Coping with Crisis

Dear Dave
This economy has hit our firm squarely between the eyes and we are reeling.  As president and chief executive officer, I have endured more restless nights than I can count as we struggle to get through it.

Before our bottom dropped out about ten months ago, we were just over 200 employees and coming off several years of a steady upward growth trajectory.  We have cut all non-payroll expenditures back to the bone. About seven months ago we made a couple of rounds of layoffs reducing our headcount to around 160.  Since then, through a combination of across the board salary reductions, and rolling furloughs, we have achieved a 20% payroll cost reduction which has allowed us to preserve our remaining employees and hover around our monthly breakeven point.

Although the media and some of our clients are starting to talk about a recovery, So far, it is all promises.  I’m still not able to see an end to this for us and we continue to tread water.  I’m having some second thoughts on our strategy of reducing pay across the board to save jobs as an alternative to more layoffs and would like your opinion.
RH WA

Dear RH
To paraphrase a founding father of our country, Thomas Paine, at a particularly bleak time in the early days of our republic; these are indeed the times that try men’s souls. While some fortunate firms have suffered little or no impact, in my thirty years around engineers and architects, I have never seen a business recession cycle as deep as this one, and as broad as this one, and as long lasting. And, while I agree there are some signs of hope and promise, there are still many issues working against a robust economic recovery anytime soon.

Obviously, each firm must decide for themselves but I would suggest that a 20% across the board pay cut is at best a short term tactic to be employed as a temporary bridge back to certain full salary within one to two months at most.  At seven months and counting, your methods are doing too much damage to too many of your staff.  Not only is it hurting everyone financially it may incite more than a few of  them, especially those key individuals that are the most marketable,  to seriously consider if they will remain with your firm once the crisis eventually abates and opportunities at other firms begin to open up.

There is a hard truth behind the adage “it is lonely at the top”.  As president and CEO, you must resist the temptation to indulge your personal emotions and never forget that your primary constituency is first and foremost the overall health and welfare of the firm.  In doing what’s right for the firm, you will by definition be doing what is in the best long-term interest of the staff and clients.  Real leadership requires real courage - the courage to take necessary actions in a timely fashion no matter how unpleasant and dreadful they may be.  Given the conditions you’ve described perhaps it’s time to face up to the depth and open-endedness of the situation and reconsider your payroll strategy.

I would suggest that you plan to make one more major round of layoffs - deep enough once and for all to ensure that given your backlog of existing work and realistic prospects for likely new work you will not only be able to put the remaining staff back to full salary, but that you may even need to work some overtime to meet deadlines.  Assume that the level of business you’re at now is the new reality going forward and adjust to a viable size accordingly.

Given the magnitude this cut is likely to entail, you must be willing to cut vertically at all experience and pay levels from the top to the bottom.  Consider this a major, long-term reshaping of the firm.  Test your plan by keeping an eye on the average raw hourly payroll cost of staff before and after the intended staff reductions.  Try very hard to keep the post-cut average hourly raw payroll cost no higher after the reductions than before to enable you to be profitable going forward.  If your planned reductions cause your average hourly rate to increase, you have cut too many lower paid individuals and not enough of the more highly paid. By all means work against your own hourly pay rate average, but for reference, according to industry surveys, the median average hourly raw payroll cost per direct labor hour for A/E firms is approximately $30 per hour.

Don’t rationalize not making staff reductions because if we release good people now, we won’t have them to do the work when the economy turns around.  First, no one knows when the upturn will occur, and you can’t wait forever to repair the firm or you might not be around when the rebound does occur.  Second, there are a lot of good people on the street already with more to come. Third, if you manage through the crisis well, and turn around your firm more quickly than others, you’ll have the pick of the crop when it comes time to rehire. Fourth, the core staff you do retain and get back to full-time status will likely be immensely grateful (without admitting so outwardly) that you took the actions you did.  

It is vital to return the firm to consistent, profitable operations as quickly as possible in order to generate a sufficient level of capital and cash flow for reinvestment, and to maintain key business processes necessary to keep the firm evolving, sharp and competitively effective. Marketing and other basic business and financial processes, personnel development and training, software and hardware expenditures, etc. ought not to be sacrificed for too long.

Above all, hang in there.  To end as I began with Thomas Paine, “by perseverance and fortitude we have the prospect of a glorious issue; by cowardice and submission, the sad choice of a variety of evils”.