Recession and Layoffs and Small Business

Small firms get creative to avoid layoffs

January 26, 2009
Westfield Lighting Co. has been in the Hutson family for 30 years and three generations. In all that time, its lamp and accessory showroom never endured a layoff—until last year. First came the housing sector's implosion. Then the whole economy soured. Today, the specialty retailer in Westfield has 20 employees. That's 11 fewer than a year ago.

"We are a small business. We don't have fat. We don't. We don't carry people we don't need. To make a decision like that ... I didn't know how to do it, to be quite honest with you," said Westfield Lighting President J. Michael Hutson. "It took three months to make a call. And even then, the tears were on both sides of the desk. It was the worst thing I ever went through."

As the recession deepens, many small-business owners face Hutson's dilemma. The national unemployment rate stands at 7.2 percent—its highest mark since 1993. Economists expect it to keep climbing. When small businesses slow down, it doesn't make headlines like a shuttered manufacturing plant would. But relatively speaking, their layoffs are just as meaningful. Losing even a handful of key people can be crippling.

"Most of our members are very hesitant to ever lay off," said Barbara Quandt, Indiana state director of the National Federation of Independent Business. "They'll cut their own compensation and not take a check rather than let someone go."

Hutson learned the lighting trade from his father, who had done the same with his own father before him. Westfield Lighting has no business loans, so it's relatively insulated from the bank industry's problems. But that doesn't mean the company's immune to the credit crunch. Many of its customers have slowed down their payments. Others have walked away, leaving delinquent bills behind. There's not much Westfield Lighting can do but write off bad debt. Hutson said it's better than paying taxes on receivables he'll likely never collect.

Like most small-business owners, the downturn's impact is testing Hutson's creativity. When sales fell off, he didn't immediately begin handing out pink slips. He cut back elsewhere. Westfield Lighting reduced its inventory. Flying to Dallas for the lighting industry's annual trade show was out. So were vacations.

Hutson also asked his remaining staff to do more. Westfield Lighting's store manager now also runs the service department. Employees rotate warehouse duty. Everyone answers the phone and doubles as sales representatives. Hutson himself is personally installing customers' lighting fixtures for the first time in years.

"We're relearning our jobs. But we're doing it. That's the thing that makes me the proudest," Hutson said. "I haven't had any 'no's.' People are pitching in and doing it. That's satisfying and gratifying."

New reality

Small-business experts say the first step to surviving a recession is quantifying where you stand, and how much that's changed since 18 months ago. Now is a good time for small companies to review their business plans, said Gail Gessell, Indiana district director of the U.S. Small Business Administration. Which products or services remain profitable? How are the volumes? Have customers' needs changed with the times?

Once you've asked those kinds of questions, make sure to share the answers, she advised.

"This is a time for understanding what your business is all about and thinking about where it's going to go long term, as well as getting through the short-term challenges," Gessell said. "You really need to make sure everyone on your team understands what your business is all about."

Morale is another HR issue during a recession. Many employees are worried about the stability of their jobs. Keeping mum only flames their fears.

"If you keep everything close to your vest and don't discuss things with the employees, you run the risk of losing productivity because there's so much concern," Gessell said. "People are very aware there are fewer orders coming in and customers are paying slower. But employees may have good ideas [to share]."

Deb Peters, managing principal of locally based environmental engineering firm QEPI, sharpened her pencil and discovered that her firm had been spending nearly $9,000 a quarter on overage fees for its color copier. Six months ago, QEPI began relying instead on electronic file sharing and black-and-white copies.

The company made other small changes, too. Rather than buy its office coffee in pre-measured packets, it switched to a big can from Sam's Club. Peters put up a suggestion box for ideas that might yield new efficiency. Instead of the company's annual $5,000 Christmas party, she bought pizza.

Peters used the savings to underwrite an incentive program for employees. QEPI regularly gives staffers rewards of about $250 for good work. She's also allowing more flex time for people who want to work from home, or clock in outside traditional business hours. As a result, the 13-year-old QEPI has kept all 34 of its employees.

Peters said she was flattered over the holidays when several employees wrote her thank-you notes for her efforts to meet the economy's challenges head-on.

"We've all worked together to stay lean and mean during hard times," Peters said. "Sometimes respect and appreciation go even further than the almighty buck. I'm not kidding you."

Peters knows employees' institutional knowledge and personal relationships are critical assets that shouldn't be wasted. It's expensive to hire workers and bring them up to speed, which makes most small-business owners reluctant to let anyone go.

Coping with credit crunch

Some areas, such as the banking crisis, are outside any entrepreneur's control. The smallest of businesses, sole proprietorships, have unique challenges during a recession.

Sharon O'Donoghue, executive director of the Business Ownership Initiative of Indiana, said it's increasingly difficult for even veteran sole proprietors to secure bank credit. One of the most basic small-business rules is not to mix household income with the company's. But O'Donoghue said banks now often ask sole proprietors to use home-equity lines of credit instead of issuing them business loans.

Rather than accept those terms, O'Donoghue counsels sole proprietors to work creatively with their customers. If banks won't offer loans for equipment, for example, see if a client might buy or rent it instead, whether the work is for painting or video production.

"Many customers are very willing to work with contractors because they know them and like the quality of their work," O'Donoghue said.

Flexibility is small business's great advantage. NFIB's Quandt points out that many small employers are now reducing their hours of operation, allowing people to work from home to trim the cost of day care and even eliminating simple perks like coffee and doughnuts. They're doing the same thing with their business models. If a product or service isn't in demand anymore due to the recession, small businesses quickly adjust with the times.

"A small business can change much more rapidly than a large corporation," Quandt said. "If one service isn't working, provide something else."

Unexpected prospects

Despite its challenges, the recession also offers opportunities to small businesses. Brad Rider, CEO of locally based United Package Liquors Inc., visited four job fairs in 2008. At each one, he found better talent available than at the last.

With 23 retail stores and 150 employees, UPL usually considers about 700 applications annually. In 2008, it reviewed 1,400. Among the candidates for simple cashier jobs were former attorneys and vice presidents with Carmel-based insurer Conseco.

That might sound like a career path downgrade. But Rider himself proves a job is what you make of it. Fourteen years ago, he joined UPL when he saw a help-wanted sign at its store at 56th Street and Georgetown Road. He quickly rose through the company's ranks and became its leader six years ago.

"Don't overlook a resume because they look overqualified," Rider said. "They do really need a job, and they are willing to work for you."

Rider said alcohol is in demand during both good times and bad. The difference is the type and its price level. People who used to buy Grey Goose vodka may switch to Smirnoff. UPL is making similar adjustments to trim its expenses; it hires floor buffers and window washers less frequently, for example. Rider said he's making those changes so he doesn't have to cut areas that really matter to employees, like health care benefits.

"We figure we're not hurting yet, but let's not get to the point where we are. So our employees are going to have to break out a bottle of Windex and some paper towels," he said. "I'm doing that so I don't have to get to the point where I have to lay off people. I'm trying to avoid that at all costs. We do have some quality people, and I don't want to lose them."

When sales slow down, so can productivity. Rather than leave staff idled until the economy picks up, SBA's Gessell recommends exploring their hidden talents.

"Employees may have untapped skills," she said. "If you've never asked Bill to do marketing, he may be very good at it. Maybe he could find a way if he has time because his other activities are reduced.

"A lot of times, we get so caught up in trying to meet payroll tomorrow that we don't stop to analyze capabilities before we think about reducing staffing size."

Bottom line: Just like big companies, small businesses need to lower their expenses during a recession. Purdue University management professor Ben Dunford suggests employers focus on the cost of raises, which become permanently embedded, by paying for performance instead.

But to keep employees motivated, performance metrics must be fair. Their annual reviews should be tied to productivity benchmarks they control, he said, not necessarily the company's profitability.

And creativity can spawn non-cash compensation in the form of new titles. When owners ask their employees to do more, they should frame it as an opportunity for career advancement through increased responsibility, not a duty because they're lucky to have a job.

"In compensation, we talk about emotional returns," Dunford said. "Symbolic gestures can do a lot for employee morale."

For those in a position to hire, like UPL, now is also a great time to attract top talent. Many quality employees are let go during a recession for no fault of their own. It's a prime opportunity for small businesses to ratchet up their selectivity.

That strategy will pay off in the long term, when the recession ends and the economy begins to grow again.

"This is a good time to use your network to find highly skilled people who have been laid off and identify people with strong credentials," SBA's Gessell said. "You want to get through this challenging time and then take the next step."
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