When Bad Economies Happen to Good Companies
Here's how Inc 500 CEOs are managing their way through the tough times.
Talk about painful wake-up calls. The youngest chief executives of this year's Inc 500 companies are experiencing their first-ever economic decline. But even the more seasoned CEOs on our list have had a rude jolt. During the recent boom, their biggest problems were caused by getting too much too soon. Now the trouble is suddenly too little of everything.
Ah, but Inc 500 CEOs are a quick and resourceful bunch. Facing adversity, they've done whatever was needed, no matter how difficult, to save their companies. Some laid off employees. Others shored up funding. Still others changed their focus, either internally -- looking at how their company was organized -- or externally. For all, there was much to be done. Now these CEOs have new strategies in place and new war stories to tell.
Take Al Wasserberger. Looking out on his company's Christmas party last December, the 34-year-old CEO couldn't help feeling a pang. Just one year earlier, his software-services firm, Spirian Technologies Inc. (#62), in Chicago, had launched a major product after reporting the best financials in its five-year history. The company celebrated richly, flying its employees and their families, as well as some customers, on an all-expenses-paid trip to Disney World in January 2000. But midway through that year, many of Spirian's customers abruptly halted projects, throwing Wasserberger's company into a cash-flow crisis.
By Christmas 2000, even though Spirian would draw record revenues of more than $8 million for the year, Wasserberger had restructured the company. He adopted a new business plan focused on profits and let go of 11 employees. The day of the layoffs was the hardest of his career, Wasserberger says, adding, "These people's kids call me Uncle Al." To help keep costs down, employees celebrated the holidays that year with only a potluck supper held in the office.
Though Spirian helped large companies deploy Windows 2000 and other software, with the downturn customers were scrambling to reduce costs. Speedier software deployment -- Spirian's claim to fame -- was no longer closing sales. For Wasserberger, the new mood in the industry had come like a bolt from the blue. "We didn't recognize this whole change was coming," he says. "Suddenly, we had to change to a message that you could use our services to cut costs."
Fortunately, Spirian had recently launched a subscription service that could be pitched as a way to lower costs. The service let customers pay a monthly fee to have Spirian manage their software applications. Spirian's sales team quickly shifted its pitch, telling prospective customers that the service could reduce their technology expenses by up to 50%. The new strategy worked. Prospects were receptive.
"Could we have trimmed costs so far that we required no outside funding? Yes. But we didn't want to do that. It's not good for morale or the value of the business."
The time was also right for Spirian to push a recurring-revenue product. Wasserberger had learned that while customers will often put new projects on hold indefinitely, they tend to retain monthly services. "We had project customers and subscription customers," Wasserberger says. "The first group disappeared almost entirely, while the second group had no change."
During the tough times Wasserberger continued his drive to raise funding. "Growth requires capital," he says. "Could we have trimmed costs so far that we required no outside funding? Yes. But we didn't want to do that. It's not good for morale or the value of the business."
In 2000 Wasserberger had raised $2 million from a group of investors and sold 8.5% of the company for an undisclosed amount. In January 2001, he secured another $7 million from an investment consortium.
Throughout 2001, the 70 remaining Spirian employees have focused on cutting costs. One of them suspected that the company was spending too much on health insurance, and the hunch was later confirmed by an outside health-care consulting firm. A few changes in coverage reduced Spirian's health-insurance costs by an impressive 34%.
With the memory of the lavish Florida trip still fresh in their minds, Spirian staffers have learned to spend carefully. "In hindsight, the Florida trip wasn't the greatest move," says Wasserberger. "Now no one buys a paper clip they don't have to buy." The upside: everyone at Spirian has grown so accustomed to belt-tightening, it no longer requires a second thought. This year Spirian is on track to return to profitability.
Never far from Wasserberger's thoughts these days is what he calls the "feed number" -- the number of employees, plus dependents, his company is responsible for feeding. He keeps that number -- currently 134 -- pasted to his office wall, where it serves to remind him how difficult it was to lay off employees he had been close to. Still, Wasserberger says, "sometimes it's good for a business to go through an economically challenging time. We're a better company because of it."
Plan B: The Sequel
For Dan Turner, this is downturn number two. His first came in 1996. Two years earlier Turner, then a recent college grad, had founded a Web-development business in the basement of his parents' Washington, D.C., house. He called it Turner Consulting Group (#332), and he staffed it with some 15 far-flung college students and other virtual workers, to whom he paid a flat hourly rate. He built a decent business developing sites for federal agencies.
But that came to a halt with the congressional spending debate of 1996. "Our business went down overnight," says Turner. "We had no money for seven months. I laid off the entire company."
Not long after that, the feds got their act together, and the money started to flow again. To Turner's surprise, none of his former employees had landed jobs since being laid off. Instead they had survived on contract work and savings, many of them waiting for Turner to get back on track. Turner hired them all back as part-time and full-time hourly employees. He also paid for their health insurance premiums and for other benefits -- even for the part-timers. Business took off again, and this time Turner diversified his clientele, adding nonprofit agencies as well as small businesses. By the start of 2000, Turner's company had eight clients for projects ranging from $50,000 to more than $1 million each. Revenues in 2000 hit $2.5 million.
But in April of that year, the Nasdaq crashed, and though Turner's consulting company had only a few dot-com clients, he was gripped with a familiar sense of foreboding. That same month Turner opened a $250,000 line of credit with a local bank, just in case. Though his accounts receivable remained strong, Turner felt worried as one of his clients saw its business sour. In late summer 2000, he shifted several of his programmers to internal projects, including upgrading his company's Web site. Turner also stopped paying himself, which was especially tough, since he had just bought his first house. He also asked his parents to let him temporarily suspend paying rent for his office space, even though they were charging him just $27 a square foot, compared with the going rate of $35 to $40. By the fall of 2000, Turner had almost completely tapped his line of credit yet was still short on cash. With 34 employees on staff at that point, he says, "it crossed my mind that we might not be able to continue."
Indeed, in mid-November, Turner made a list of all his employees who were not working on client projects; they numbered 17 people. He then gave those employees two options: either they could remain on the payroll (they wouldn't get paid for any work, but he would continue to cover their health-insurance premiums) or they could sever all ties with him and fend for themselves. Only one person immediately chose not to go back to Turner. One left in January 2001, and one was let go by Turner. The rest of Turner's employees stuck with him, and he has repaid them. In the past six months Turner has hired back all 14 loyalists.
"With the technology industry here and all the stock options flying around -- things we could not offer -- good labor was tough to find. We had to bring in some B and C players."
This time around, Turner is focusing on diversifying his client base even further. He is also working on getting a new line of credit, though it's proving difficult, even though he paid off his previous $250,000 loan earlier this year. If he can't get the credit, Turner says, he will go to a factoring company, which has promised him $400,000 on a moment's notice. Factors collect on a company's receivables, taking anywhere from 2% to 8% of the invoice as their cut.
If all else fails, a few of Turner's employees have said they would invest in the business themselves. During the past six years Turner has believed in his staff, and the feeling is apparently mutual. "I have very special employees," he says. And they seem convinced that they have a special employer.
Richard Calcaterra is thanking his lucky stars that his company never relied on dot-com business. In fact, he's taking advantage of the dot-com bust to hire new staff.
It could have been different. Calcaterra co-owns Enterprise Events Group Inc. (#289), a $10-million event-management company in San Rafael, Calif., just across the bay from San Francisco and the heart of the E-commerce industry. He started the company in 1995 and has mainstream high-tech clients that include Oracle and Cisco. Then came the dot-coms. Though they threw around an awful lot of dollars on their spectacular launch parties and other events, Calcaterra and partner Matt Gillam weren't buying. "We never went after that business," Calcaterra says. "We had our hands full with the Fortune 100 companies down in the Valley."
In fact, with 75 to 80 events a year, business was so abundant that Calcaterra's biggest challenge was a constant need to hire good people. "With the technology industry here and all the stock options flying around -- things we couldn't offer -- good labor was tough to find," he says. "We had to bring in some B and C players."
According to General Electric's ubermanager Jack Welch, who popularized the terminology, and others, B and C players are not as focused on quality as A players are. And in a service-oriented business like Enterprise Events, a lack of customer focus can be deadly. "Some people are made for the hospitality business, and some are not," says Calcaterra. "People who are A players exceed customer expectations each and every day."
As the economy began to slide in mid-2000, Calcaterra saw an opportunity to pick up superior people who had been displaced by the dot-bomb. "Great people are all over the place," he says. He hired some of them and fired some of his employees that he considered Cs. He now has nearly 130 employees in all.
Of course, Calcaterra's own business is feeling the crunch, too. His high-tech clients are cutting back on their events, so Calcaterra expects revenues will grow more slowly this year than they have for the past five. "This is the first time in five years we've been able to catch our breath," he says optimistically.
Also, Calcaterra believes his current roster of employees will be sufficient for now, and he doesn't plan to add staff this year. But that hasn't stopped him from continuing to look for the best people. "We will always make room for A players," he says.
Lauren Gibbons Paul is a freelance writer in Boston.
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