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.

Hire Contractors

Like many CIOs, Utilicorp’s Paper staffs for a baseline, not a peak, by using the minimum number of employees necessary to keep her department productive. She says that by hiring consultants and contractors as a percentage of her staff, her department is safeguarded in the event of cutbacks. If cuts are needed, she can dip into the consultant base rather than her full-time staff. Knowing this, her employees feel more secure, and that in turn improves morale.

Robert Obee, CIO of Roadway Express, a trucking and transportation company headquartered in Akron, Ohio, planned for a downturn when creating his staffing plan last October. When times were good and the temptation was strong to hire permanent staff at a lower cost than contractors, he made sure that 15 percent to 20 percent of his slots were filled by contractors. When budget cuts were mandated early this year, he cut about 20 percent of the contracted staff.

"When it was necessary to share the financial burden with the rest of the company in reducing personnel-related costs, we were able to do that without impacting our permanent employees," Obee says. "We did that by going through our portfolio of contracts and deciding which contractors would least impact projects if they left, and those were the ones we let go."

Staffing with consultants and contractors is fast becoming a common way of doing business, particularly in the IT parts of an organization, says Bain & Co.’s Rigby. "It can be a very effective way of managing because it adds greater flexibility," he says.

Train for Versatility

For Richard Talaber, CIO of Horsham, Pa.-based VerticalNet, a business-to-business marketplace for vertical industries, the most efficient way to handle staffing is to focus on training and retention. In January, VerticalNet laid off 150 people, but the cuts didn’t significantly affect Talaber’s department, primarily because VerticalNet has acquired 22 companies since mid-1998 and desperately needs every one of its IT staffers to help integrate the new systems. Still, Talaber is working with his staff to optimize their skills and reduce redundancy. For example, if someone is hired to work the help desk, Talaber will also train him to be a Web engineer or a systems administrator. The employee will be taught problem solving and networking, and he will get his Microsoft certification, which increases his value to the company.

"That way, when they’re ready and a position is open, we can move them up from within," Talaber says. "That flexibility can help you move from being oriented toward break-and-fix kinds of situations to planning strategically for things like change management. Optimize what you have."

Cross-training employees also means that Talaber needs fewer staff members and if a certain project is delayed or cancelled, staff can be shuffled according to their skills. This is another way to avoid layoffs.

Think Twice Before Outsourcing

There are many benefits to outsourcing. It can be an effective solution to mandated budget cuts. But it’s not something to leap into immediately, especially during a downturn, says Andrew Bartels, senior research analyst for e-commerce at the Giga Information Group.

"It’s not a good idea to start thinking about outsourcing right now," Bartels says. "Outsourcing has too many issues around it for CIOs to do it quickly and right. The odds are that if you go through with it, you won’t be able to outsource in a time frame that’s meaningful. Once you do the due diligence and think it through, you’ll be 12 months down the road, by which time the economy is hopefully picking up. You might be ready to outsource at just the wrong time."

According to Bartels, outsourcing is a "quick hit solution" that often produces adverse consequences. The odds are high that if a CIO tries to rush through this kind of major decision, he will end up paying for it in the long run. Even if you do it right, says Bartels, you might not get the savings you want in the time frame you need.

Time to Renegotiate

Remember, you’re not alone. Outsourcers are also having a tough time. So if you’re already engaged in an outsourcing initiative, now is a good time to renegotiate price and service. In March, and continuing through April, Novara Comp Services, a Westbury, N.Y.-based IT services provider, halved its hourly rate to better "combat the downturn in the market." American Axle’s Shanti renegotiated contracts with EDS Corp. and Compuware and built in a flexibility option so that he can increase or decrease the number of contractors in his department depending on his current need.

"If the economy really tanks, we can react very fast to changes," Shanti says. "That’s the ultimate relationship to have in IT?flexibility."

Strengthen Your Processes

Times change. Where once CIOs were asked to create new systems for new e-business initiatives, now they’re being asked to cut costs while maintaining good customer relations. To properly handle such demands, the best thing to do is reevaluate the strategic position of your department in relation to the company as a whole, says Ken Bohlen, chief innovation officer and executive vice president of Textron, a Providence, R.I.-based developer and manufacturer of automobiles, aircraft, and financial and industrial products.

"Manage the business as it is right now," Bohlen says. "You have to take a step back and not get overwhelmed. Think about the programs you have. When your company emerges from the downturn will you have the programs you need, or will you need to regroup and refocus your initiatives?"

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