IT Leadership: Best Practices for Surviving an Economic Downturn

IN 1999 WHEN ABDALLAH SHANTI, CIO at American Axle & Manufacturing, created a five-year strategic plan, his company was enjoying the same boom as everyone else. The Detroit-based manufacturer’s earnings were up and Shanti’s budget reflected the company’s profit sheet: fat and sassy.

And Shanti knew it couldn’t last.

"It’s like the Native American saying," he says. "As you prepare for battle, you must plan ahead so that if you are faced with your death, you are not afraid."

Now, amid headlines screaming about layoffs, bankruptcies, and the dire state of the national and global economies, Shanti and his company are sitting tight. Like everyone else, they’re feeling the pinch of reduced sales and a bearlike market, but as of press time, there were no layoffs in sight for American Axle.

So how did they do it?

Back in 1999, Shanti decided against staffing up his IT group with full-time employees, knowing that when the inevitable rainy day came, it would be easier on morale to lay off part-timers. He also negotiated flexible terms with his outsourcing partners, stipulating what would happen if the economy headed south.

Shanti was smart back then, but how can that help CIOs now? Well, the principles behind these strategies reflect widely agreed on best practices.

For IT executives, the shift from boom times to hard times has been particularly difficult. Instead of frantically recruiting, CIOs find themselves faced with mandated staffing cuts. Instead of managing runaway growth (see "Let’s Not Forget the Good Times"), they’re being asked to cut costs. For CIOs who reached the top of their game during the Internet boom, this sudden scarcity of resources, not to mention the pressure from the business side, can be disorienting and even frightening. Pressure and fear can lead CIOs to make hasty?and bad?decisions. "When it comes to this downturn, executives are headed toward short-term, rash decisions that appear to make sense but eventually damage their competitive positions and financial performance," warns Darrell Rigby, a director at Bain & Co., a Boston-based global consultancy.

Opinions vary regarding the best ways to manage during hard times. Some say a downturn is a great time to consider outsourcing, while others say it’s the worst. Some argue for immediate cuts across the board; others suggest it’s better to examine processes and projects in order to trim fat, not internal organs.

What’s best for one company may not be ideal for another, but after speaking with many IT executives coping with these hard times, we have assembled some best practices for managing during an economic downturn.

Resist Layoffs

If you’re thinking that layoffs are a quick way to solve budget problems, you’re not alone. A survey of 100 senior-level executives at Fortune 500 companies conducted by Bain & Co. in January found that almost 40 percent said they were likely to implement layoffs in a downturn. The survey found that "though managers publicly praise employees as their most valuable assets, executives are almost twice as likely to lay off employees as they are to dispose of physical assets."

But just because lots of managers are cutting staff doesn’t mean it’s the right or the smart thing to do. In some cases, layoffs are indicators of a sick organization that doesn’t know how to handle people, says Kris Paper, CIO of Utilicorp United, a Kansas City, Mo.-based electric utility.

"I never want to get into a layoff situation?people wouldn’t want to come here," Paper says. "Layoffs are unfortunate and sometimes unavoidable, but they indicate that business triggers along the way were missed, and that’s how companies get into that situation."

If You Must Lay Folks Off, Do It Right

There are, of course, situations in which layoffs are inevitable. For Randy Weldon, who left his job as CIO of Geneva Pharmaceuticals in April, the specter of layoffs appeared after his company, a Broomfield, Colo.-based subsidiary of Novartis, dropped prices on its generic drugs in order to preserve market share. Weldon’s department was one of the first places to feel the sting; his bosses called for a 30 percent cut in staff. While far from thrilled at the prospect of having to manage a layoff, Weldon used three principles that got him through a similar situation when he was director of application development at StorageTek, a Louisville, Colo.-based data storage company.

1. Communicate early and often. "People hate surprises," Weldon says. "They get scared if they find out the wrong way."

Weldon holds regular department meetings to keep his staff informed of what’s going on in the company. Communication is vital, he says, but what’s most important is that you tell the truth, no matter how difficult it may be.

"People are so afraid to tell the truth, but if you do it the right way, your staff will respect it," he says. "I try to put a good face on the situation, but I always tell the whole truth. Give them the positive and the negative, and keep them up to date."

2. Try to limit the damage. It’s the CEO’s job to decide when and where to cut, but she won’t always be aware of how those cuts can affect the rest of the company, says Weldon. Help the CEO and the senior management team understand the exact nature of the demands on your department and how reducing the number of people available to answer those demands could affect the bottom line.

"CEOs typically want to make big cuts," Weldon says. "I went to senior management and let them know that the demands on my department were going up, not down. They needed to see that there was a need to hold my team together longer to support the transition caused by the restructuring, rather than cutting the number of critical employees."

Have a goal in mind when initiating this conversation with the CEO. For example, Weldon went to his CEO to negotiate for retention packages and bonuses to help keep the critical members of his staff on board.

"I made a list of what will no longer be supported when I’ve cut 30 percent of my team, and that scared them," says Weldon. "So they gave my department a higher number of retention packages than any other department in the company."

So far Weldon’s tactics have worked: As of March, only one of his 19 business-critical staff members had left for other jobs.

3. Cut from the bottom up and consolidate. No one enjoys cutting his workforce, but if you look closely, you can find weak spots. For example, Weldon began by cutting through attrition. When his CEO mandated a 30 percent cut from a staff that was still several positions short, Weldon began by looking at people who weren’t meeting his expectations.

"Look at performance problems first. This is hard because if you’ve been doing your job correctly, there hopefully aren’t many people in that situation," he says. "You certainly shouldn’t have more than 5 percent or 10 percent of your staff in that category."

Next, Weldon focused on areas with low-priority projects or tasks that had recently been eliminated. Geneva’s manufacturing department had cut several projects, so he trimmed the number of people who were focused on manufacturing. Then he consolidated. Rather than having several application managers in different areas, he created a position for a manager of applications and application development and filled it from within.

"You have to look at the whole structure when you cut people and make sure you cut vertically as well," Weldon says. "Work with the management team on the project prioritization list and cut a whole team."

After all was said and done, Weldon found himself with 24 staff members, down from 35.

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