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Strategies: Radical Sabbaticals

Threatened by downsizing, small companies are making an effort to find alternatives to layoffs.
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Strategies

Some large companies have been doing it for decades: finding innovative ways to cut costs without laying people off. But small companies, which have often felt they simply had fewer options, historically haven't been able to be so inventive. During the current downturn, however, some entrepreneurial businesses have come up with alternatives to layoffs that rival the creativity of their giant counterparts.

Over the years, the big guys have built the template for human-resources ingenuity:

  • In 1981, Lincoln Electric, a $1-billion manufacturer of welding products and systems in Cleveland, instituted the Leopard Program to avoid laying off any of its employees when sales dropped as a result of the steel-fabrication industry's flight from U.S. shores. The program, which encouraged employees to "change their spots," took 68 volunteers -- 54 factory workers and 14 clerical workers -- and trained them as assistant salespeople. Four years later, when the economy rebounded enough for the nascent sales force to be disbanded, the Leopard Program had netted more than $10 million in sales.
  • In the early 1990s, then $1-billion London-based Virgin Atlantic Airways, reeling from a drop in travel revenues caused by the recession, offered unpaid leaves of three to six months to 600 staffers, who kept their travel benefits on Virgin flights during their time off. To this day, in what is clearly an outgrowth of that earlier policy, employees can take a "career break" of up to one year as part of the company's standard human-resources policy, though they do forfeit their benefits.
  • And just this past March, $22-billion Cisco Systems Inc., based in San Jose, Calif., responded to the prospect of laying off some 8,500 people by developing a one-year Community Fellowship Program as an alternative to the typical package of severance plus unemployment compensation. Of the 300 employees who applied to be fellows, Cisco matched 81 with nonprofit organizations in need of technology help. The fellows will receive one-third of their salaries and full benefits through January 31, 2003.

With such big-company strategies as inspiration, small companies have begun experimenting with ways to retain their most valuable resource -- their employees -- while still keeping their heads above water.

One business -- Tweezerman Corp., a manufacturer and distributor of personal-care tools headquartered in Glen Cove, N.Y. -- has even figured out a way to keep its workforce intact while reducing its expenses at the same time.

When Dal LaMagna founded Tweezerman, in 1980, his goal was not just to make products that remove unwanted eyebrow hair but also to give voice to his ideals. Tweezerman's 175 employees own about 11% of the $22-million company through an employee stock-ownership plan and actively participate in decision making through the company's system of open-book management. Tweezerman was hit hard by the events of September 11. Sales during the following three months were down 25% from the previous year's figures. "We were going to announce a new program to move to a living wage," says LaMagna. "Then September 11 hit. It became apparent that this was a time to protect jobs, not to increase salaries."

LaMagna first froze hiring, even for replacements at the company's headquarters and at its remanufacturing facility, in Houston. When people left, their responsibilities were distributed among the remaining staff. Cross-training became the norm: pickers also became packagers, and shippers checked accounts. The director of product development volunteered to work three days instead of five at a prorated salary, and other executives offered to follow suit as needed. To avoid layoffs at the remanufacturing plant (where 10% of the product mix originated), LaMagna continued to import raw materials, such as unfinished cuticle-nipper forgings from India, even though that meant stocking up on inventory.

Then came the hardest part: freezing wages and salaries. Typically, Tweezerman budgets 20% of its sales for employee wages, salaries, and benefits. As sales dropped, that ratio got out of kilter, with about 25% of sales going to the compensation pool. To bring about a balance, LaMagna first suspended his own salary for the last two months of 2001 and cut it by 60% for 2002. He then put the money that the company was saving from lowered interest rates on its bank loans into the compensation pot instead of into profits or new investments. If by the end of fiscal 2002 sales have outstripped the cutbacks in compensation, LaMagna will distribute the difference as retroactive raises. "It's a good-faith agreement with everyone," he says.

Last October, Tony Wheeler, cofounder of $40-million Lonely Planet, was banking on the same sort of good faith when he and his global-management team instituted a program that let employees opt for sabbaticals or shortened workweeks in order to avoid layoffs. Before last summer's slump and the plummeting of U.S. sales in September, the international publisher of travel guidebooks was planning for 10% to 15% growth. "Instead, we're hoping to get back to $40 million again," says Wheeler.

The sabbatical program wasn't the company's only cost-cutting measure. Lonely Planet stopped publishing its quarterly newsletter and put off beginning work on certain new books (such as those for current global hot spots like Pakistan and Israel). But appropriately enough, since the company champions independent travel, it was the sabbatical program that struck closest to employees' hearts. More than 100 of the company's worldwide staffers (the publisher has offices in Melbourne, Australia; Oakland, Calif.; London; and Paris) took advantage of the extended leave, setting out for one to six months off at 15% pay. The goal was to reduce Lonely Planet's payroll by $250,000 between November 2001 and June 2002, the end of the company's fiscal year. At press time the company was set to easily meet its target.

Unfortunately, the payroll cutbacks weren't enough. By early January it was clear that the company would need to move some of its production capability from Oakland to its Australian headquarters. And so in March, for the first time in its 29-year history, Lonely Planet had a major layoff -- 15% of its staff -- in order to centralize its production operations (editing, designing, and cartography) in Melbourne.

Instead of viewing the belt-tightening as a failure of creativity, the company regards it as a long overdue wake-up call. "September 11 forced us to look under the hood, to take a look at how we can run a more efficient organization," says company spokeswoman Cindy Cohen. "This is part of a three-year plan as we move into the future in a sound, profitable way."


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Please E-mail your comments to editors@inc.com.

How much will it cost you to layoff employees? Read The Real Cost of Layoffs to find out.

Last updated: Aug 1, 2002




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