firm's survival. The firm's lender extended its credit facility on improved terms.

In CMBG's experience, leadership teams often acknowledge after the fact that the work they were most reluctant to undertake was the work that saved the firm.