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?”

According to a study conducted early this year by Mercer Management Consulting, a New York City-based corporate strategy company, the average downturn lasts about a year, with the economy receding 1 percent to 2 percent. Still, it’s incredibly difficult to judge when a downturn will right itself.

“The challenge is that you can see a downturn coming, you can know you’re in one, but the duration and depth vary,” says Robert Atkins, vice president of Mercer and coauthor of the study. “A CIO’s steps and strategies need to reflect this uncertainty.”

When a recession takes hold, most managers instinctively reach for the lever marked “10 percent cut across the board” and hunker down, Atkins says. They order layoffs, hoard cash, delay product development and wait for tough times to end. If they’re lucky, he says, that’s what their competitors will do. What successful managers do, however, is start to prepare their transition to economic good times. They can do this by becoming indispensable to their customers and by cutting costs carefully rather than impulsively. “The challenge during a downturn is for IT to work on improving processes and automation,” says Shanti. “You have to make an investment during this time to prepare for an upswing. When that comes, if you’re not prepared, you can be very inefficient.”

Despite moderate pressure to cut costs, Shanti is using the current slowdown to automate his supply chain and inventory processes. The project is an example of Shanti’s mantra of management: Always improve efficiency and plan ahead. Every five years, Shanti meets with senior management and creates a five-year strategic plan that focuses on using IT to improve efficiency in every aspect of the organization. These plans, he says, are the best way to be prepared for possible downturns.

“In the auto business, we expect downturns every three years, so we plan for that,” Shanti says. “It just so happens that in the last 10 years, we had a boom that didn’t stop. But that didn’t keep us from planning for a downturn.”

Shanti thinks the current plan will hold up as long as the slowdown doesn’t turn into an outright recession. If that occurs, all bets are off and IT goes back under the microscope. “Then you have to look at your top 10 priorities,” he says. “Numbers eight, nine and 10 will probably be pushed out until 2002. If it becomes a recession, you must cut spending, and everything from operations to priority projects has to be reshuffled.”

Shanti and his team reevaluate their strategic plan every year. “If we didn’t do that last summer we’d be in bigger trouble right now than we are,” he says.

Get Organized

Last fall, when the economy was still good, CIOs around the country sat down to draft their budgets for fiscal 2001. Then, within weeks, resources became scarce and suddenly there wasn’t any money for a percentage of projects that had received funding in the planning process. No one likes giving up on projects, but you have to do it and do it right.

At Roadway Express, CIO Obee recently established a program management office that oversees all the company’s large cross-functional projects scheduled for the next nine to 18 months. All information for each project, from expected benefits, projected costs and ROI, is filed together. This means that if Obee needs to pull the plug on an initiative, he doesn’t have to guesstimate the consequences.

“We can do ’what if’ analyses,” Obee says. “We take two or three projects and see what happens if we defer them or eliminate them and see how it affects the overall picture and if it will help us return to the bottom line.”

The project management office makes it easy to spot projects that don’t warrant the use of scarce resources, Obee says, and it helps prevent his staff from wasting time working on projects that aren’t feasible.

Protect Your Flank on the Business Side

Alignment is important all the time, but it becomes even more critical during hard times. Business-side executives will ask questions about cutting costs and improving efficiency while maintaining performance, and CIOs need to know how to give good answers.

“It’s important that you help the business side understand how your initiatives will help the company and what needs to be done for them to succeed,” says Textron’s Bohlen. “At meetings, listen twice as much as you talk, and then explain your problems and needs in terms of how it will affect the business.” One thing CEOs are looking for from their CIOs is responsiveness, Bohlen says. “You have to be aggressive when it comes to making decisions like delaying or pushing off a key project if the market has changed. Be quick to react and be willing to stop and start. It shows you know how to generate growth. It’s hard when you’ve had 20 people dedicated to one project and you have to change direction. But you have to be responsive to survive. Denial won’t do anything for you in the long run.”

For alignment to improve, Bohlen says, it’s essential for CIOs to put themselves in the CEO’s shoes. “Get out on the production floor for a few days and walk a purchase order through the entire process so you understand what’s working, what’s not and whether something like a new supply chain system or an organizational change is going to fix it,” he says.

The Customer Comes First

When resources become scarce, the customer feels the pain. Lower levels of staffing can adversely affect customer service. CIOs say that during downturns they often feel a greater demand on their time from internal and external customers, but have to balance available resources with acceptable levels of service. Now is the time to examine your approach to your external customer base regarding profit levels. But don’t make rash decisions about customer relationships without thinking hard, says VerticalNet’s Talaber.

“Don’t have knee-jerk reactions,” Talaber advises. “Don’t react to users and customers without understanding the business model and what the desired results are. For example, if an internal user is pushing for you to complete a project that’s not on your product roadmap, and they divert the attention of people in your group from working on projects that are on the roadmap, keep yourself focused. Don’t be pushed around.”

In good times, all customers are good customers. But during a recession, it’s time to look at which customers are profitable, says Atkins of Mercer Management in a report titled “Bring on the Recession.” “Should a recession hit, your best customers typically provide an even greater share of your profits. Your worst customers typically become value destroyers. So cull your portfolio and cut out your weakest market segments.”

Once you’ve identified your best customers, reach out and “kill them with kindness,” Atkins says. Do what you can to make their lives easier by easing payment terms, adjusting offers and lending staff to help with problems. This can reinforce your status as their supplier of choice, and they will repay you with loyalty.

Roadway Express’s Obee, however, vehemently disagrees with Atkins’ advice. For him, and for many other CIOs, there is no such thing as a bad customer, particularly when the economy is rattled.

“Any company that knows their costs and profits the way they should will say this isn’t a time to dump customers. It’s just the opposite,” Obee says. “If you’re going to find unprofitable parts of a customer’s business with you, it should be done during good times, not bad.”

During the past three years, Obee’s department built a data warehouse to manage Roadway’s customer information. Every transaction with each customer is recorded and broken down. For example, Obee can look at any particular customer and see whether or how often they use Roadway’s international or time-critical shipping services. If there are services the customer isn’t using, Roadway’s sales force can jump in. By working with customers to maintain business connections, there is less need for culling unprofitable customers.

“You can’t look at any customer as a monolith based on a cost composite,” Obee says.

IT’S MACHO TO SAY one relishes the challenge of difficulty, but let’s be honest: Hard times are not fun. They are, however, here, and you’ve got to deal. The critical question is what shape you and your company will be in when the hard times are over.

“Each downturn is an opportunity for CIOs and their departments to rally around a common cause, to demonstrate pride in teamwork, to put in long days and nights, and to make some difficult decisions,” Obee says. “In every problem and challenge there is learning and opportunity.”

And when hard times are over, you may just find yourself in better shape than you were before.