Business brace for change in 2011

By Jonathan O'Connell
Monday, December 27, 2010; 12

Economists reported in September that the recession officially ended in June 2009 and the American economy was growing again. Not only did the Washington area fare better than many others during the hardest times, but 18 months later the region's economy is one of the strongest in the country, ahead of the nation by almost any statistical measure, from employment to job growth to earnings to vacancy rates.

But does it feel that way? For many business owners and executives, it still does not. In every industry, the economic collapse inflicted such pain that the old guidelines for risk, return, failure and success needed to be altered. Rather than charting a path back to the earnings and margins that were commonplace in 2005 or 2006, business leaders find themselves operating under a new set of rules. So although economists and other prognosticators are forecasting growth, operating under a reconfigured business model can make it feel like the shackles of the economic collapse have never come off.

"We basically got to a point where we realized it was a worthless waste of energy to model, and we then spent 100 percent of our time on really two things: shoring up the balance sheet and cutting expenses," said Brett White, chief executive of CB Richard Ellis Group, the world's largest real estate brokerage firm, of the economic collapse.

White believes the country is absolutely in recovery mode and that prospects for the Washington area are stronger than anywhere else in the nation. But he can immediately recall how it felt for many of the lessons he had learned and refined about his business to quickly melt away.

"I've never seen anything like it . . . I could pick up the phone and call the CEOs of the world's biggest banks or our largest customers and no one, no one knew where it was going," White said.

If the old models are broken, what are the new ones?

There are certainly new rules shaping major government contracts, even at the Pentagon. Months of speculation about the government wanting to build more affordable systems and require contractors to stay on budget and on schedule culminated recently when the Defense Department began soliciting builders for its new combat vehicle using a fixed-price structure -- a term many defense contractors may only be accustomed to hearing during Washington's Restaurant Week.

"I think that industry is going to have to take a little time to consider the ramifications," said Col. Andrew DiMarco, the Army's program manager for the vehicle project.

Consider as well the efforts by the federal government to improve the management of its information technology projects, the source of major business here. In December, Vivek Kundra, federal chief information officer, issued a 35-page plan for reform, noting that the feds have nearly 2,100 data centers. The Office of Management and Budget, with its sights set on a 40 percent reduction of data centers by 2015, has begun pushing federal agencies to move information to "cloud" -- or Web-based -- computing. Kundra has also been pushing modular development of technology, i.e. work and awards in smaller bites, something he writes in his plan "has long been considered best practice in the private sector."

"Moving forward," Kundra wrote, "Federal IT programs must be structured to deploy working business functionality in release cycles no longer than 12 months, and, ideally, less than six months, with initial deployment to end users no later than 18 months after the program begins."

Bankers, meanwhile, are closely watching as regulations implementing the new Dodd-Frank Wall Street Reform and Consumer Protection Act are put into place. And on Capitol Hill. a set of new procedural rules is being laid out by House speaker-in-waiting John A. Boehner (R-Ohio), who has pledged to "open things up" by returning power to committees and, rather than relying on massive spending bills controlled by leadership, allowing bills to be considered piecemeal.

Grass-roots outreach will be back in vogue, likely drumming up more work for lobbying shops, even as their legal counterparts struggle to adapt to the new economy.

In the District, non-hourly or "alternative" billing now represents 15 percent of the total work done by law firms. More often than firms nationwide, the locals are utilizing retainers, contingencies and fixed-cost structures. "We're continuing to see a growth in the use of it," said David Fries, chief client service officer at Orrick, Herrington & Sutcliffe. "Last year was probably the year that from kind of an overall magnitude standpoint we had probably the largest increase."

There are even new parameters in effect for venture capitalists and entrepreneurs as money begins to return to tech investments. In 2009, venture capital nationwide dropped to the lowest level in a decade, and there were only 117 deals totaling about $540 million in the Washington area. Activity improved to the point to which by the close of the third quarter of 2010, $690 million had been invested here year-to-date, surpassing investments for all of 2009.

But the money is not just going anywhere. It might seem like the clock has been turned back to 2000 to see Amazon.com invest $175 million in D.C.-based LivingSocial, a dot-com start-up that offers daily coupons. But LivingSocial isn't selling just eyeballs; the firm is already grossing $1 million a day, and the Amazon investment in the three-year-old company demonstrates the need for start-ups to have a plan to increase revenue and become profitable.

Many venture capitalists, in fact, began asking their portfolio companies to cut costs when the recession hit, as Frank Adams, founder of Grotech Ventures, explained in September. "Our view to them was that there has been a game-changing event at the world level that will filter down to you," he said. "It may not be tomorrow. It may not be today. But it's coming."

And then there is real estate, the industry to which much of the economic malaise was attributed. Many reforms -- some by the government, others by the industry itself -- have changed residential real estate, and there are new rules for commercial developers, investors and buyers as well. Only in select markets of Washington and a handful of other locations worldwide are developers attempting to construct office buildings that aren't heavily pre-leased.

Andrew C. Florance, chief executive of the commercial real estate data firm CoStar Group, said developers used to typically need to lease 30 percent of an office project before building. Underwriting standards by banks and other construction lenders have changed that.

"Now you probably need 70 percent as a floor, if you are getting anywhere," Florance said.

As with most every industry locally, the fate of Washington area real estate investors lies increasingly with the federal government. The Washington area enjoyed 4.2 million square feet of net newly leased space in the 12 months ended Sept. 30, more than triple the 1.3 million square feet of new space leased in the entire rest of the country, according to Jones Lang LaSalle. Amazingly, federal leasing in Washington accounted for more than 65 percent of all leasing nationwide of any kind in that period. The statistic shows that a government lease now holds more value than it did before the real estate collapse, but it also serves as another reminder -- that Washington is not in a recession.

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