Friday, October 10, 2008

Chicken Little Syndrome

With all chatter about the "dire economic situation" and the "bleak horizon" I have to chime in to advise some sanity. I am not trying to belittle the situation any and the position many businesses and business owners find themselves in. As everyone states, it is bad. Accordingly, it will probably get worse before it gets better. So with that understanding, the question you should be asking yourself is how to come out of it not only in one piece, but also positioned to capitalize on the market's eventual return?

I had lunch with a friend a month ago. Before "all hell broke lose" on Wall St. During our conversation he mentioned impending layoffs due to the cyclical nature of his business. Below is a follow up e-mail to him. Hopefully it provides some food for thought and spurs some more creative ways to face the tough times ahead without breaking out the hatchet for something that can be carved using a pairing knife.

Hi J---,

I was replaying some of the conversation in my head last night and thought I might be able to offer you some food for thought on the downsizing topic. At X----, during the 2001 recession, the CEO at the time, promised to try and make it through that without having layoffs. His inspiration was a book called Shakelton’s Way.

[The CEO] explained the situation to the employees. He also laid out the options and his intentions to try and not have layoffs. As an employee, I could see the predicament the company was in and appreciated his desire to have everyone make it through it. His options were the following:

1.Voluntary severance. I forget the amounts and time offered, but it was attractive. (The worry with this one is the top performers may take it since they can find a job anywhere else easily enough)

2.Because vacation time came out of a different accounting bucket than operating expenses everyone was asked to a mandatory 3 days off initially. These generally were before or after traditional holidays so it gave more time for employees to be with the families. (e.g. Friday after Thanksgiving or the Christmas week 12/25 – 1/1)

3.Offer a year sabbatical to those who wanted to take it. There was no guarantee their job would be there when they came back, but the company would make every effort to find a position when they returned. During this time, health care, profit sharing, employee stock purchase were all discontinued. Any stock options continued to vest though. Note: Some people took this option, allowed their stock to vest and then came back only long enough to sell it off. Many people also took this time to get additional education (MBA) or try to start their own business. It was a win-win all the way around.

4.Things got a little worse, so another 5 days / quarter were asked to be taken as either vacation or time off without pay. Many opted for the time off without pay. This people up to get used to what they may need should pay cuts come into play. This was scheduled as every other Friday in order to minimize business impact.

5.The situation as you know did get worse and [the CEO] came back and asked everyone to take a graduated pay cut. "Looking in the mirror he took the biggest cut" of 20%. VP’s took 17%, Directors 15%, Managers / Sr. Managers 10%, individual contributors 5%, mail clerk types since they had the lowest pay and probably least disposable income they didn’t get a pay cut. (This also did a good job of keeping the most amount of money with the company and impacting the least number of people too hard) Seeing that upper management was giving just as much as the rank and file while not having layoffs made it more palatable.

We retained a large part of the personnel and IP that had been accumulated. This put us in a good position once the tide turned to ramp things up quickly. There was no rehiring or retraining needed. The outcome of this was a very committed work force. The downside was that some dead wood was left. Layoffs allow corporations to purge some of that. Since we didn’t, these people had to be worked around or processed out. As a recent casualty of downsizing though, sometimes the wrong people are let go in that purge process.

Listening to you yesterday, it sounds like you are in touch with who is on the bus and should remain on the bus. You probably also have a good idea of who might benefit from getting off at the next stop. The alternatives suggested may make someone voluntarily get off and not have it be your decision.

Good Luck,

Am I saying these are the only creative ways to handle a difficult situation? Hardly. Each situation is unique. What worked at a 2500 employee company may not work at a 25 employee company. What I would like to advise though is you communicate the situation with your employees and work to develop a mutually beneficial solution. You may be surprised with the suggestions you receive and the willingness to work through it to the greater good of all involved.

I would like to hear what suggestions you do end up coming up with. Share so others may benefit as well.