Is creating the ideal workplace hazardous to your business's health? The founders of once-idyllic Hanna Andersson are finding out

On a dim April morning last year, word was traveling fast. Daphne Clement and everyone else in the phone room at Hanna Andersson had been watching in taut silence from their stations as coworkers filed nervously past. One by one, those marked for redundancy were summoned alphabetically to a supervisor's office. "Thank goodness I was a C," says Clement. "The tension was so high, I don't think I could have waited all day." If timing softened the blow, the suddenly unemployed customer-service rep realized it only in hindsight. "When they came to get me, I was on a call with a customer," recalls the 47-year-old single mother. "I thought I would fall apart right there."

Perhaps she should have seen it coming. In the weeks prior, even during the busiest days of the spring season, when the call center of Hanna Andersson, a mail-order company based in Portland, Oreg., should have been a din of phones ringing and keys clacking and orders being processed, there had been long, silent lapses. Yet Clement, who had earned high praise in her review only weeks before, says she had had no warning. Like her colleagues, she had come to feel quite secure in the embrace of her high-minded employer. "The benefits were just incredible," she says, "and it was such a wonderful, New Age place to work that you didn't worry about hanging onto your job."

Even when managers had talked of reducing expenses until sales rebounded -- and they took pains to keep everyone informed -- she trusted. When they'd talked of reducing hours and sharing the pain, she agreed. When they'd talked of layoffs for poor performers, she felt pity for those who would be downsized, but she didn't dissent. Then the talk turned to simple layoffs. Unqualified layoffs. And all she felt was betrayal.

"We cut quickly. We cut deeply. We did it without warning," explains company president Mary Roberts. "When it came to handling bad news, we did not have a lot of experience. So we did it completely by the book.

"It was the most traumatic thing that had ever happened in the history of the company."

In a direct-mail company, where the rhythms of business are measured by the season, it becomes apparent within weeks of mailing a catalog if the rest of the quarter will be spent singing the blues. "You open your doors only a few times a year, with the mailing of each catalog, and if the sales don't come in, it gets pretty serious pretty quickly," Roberts says. Since you're unable to change merchandise or adjust pricing or correct mistakes until the next time out, "all you can do is control the damage," she says. So when sales were running 20% below projections in March of 1993, the managers at Hanna Andersson knew the spring was already irrevocably lost. There was nothing to do but cut every cost they could.

At the end of that first week in April, 20 employees, 10% of the direct-labor force, had been relieved of their duties, with promises that they would be called back when -- and if -- business picked up. Clement, who hadn't been working at the company long enough to qualify for unemployment benefits and lacked any other income to provide for herself and her then six-year-old daughter, doesn't recall much of what happened after she took the news. "I tried to rise to the occasion, but I was in shock." She remembers that her supervisor wept. "But I don't know what I said." She remembers that as she drove home, in a miserable rain, she was shaking all over.

it might have been just another day at the office for many anxious jobholders, but for those in the employ of Hanna Andersson, it was historic. At the company Gun and Tom Denhart had founded almost a decade before, they had known mostly heady growth and plentiful profits. Bootstrapped, just as in the storybooks, out of the founders' garage, Hanna Andersson had managed to top $40 million in sales without losing the character of a small family-run shop. The company's success and the owners' generosity had made almost every job at the company a tenured position. Even if Hanna Andersson was the largest direct-mail marketer of children's apparel in the country, a decision so mercilessly corporate as a layoff scarcely had been imagined, much less unleashed. "You'd think the world had ended," says Roberts.

This, after all, was an award-winning workplace revered for its family-leave practices, its child-care subsidies, its charitable giving, its participatory management, its flextime, its sick time, and even its lunchtime. (It subsidizes light gourmet fare in the employee cafeteria.) In the 70-year-old former bicycle factory the Denharts had purchased, restored, and tastefully appointed with Swedish antiques to accommodate their growing business, employees passed their shifts, empowered by management, ensconced in large, ergonomically correct offices, and knee-deep in benefits.

The company paid half of all child-care costs for its employees, most of whom were parents lured by the uncommon largesse. It granted part-timers and seasonal workers working 30-hour weeks full benefits. It even paid for their parking. There were cash bonuses, profit sharing, tuition reimbursement, and steep discounts on the handsome, high-priced clothing the company sold. Says human-resources vice-president Gretchen Fields, "We had this very maternalistic approach to employees. They expected to be taken care of."

Indeed, there was little that Hanna's employees were denied by their doting employer. Except, as Daphne Clement and others found out, the most important perk of all: job security.

The beneficence didn't stop with employees. The company pledged a part of its earnings, donating 5% of pretax profits to local charities. With those profits often exceeding a couple million dollars a year, the custom yielded six-figure gifts in which everyone took pride: the founders, the employees, the customers, the recipients. Perhaps nothing better represented the happy alliance the owners had struck between altruism and self-interest than an initiative they called the Hannadown program. Customers could return their used Hanna-wear in exchange for a 20% discount on their next order. The clothes were then redistributed to needy children across the country. The program not only reinforced the company's message about the quality and durability of its product but also endeared the company to customers, who already harbored a cultlike devotion to its products. Everybody won: kids got clothes, customers got deals, the company got incremental sales. The Denharts were doing the right thing all the way to the bank.

They calculated their success according to what they and other socially responsible entrepreneurs call the "double bottom line": one tallied profits, the other good works. And they promoted it all in their catalog and in the press.

Of course, at the outset, when the Denharts decided to leave their home in Connecticut and head west to start a business, they hadn't given much thought to how they'd measure their rewards. "We just thought we'd start this business to make a couple of nice part-time jobs for ourselves," recalls Gun. "The only strategy was to sell high-quality Swedish products for kids." It was strategic enough.

The first catalog, which Tom photographed in Sweden -- in Gun's childhood room -- in only 10 days, was printed and mailed to 75,000 would-be customers. A tiny ad asking the teasing question "Why are Swedish babies so happy?" was placed in Parents magazine. Some 2,500 responses later, the catalog had pulled in $53,000 in sales, well shy of breakeven but enough to try again. By the second year, the business, still operating out of two locations -- a spare room and the garage -- began to post modest profits.

Because the Denharts showed a genius for design and customer service, their products practically sold themselves to the affluent parents who constituted their customer base. Marketing was a matter of placing the Swedish baby ad in the occasional magazine, renting reliable lists, and talking up the company's honorable intentions to reporters. Tom's instincts for image making had been well honed at Ogilvy & Mather, and he applied them brilliantly to render the catalog an understated masterpiece of direct mail. The book was a celebration of childhood in which beaming babies romped happily in bib overalls and cotton jumpsuits.

The catalog won a devoted following among upscale baby boomers who bore children and spent lavishly on them throughout the 1980s. Before long the company (which was named after Gun's grandmother) was mailing millions of catalogs a year and employing hundreds of people to meet the demand for its products. The founders' humble expectations notwithstanding, they had a booming business on their hands.

Astonished by their good fortune, they were equally surprised by the seriousness of their own intent. What had been hatched as a plan to liberate Tom from a grueling pace in the New York City advertising world had become something more than an exercise in self-determination or wealth creation or even business building. The longer the Denharts worked at it, doubling sales and sometimes head counts during each of the first five years, the more they came to view the task they were engaged in as a process of creating a community. They were inventing their own counterculture, right inside that old bicycle factory on 10th Street in Portland, where their ideals about the meaning of work and the proper balance of things could become not merely points of private conviction or the subject of Gun's scholarly interests but the stuff of lived experience.

"The purpose of this business is not selling baby clothes," Gun Denhart professes. Like the chorus of conscientious and often reluctant capitalists who preached about socially responsible business building in the mid '80s, Gun attributed a higher purpose to her enterprise from the start. "It's been a way to grow. A way to create opportunities for people to be fulfilled at work and find some deeper meaning in what they do." Since the company was making plenty, it was not about the money.

Gail Johnson, the Denharts' first employee and now the company's vice-president of operations, recalls the early years: "We'd be packing orders and, assuming we were going to be around next season, we'd discuss how we would want to be treated and how we would treat employees as we hired more. We would dream of the kind of environment we wanted to work in. We wanted it to be a humane place, a place where people felt comfortable being themselves, could grow, have fun. All of that. So we were going to create this workplace by conscious design. From the very beginning, even when we were doing horrendous work and logging insane hours, that's what we were talking about."

By the early 1990s the company had largely achieved those goals, owing to its steady accretion of perks and benefits. It seemed to occupy a place on a Platonic plane above the shadowy world of capitalism. Other, lesser ventures might spend their days putting off vendors or exploiting workers or stalking costs. At Hanna Andersson the mission was somehow more pure. As people liked to say around the place, Hanna cared.

"It's surprising how fragile it all is," says Gun Denhart in her airy office overlooking downtown Portland. The 48-year-old cofounder possesses an easy grace that belies the stresses that have beset her business in recent months. As the matriarch of a company that trades on cloaking children in the purity and innocence of Swedish cotton, she is served well by a pleasant reserve and a Donna Reed-meets-Ingrid Bergman demeanor. When she talks about the past year and the accumulation of crises her company has faced, her native Sweden lingers in her voice.

"We always thought the money would come to us if we did the right thing," she explains. For a long time it did. "But it is not so automatic anymore."

The layoffs of last year were the first acknowledgment that bad things did happen to good companies. And they were happening in spades at Hanna. The numbers made it painfully clear: the company's double-digit growth had faltered. Two years of recession had slammed the brakes on sales. Value-conscious customers were less willing to sink $38 into overalls for their two-year-olds. But the poor economic climate accounted for only part of the slowdown. There had been management missteps as well.

In 1992, after Tom surrendered to a midlife crisis and took a sabbatical, the catalog was handed over to a new creative director, who set out to fix what wasn't broken by redesigning the book. Even though the catalog had earned a string of design awards, "we wanted to allow a new director to put her stamp on it," says Gun. The result: sales took a nosedive. Although they revived after the redesign was shelved, 1993 revenues inched a mere 8% above the previous year's. Such lackluster performance was unheard of at a company in which managers used to toy with strategies to limit growth. "We used to sit around and talk about whether we wanted to grow 40% or maybe just 30% next year," Roberts reminisces. "Can you imagine that?"

Profits also began to list. While industry averages indicate that a well-run catalog company of comparable size should post profits in the 6%-to-10% range, earnings at Hanna fell below 5% last year. The cost of everything, from employees' health insurance to the mailing of catalogs, had increased, but price pressure from competitors and customers was forcing the company to absorb those costs. Margins began to erode.

"We thought we were immune to those worldly cares," explains Roberts. "Suddenly, we had to face the fact that we were part of the real world."

If there were any doubts about how cold that reality could get, they were dispelled in the marketplace. Once a private preserve that afforded plump margins and uninhibited growth, Hanna's market had become thick with competitors. When the company mailed its first catalog, in 1984, there were virtually no rivals selling cotton clothing for children. "By the end of 1991 we started to realize, 'Oh my God, we have some worthy competitors out there," says Roberts. Today at least 25 mail-order marketers of children's apparel, including such giants as L.L. Bean, Lands' End, and Oshkosh B'Gosh, have been enticed by the segment's relatively robust growth. They are peddling anything but polyester, and more than a few, Hanna partisans claim, have knocked off the company's designs. Add to the mail-order fray rapidly expanding retailers such as Gymboree and the Gap's Gap Kids division, and competing in this market becomes anything but child's play.

"The market has gotten very crowded, and people are very tough," notes Tom Denhart. Few other companies are saddled with the cost structures that support Hanna's generous employment and discriminating merchandising practices. The company designs and manufactures its own fabrics, buys little "off the racks," and contends with the currency swings and lead times entailed by importing a fair portion of its inventory from Sweden.

"Competitors are sourcing products a lot more cheaply than we are," notes a philosophical Tom Denhart. "In the Far East, for instance. I know there are places where we could get T-shirts cheaper, but I also know that they're being made with child labor under unhealthy conditions. And I don't really want to build a business based on some kid's getting cotton lung disease."

Righteous sourcing may be its own reward. Still, it comes at a price. Along with the company's bounteous benefits and its cordial but not always advantageous relationships with suppliers, scrupulous sourcing numbers among the many costs of doing business the "Hanna way." Until the impact of competition was felt, last year, there was little need to meticulously account for those costs. But the consequences of competition -- price rollbacks, for instance, as well as increased spending to acquire new customers -- have awakened an urgency to contain costs. It's little wonder: benefits and payroll taxes in 1993, at $1.75 million to $2 million, equaled the company's net earnings. Among the more frivolous expenditures, paid parking, which cost the company $80,000 annually, was eliminated last year.

Of course, at any other company, one at which only one bottom line matters, the incursion of new rivals might not have come as such a rude awakening. Ordinary businesses, preoccupied with maximizing profits and minimizing costs, might have anticipated the inevitable arrival of more competition, because they expect the natural laws of maturing markets to apply to them. Not so with Hanna. A passion to be a company apart had to some extent left it a company afield. It wanted so fervently to be a company with a soul, it became a competitor without eyes.

"We became so introspective that we lost sight of what was happening outside the company," says Gun. "Instead of looking out at what was happening in the marketplace, we were all wrapped up in figuring out the best way to run the company."

By 1992 the Denharts realized that being in business was not purely a matter of satisfying customers and motivating employees. It was also a game of numbers and a never-ending series of compromises. As the company had matured and its competitors had multiplied, the compromises had become more unpleasant. Winning the numbers game required a new discipline. The Denharts knew that costs had to be reduced and efficiencies improved. They simply didn't want to be the ones to do it. "It's part of business, I know," admits Gun. "But it's no fun." Tom wanted to restore boats and spend time with his son. Gun, who had begun lecturing about socially responsible entrepreneurship, wanted to devote more time to her philanthropic interests.

Like good social democrats, the owners didn't choose a successor. They chose four. The company would be run by a committee of managers, none of whom would outrank the others. It was in many ways the logical culmination of Gun's own egalitarian style and the company's long-standing commitment to participatory management.

"It was a noble experiment," Gun Denhart notes. And it failed utterly.

When the management committee tried to tackle disparities in its own compensation, rapport quickly disintegrated. "It's not that we didn't get along or respect each other," says Roberts. "But when we were supposed to make decisions about how to pay ourselves -- everyone had different deals, and there were jealousies and resentment all the way around -- we got bogged down. We spent 10 times more energy and time than we should have on decisions like that. Because there was no leader. No tiebreaker. Nobody to make a hard decision."

A participatory paralysis set in. And relations all around deteriorated. The acrimony ran so high that an arbiter was called in to mediate a meeting between the managers and Gun. On only one point were they able to reach agreement: a committee was no way to run a company. The managers exhorted Gun to return to managing the day-to-day operations. The company had urgent problems: costs needed to be reined in, better terms needed to be extracted from vendors, a definite course needed to be set for the future. Gun's response was unequivocal: she said no. "I'm not good at those things, and I'm not interested in them anymore."

"It was a fearful moment," Roberts recalls. Amidst increasing competitive pressure and distracting internal disputes, the company was confronting the most challenging period of its history -- without a leader. And no matter how wholesome an employer it had been, it risked becoming a very unhealthy business before long.

To her credit, Gun read the warnings. After abdicating in that charged meeting, she became, as Roberts recalls, uncharacteristically businesslike. "She asked us to help design the job that a new president would step up to fill. And told us she'd get back to us in two weeks with her decision." When Gun asked the assembled group if anyone wanted to be considered for the job, only Roberts declared she did.

The reformatting of the management team began in earnest. After two weeks of deliberation and interviews with inside as well as outside candidates, Gun tapped Roberts to be president. "You have to either train someone for the job or train them for the company," Gun had reckoned.

By selecting Roberts rather than an outsider, the Denharts sought change but not without continuity. "We wanted someone who understood and could maintain the same values even as we changed," says Gun. Improving profitability was only as important as preserving the culture she and Tom had painstakingly created. Roberts, they hoped, could be a conservator as well as a change master. "Mary shared our principles, but she was willing to make the hard decisions that I wasn't," says Gun.

Roberts and Gun, now chairman, began importing talent. In a quest for "balance," they brought in seasoned executives -- chief financial officer Steve Eklund and marketing vice-president Marvin Cohen -- from mainstream corporate America. Drawn by the kinder, gentler culture of Hanna, they were nonetheless businesspeople trained to hunt down costs and enhance profits. They would focus on reviving growth and reducing expenses and make no apologies about it. Gail Johnson, the company's original employee and Gun's confidant and surrogate before Roberts's appointment, narrowed her responsibilities to operations, which she heads as vice-president. She remains the company's walking archive and, according to Roberts, is "the keeper of the company's soul." A symbol that the company would not overlook its homegrown talent, a young and savvy merchant -- Allison O'Connor -- was promoted to vice-president of merchandising. Vice-president of human resources Gretchen Fields took on the formidable task of curtailing the spiraling costs of employee benefits.

Installed just over a year ago, the company's reconstituted management team has yet to work miracles. The disappointing results of last year occurred on their watch. But change at Hanna Andersson is bound to come in small, incremental steps. And signs abound that this ideal employer is, indeed, getting real about business.

For the first time, serious, even fractious budget negotiations were undertaken this year. A scarcity of profits has meant "we have to make choices," Gun says. More rigorous planning and marketing also have begun. Innocent of long-term stratagems until this year, managers have recently devised a three-year business plan to grow the company to $65 million and nearly double its profit margins in that time.

Meanwhile, the founders have rewritten their own roles. Tom has returned to active duty as creative director. He still hopes to sail off into the sunset, but he'll do it less precipitously next time, making the transition over a period of years rather than weeks. Gun has focused her energies on long-range growth prospects such as international and retail expansions. "I'm doing what I'm good at and what excites me," she says. "I'm not going to beat myself up over what I'm not good at or force myself to do it. I've found people better suited to run the company on a daily basis, and I trust them to do what needs to be done."

Topping that to-do list is reeducating employees and weaning them of the sense of entitlement that years of prosperity have bred. Says Gail Johnson, "We have to remind people that we are not here simply to bestow benefits upon them." Opportunities to advance, once regarded as a right, are now harder won. For the first time, the company has required employees to contribute to the cost of their health insurance. It has also placed a cap on child-care reimbursements. The ceiling coincides with IRS rules -- and employees are unlikely to exceed it -- but the message has been sent: there is a limit.

Managers have begun to talk openly about profit goals. Although the company has long shared its financial results with employees, it has not always convinced them that the difference between $2 million and $4 million in earnings might affect them. "We must have financial health in the company or we just won't have the rest," Gun says. "I want people here to feel the money, you know."

But she doesn't want it to preoccupy them. "If you focus too much on the bottom line, it can be deadening to the spirit of the company. The bottom line cannot be the only thing."

While managers are reevaluating many of the company's business practices, they are mindful not to reengineer the parts of the company that work. "If you have the ultimate bib overall," says Gun, "you don't need to reengineer that." And if the company is cutting costs, not everything is under the knife. The child-care benefit, though no longer limitless, remains sacrosanct. The commitment to charitable giving also stands, although lower profits have resulted in smaller donations.

"The culture here is changing because it has to change to survive and grow," insists Gun. "But we are not abandoning our values. We are modifying them."

Can Hanna Andersson maintain its heroic ideals in the face of cutthroat competition? Can it still afford to do the right thing? "It would be the crowning glory of this company if we could," replies Tom. He concedes that the odds are even at best.

When Gun considers the quandary, she can't help thinking of her homeland, which for decades thrived by practicing its "third way" -- in a marriage of socialism and capitalism -- but in recent years has struggled with a no-growth economy. "You know, Swedes have always had a protected life, and Hanna's had a protected life, too. Now they're up against reality in Sweden. And we're up against reality at Hanna. It is not so easy."

Doing the right thing by employees, it turns out, is not always twin to doing the smart thing or even the prudent thing by the business. What happens when the current well-being of employees collides with the future well-being of the company? And the right thing is not nearly so obvious as it was in better times?

"We struggle with it," says Gun, who has arrived at the conclusion that "the right thing changes over time." There are few fixed stars. Even when the founders are committed, the management is able, and the employees are informed, the task of being a providential employer and a lean competitor is just plain hard. "It's a tension you never resolve," says Roberts.

it has been more than a year since the layoffs, and while many employees -- including Daphne Clement -- have been called back to work, the cuts' effects can still be felt, like ghost pains jabbing now and again, in the organization. "There's a level of trust we might never regain," laments Roberts.

The awards and plaques trumpeting the company's commitment to the care and maintenance of its workforce still hang on its walls. But the call center Clement returned to last summer is not the same place she left in despair months before. There have been improvements, it's true. For starters, the walls were torn down, the room was freshly painted, and new workstations were installed. Self-directed teams are now being organized to run the department. And sales this spring were running 20% ahead of plan.

Although Clement, who relied on family members for financial support while she was jobless, is grateful to have her old job back, the place feels different to her. "We're not this family business with cushy benefits and high ideals anymore. At least not just that. It's a different atmosphere. More businesslike. More corporate.

"The experience has made me wiser," she says. "It's easy to have high values. But when the going gets tough, it's difficult to maintain them."

The managers, Roberts reports, are growing accustomed to the complaints and the nostalgia for paradise lost. "We have to get used to hearing the noise."

Financial Comparisons
Children's apparel

industry Hanna

benchmarks* Andersson**

Gross margin 55.3% 50% (estimate)

Marketing expenses 23% 15% to 20%(includes catalog prep, printing, postage, list rental, and advertising)

Operating expenses 17.7% 18% to 20%(includes labor costs, shipping materials, outbound freight, telephoneservice, and other operating expenses)

General & administrative 11.2% 15% (estimate)(includes salaries, occupancy, insurance, and other operating expenses)

Income 12.9% Below 5%

*From "Catalog Survey Results," by Bruce, Dean and Co., a survey of financial benchmarks for the catalog industry. Figures are for 1992, the latest year available.


* * *

Employee-Productivity Analysis
$40-million Hanna benchmark Andersson

catalog company* at $43 million**

Number of full-time 116 300employees

Average revenue per employee, in thousands $349.3 $143.3

*From "Catalog Survey Results," by Bruce, Dean and Co., a survey of financial benchmarks for the catalog industry. Figures are based on 1992 sales volume of respondent companies.

**1993 n