A Year of Living Frugally

By Adam Lashinsky, Senior Writer
Fortune Magazine

In the autumn of 2008, just as the global financial system was cascading into a crushing, U.S.-led crisis, the Silicon Valley venture capital firm Sequoia Capital summoned the heads of the companies in which it had invested for an urgent meeting on the unpleasant subject of cutting costs. “R.I.P. Good Times,” read an illustration of a tombstone (the kind one finds in cemeteries, not in the financial press) at the beginning of a presentation Sequoia made to the assembled CEOs. The VCs then let loose on them a torrent of statistics and analysis that described a bleak economic outlook for 2009.

Sequoia’s message was largely interpreted as a call for layoffs. Cutting people assuredly was one of Sequoia’s recommendations. It dourly told the CEOs that companies that didn’t cut quickly enough could find themselves in a “death spiral” from which it would be difficult to recover. But a closer read of what the prestigious firm that has funded Cisco Systems, Yahoo! and Google, among many other technology startups, actually said reveals a more nuanced approach. For Silicon Valley startups as well as giant, mature organi - zations everywhere else, it will be a year of doing more with less. Every company has to examine its expenses. Although reducing head count is often the biggest headline grabber as well as the quickest way to reduce costs, it isn’t the only – or even the preferable – way to go about the task.

The Sequoia presentation shows how companies can cut back without necessarily slashing their workforces. In times like these, Sequoia reasoned, survival was more important than grabbing market share from rivals. Companies that would be able to survive needed “must-have” products, established revenue models, a clear understanding of the market’s uptake of their offering, and customers who could afford to buy. (The not-so-subtle implication: If your company doesn’t meet those qualifications it’s possible you aren’t meant to be a company any longer.) Sequoia then urged corrective measures to its companies that wanted to see 2009 and beyond: Consider reducing engineering expenditures for future product plans, strip out non-essential product features, measure the effectiveness of marketing (and cut spending accordingly), assess which signed deals actually would close (and again, budget appropriately), and determine which payments to suppliers could be pushed out, renegotiated or canceled altogether.

Its final suggestions could apply to all companies, big and small, young and old: Adapt quickly, plan a budget that assumes no growth in expenses, review (that is, consider cutting) salaries, favor sales compensation structures that are skewed toward commission payments rather than fixed or hourly salaries, reduce debt, generate cash sooner rather than later, and, sagely, “spend every dollar as if it were your last.”

These are a just a few tactics for a frugal existence in tough times that emphasize cost-cutting techniques other than letting your people walk out the door. There are plenty more. Before plunging into specific suggestions, however, a word of caution. Some of what follows will seem contradictory. That’s to be expected. Not every piece of advice is applicable for every company. For some, pruning quickly and dramatically is a necessity, especially for companies in cyclical markets that might take years to recover. (A homebuilder that hasn’t cut back on land purchases would be foolish, for example.) For others, a solid balance sheet and a knowledge of innovative ideas in the R&D pipeline give managers the confidence to invest for the long term even as sales are declining. (A profitable market leader can use a downturn as a blunt instrument to club the competition.) This set of guidance, in other words, isn’t one-size-fits all.

Make employees feel appreciated. At a time when raises will be anywhere from tiny to non-existent, companies have to get smart about non-cash compen - sation. One of the best forms of rewarding employees without giving them the one reward they crave most is the simple act of gratitude. Edward Jones, the normally buttoned-up investment brokerage, decided to add more casual days for employees, reasoning that getting people to relax their dress code just might make them a little more confident about their jobs. The St. Louis-based firm, which has more than 10,000 offices across the U.S. (plus 800 more in the U.K. and Canada), also took a less conventional route to saying thank you to its employees: It hired the Ringling Bros. Barnum & Bailey Circus to perform at a company event.

It’s becoming well accepted in the corporate world that another non-cash way to reward the employee who isn’t getting a raise (or worse, a pay cut) is to let her do something that makes her feel good – on the company’s time. Aflac, the insurance company, grants employees who’ve earned performance rewards days off to volunteer in their community at philanthropies like Habitat for Humanity. There was a time when cash would have been the reward. In tough times, employees aren’t dummies. They’re grateful to have a job and also appreciative of being cut some slack to express their own desire to say thank you by helping the less fortunate. Apparel maker Timberland runs a program called “Path of Service” that grants employees 40 hours of paid time off each year for such volunteering. It’s an easy model to follow for companies that intend to be around for a while but need to cut costs in the here and now.

Get real. When times are flush companies tend to get lazy in all sorts of ways, particularly when it comes to forecasting. Observe the number of sales leads in the pipeline and generate a forecast. Easy. Now, not so much. Shrewd companies need to be vigorous about what the year ahead holds. For companies facing a weak outlook but who are blessed with strong cash flow or a healthy balance sheet an obvious cost saver is staring them in the face: reduce debt. Many companies borrowed on favorable terms in the easycredit days between the crash of the Internet bubble and the housing market’s collapse. When it comes time to re-finance that debt, costs likely will be higher. One way to head off that expense hit is to slim down the debt load now.

Trim, don’t fire. Tempting though it is as a quick fix, firing valued employees can be the worse thing a company can do for its future value. Reducing or elimi - nating bonuses, cutting salaries, removing perquisites and even revoking job offers all may be preferable to pulling the rip cord on a person who had made – and will continue to make – a contribution to the enterprise. Those fixes involve compensation, but the powerful consulting firm Bain & Co. reports that 50% of costs for most businesses are associated with purchasing, namely raw materials. A rigorous attack on materials costs will reduce expenses without involving the human resources department.

Discover substitutes for travel. The second most obvious area for cuts, after eliminating jobs, is to cut back on travel and entertainment. Every company facing declining sales or even weakening growth must cut “T&E.” Yet it’s as important to consider alternatives, given that seeing and thanking customers, partners and suppliers is the lifeblood of much of business. Videoconferencing, once a Jetsons-like dream, truly can take the place of many trips today. For one-on-one chats between people who already have a rapport, companies can avail themselves of the lowest-end video communi - cations programs like Skype or Google’s new video chat service, both of which are free. These merely require relatively inexpensive web cameras connected effortless to personal computers. For higher-end users – consider numerous meeting attendees, perhaps in multiple locations – sophisticated equipment like Cisco’s TelePresence and Hewlett-Packard’s Halo systems require big upfront investments but can quickly pay dividends in terms of skipped journeys.

Squeezing the most out of trips that must go on. This will seem draconian, but increasingly some companies are asking employees to double up on hotel rooms, especially at large companywide or divisional meetings. Think of it as a corporate slumber party. American Express Business Travel, the credit-card company’s giant travel agency, reports that this is a growing phenomenon. It also sees clients pushing an even more drastic solution to the high cost of business lodging, especially in major cities. Some companies are encouraging their workers to bunk whenever possible with friends and relatives, a trend known as “couchsurfing.” Such accommodations may be less convenient or comfortable than a centrally located hotel. But there are obvious advantages, for employees as well as companies. Travel writer Julie Moline, in an article on the web site WomenEntrepreneur.com, offers a tip that should hearten the put-upon couch surfer: Many employers, says Moline, are happy to pick up the tab for a thank-you gift or a fancy meal for their employee’s host – provided the cost doesn’t negate the saving of the hotel room. Aggressive thinking on sharing rides to and from airports, buses over taxis and so on are other obvious cost-cutting moves that are likely to generate grumbling but could save jobs.

Get the whole company to think like an accountant. This hearkens back to Sequoia’s admonition to CEOs that they spend each dollar as if it were their last. Employees also need to spend the company’s money as if it were their own. Consumer products king Procter & Gamble, for example, ties all corporate bonuses to the company’s bottom-line performance. That system under-rewards over-achievers, of course, but it does make everyone with spending authority think twice about wasting money by making budgets a personal matter.

Allow employees to excuse themselves from the table. This will seem counterintuitive at first, but some companies are getting clever about paying employees not to work. Zappos.com, the Las Vegas-based online shoe store, has instituted a radical policy: It offers all new employees $2,000 to leave the company within their first two weeks. Co-founder and CEO Tony Hsieh says the payment, which about 2-3% of employees accept, is a small amount to pay compared with the expense of trying and failing over a matter of months to integrate someone who isn’t going to fit. Most companies offer severance payments to laid off workers, of course, but the Zappos idea is a good corrective measure for the hiring process and could be expanded in a number of ways by other companies. Workers who aren’t happy because they aren’t making a good contribution just might be better off hustling out the door with a little cash in their pockets. In a different approach, innovative airline JetBlue offers a voluntary leave program that gives crew members unpaid time off but allows them to maintain seniority and benefits. The airline effectively reduces expenses by furloughing personnel that most want – and can afford – the time off without diminishing the talent pool for the future.

Go on the offensive. Finally, here’s one last contrarian idea that won’t directly involve cutting costs but will advantageously position a strong company: Spend money on the right things in a downturn, namely retaining good people and developing new products. Listen to what Apple co-founder and CEO Steve Jobs told Fortune Magazine when asked how the computer and gadget maker would handle a coming downturn.

“We’ve had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren’t going to lay off people, that we’d taken a tremendous amount of effort to get them into Apple in the first place – the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that’s exactly what we did. And it worked. And that’s exactly what we’ll do this time.”

Not every company has the strength to act like Apple. If only every manager had an iPod or an iPhone on the drawing boards in an economic downturn. But every company can focus on what is most important and take intelligent steps that will leave it well positioned for the inevitable upturn. It will come. Really.

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