Avoiding small business layoffs

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For most small businesses, personnel-related costs are among the most significant, and with sales remaining flat at many businesses, it’s tempting to look to layoffs as a way to cut costs.

Even so, using other tactics to keep personnel costs in line offers several tangible benefits. Most immediately, you limit the morale-busting impact of a layoff, says Jason Zickerman, president and chief executive officer with The Alternative Board in Denver.

Later on, when the economy picks up — which it will — you won’t have to bring in new employees to replace those you let go. “People underestimate the time, cost and energy required to hire and train people,” Zickerman adds.

Finally, layoffs can prompt concerns about your firm’s viability. Finding alternative ways to save money can help you avoid panicky business partners. 

Keeping it real with employees

As a starting point, determine just how much you need to trim costs, says Mark McCooey, owner of SEI Industries, a Vancouver, British Columbia-based manufacturer of products for the aviation and firefighting industries.

Next, you want to discuss the situation and communicate options to your employees. While many business leaders hesitate to talk about business conditions with employees, most already are nervous, says Bill Conerly with Conerly Consulting LLC in Lake Oswego, Ore. “You might as well address the issue head on.”

Distributing a summary-level financial statement also helps ensure that “the staff is in touch with reality. Otherwise employees sense something is wrong, but don’t know what,” says Ed Boswell, chief executive officer with The Forum Corp., a Boston-based consulting firm.

“A crisis can bring a company together or tear it apart.”

In late spring of 2008, SEI’s sales began dropping. After some number-crunching, McCooey figured he would have to cut personnel costs about 20 percent. McCooey then talked with employees. Without getting into dollar figures, he let them know how the business was doing and offered options: layoffs, or switching everyone to a four-day workweek.

Sharing the pain

Presenting options, if possible, is key, McCooey says. Simply mentioning layoffs without talking about solutions will just scare employees, some of whom will look for other jobs.

McCooey also let employees vote on the potential solutions. “They all voted to share the pain,” and move to four-day weeks, he says. As a result, SEI was able to cut expenses, yet retain its employees and their knowledge.

Most employees at Wheat Ridge Cyclery in Wheat Ridge, Colo. also have moved to a four-day workweek, with benefits, because of a drop in sales, says Ron Kiefel, general manager and an Olympic bronze medalist. Like McCooey, Kiefel wanted to keep his staff as intact as possible and not lay off anyone.

Kiefel also kept his staff of 25 informed about the business. “In my role, it’s important to be positive but truthful,” Kiefel says. Along with maintaining morale, this lets Kiefel tap into employees’ ideas and energy to boost revenue and reduce expenses. For example, Wheat Ridge offers free tune-ups to customers six months after they’ve bought a bike.

Employees have been calling customers to let them know about the service. Those who come in often see other items they’d like to buy. Kiefel also is having employees work on minor remodeling and organizational projects that are difficult to get done when customer traffic is brisk. Once these projects are completed, Wheat Ridge may be able to get by without additional hires when sales pick up.

Combining employees

Kiefel also explored sharing employees with another company whose business cycle runs counter to Wheat Ridge — Wheat Ridge is busiest in summer, and the other company’s busy time is in the winter. By working at both companies, employees’ income would remain fairly steady. However, that didn’t occur because of business conditions at the other company.

Some companies offer or mandate unpaid vacations or sabbaticals, which can help the organization get through a particularly tight time. However, you need to think through the length of time employees could be gone, notes Brian Drum, president and chief executive officer of Drum Associates, an executive search firm in New York. If they’re away too long, the business may change so much that it becomes difficult to reintegrate them.

And, any plan of action that reduces employees’ incomes will be tough on those whose budgets already are stretched. Some may feel forced to look for other jobs.

One way to cut costs with less impact on lower-income workers is to suspend bonuses and freeze salaries. However, Zickerman and some experts advocate retaining bonus programs as a way of keeping employees’ attention focused on the bottom line.

Another option is to discontinue a 401(k) match, if you’re making it, Zickerman notes. Of course, you’ll want to encourage employees to continue contributing to their retirement and re-establish the match as soon as possible.

When developing plans to cut payroll costs, you want to keep some, but not too much, flexibility, Conerly says. “It’s hard to have one plan that fits everyone, but it’s an administrative nightmare to have ten plans.”

Pulling together

Green River Cabins, a manufacturer of log cabins, took a slightly different approach when sales began declining last year. “We had to modify the business first, and then the labor,” says Dean Garritson, its president.

Until late 2008, the 16-person company manufactured log cabins. Employees worked four ten-hour days, Monday through Thursday, in the Green River factory in Campobello, S.C.

That schedule worked well when orders were rolling in. When they dropped, Garritson knew the company would have to broaden its lines of business in order to preserve sales and keep employees busy. For example, he began accepting some of the requests the company had always received to add a deck to one of its newly assembled cabins. Previously, the company had not pursued these.

The new work has presented both opportunities and challenges. Employees know Garritson is striving to keep them on the payroll. However, the work has changed. No longer is it all done on a schedule at the factory. Employees travel to their customers’ locations and often work throughout the week and weekend, depending on the weather. It hasn’t always been easy, but “everyone is working,” he notes.

That alone can boost in morale. When employees sense everyone is working together, they’re more likely to offer ideas and insight that can further save expenses or boost sales. “A crisis can bring a company together or tear it apart,” Boswell notes. “The leaders have a lot to do with which way it goes.”