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Hard times require leaders to look at the human capital side of the business because it represents one of the largest costs in their economic model. And for those in the training and education business, this can be a particularly scary time as education budgets are often the first to be cut.

Contrary to most firms’ initial reaction to the recession, the two best things to do during a downturn are training and marketing. Even if there is fear these groups will be scaled back, you can use the recession to reevaluate your human capital needs, reduce staff to well below break-even and upgrade the quality of your people with those available from other layoffs. Then, invest heavily in those left and get everyone involved in sales and marketing. What you’re doing is getting ready for the recovery. You’ll have a well-prepared team and an increased mind share. Overall, cherish the temporary downturn as “the pause that refreshes.”

A couple years ago, fearing a recession when the financial markets collapsed, we interviewed several well-known and successful business leaders who had lived through several downturns in the economy. Because most of our clients aren’t old enough to have experienced a recession, including ourselves, we wanted to learn from those who had been there and lived to tell about it. This article will look at some innovative companies and how they made a downturn into an opportunity for the better use of better people.

Downturn as Opportunity

Cherish a downturn. Most business leaders, tragically, fail to find the time to re-evaluate what’s going on in their company and what they’re doing. This has been particularly difficult during the Internet era where time seems to have become our most precious and scarce resource.

In the early 1970s George Naddaff, founder of Boston Chicken, had a company that was building day care centers called the Living and Learning Schools. He had built about seventy of them. They were beautiful and the company was doing well. Then in 1973 interest rates jumped to 22%. All of their buildings were financed, of course, and they were on variable mortgages. Overnight the company was in trouble.

However, it turned out to be good because of what Naddaff now calls “the pause that refreshes.” Instead of continuing to run downhill at 90 mph, he had to stop and rethink everything they were doing. Rather than continuing to build, he changed the direction of the company and began franchising the concept.

That might never have happened if the slowdown hadn’t come along when it did and made him rethink the business. When you’re running too fast, you never find time for the luxury of taking a good look at what you’re doing. Cherish a downturn and use it to re-evaluate.

One-Minus Staffing

Now is the time to get lean using what Bill Gates calls “one-minus staffing” (one of the reasons Microsoft averages $250,000/employee in profit). Figure out the bare minimum number of people you need for a project or area or for the entire firm, cut to the absolute muscle and bone, then take out one more. This keeps everyone laser-focused on priorities and actually reduces the complexity of what they’re doing since there are fewer people involved. Then take part of the savings on wages and give raises to those who are left or reassign people to launch new initiatives that will be valuable as you come out of the recession.

If you’re going to make cuts, do it quickly and deeply. Warren Avis, legendary founder of Avis Rent-a-Car, would never wait until tomorrow. He would cut back in any month that was bad. Waiting too long drains valuable resources you could be using to invest in the remaining team and marketplace.

You also want to cut deep enough so you won’t have to do it again. In bad times, people become afraid of losing their jobs, which can impact performance. So make the changes now, then gather your people together. Let them know you’ve cut deep enough and that you’re committed to keeping them employed if you can and that you need their help. “That’s one of the secrets when a downturn comes. If you’ve kept the quality people, you can gather them around the table and look at the options together,” notes Norm Brodsky, founder of six businesses, one of which made the Inc. 500 three years in a row and another which made Inc.’s 100 fastest growing public companies list.

One Great Person Replaces Three Good

What do IBM in 1914 and the Container Store in 2001 have in common? When Thomas Watson, Sr. joined a failing conglomerate called Computing-Tabulating-Recording Co. in 1914, the first thing he did was borrow money to fund in-house education programs, abolish piecework, spruce up factories, and pay above-average wages at all levels. Focused on human relations, but lacking additional funds for generous benefit plans, he staged picnics complete with a band and theme song to boost morale.

Speed ahead to 2001. Fortune Magazine chooses the Container Store (a retailer!) as #1 of the “100 Best Places to Work for in America” for the second year in a row. Keys to their success include 185 hours of training the first year (versus an average of 7 hours for the industry) and above-average wages. Their fundamental philosophy is that one great person can replace three good people. I find it fascinating that these two industry leaders, at radically different times, placed their bets on training and above average wages. 

Again, cut deep enough so you can take half the savings from the one-minus staffing approach and re-invest in wages and training, then pocket the other half to boost profitability or invest in sales and marketing. Or borrow money, if you can, and do the same!

NOTE: Check out the Container Store’s website www.containerstore.com and click on “Careers.” Scroll down and you’ll see their history (started 22 years ago, still owned by Kip and Garrett, $194 million last year, growing 20% per year) and a great list of things a company can do to make their workplace the “Best” place to work. This is a site worth viewing. If a retailer of organizing tools can do it, all of us can do it. Get your economic models cranking so you can do twice as much with half the people and then pay them more.

Every Tuesday Night

The Oct 16, 2000 issue of Fortune magazine had an excellent article “Behind Every Great Man is a Great Manager” about Ben Horowitz, CEO of Loudcloud. Their founder, Marc Andressen, clearly states he is not a manager and was looking for one when he turned to Horowitz. He knew Horowitz was a great manager from their days together at Netscape where Horowitz ran the directory and messaging departments, among Netscape’s biggest and most successful groups.

To quote Fortune, “Horowitz’s goal at Loudcloud is to groom talent that can deliver. To this end, every Tuesday night he hosts a career-development meeting for top managers, where he leads discussions on such topics as ‘Management 101: Managing at Loudcloud’ and ‘Management 102: 1001 Ways to Keep Your Employees Happy.’ This is basic education, but in the Valley it’s almost revolutionary stuff. ‘Most of the managers are here for the career-development part of working with Ben,’ says vice president of marketing Scott Dunlap, a former Netscape intern who followed Horowitz to Loudcloud. ‘I can’t tell you how devoid Silicon Valley is of career development.’”

To facilitate this career development, Horowitz instituted weekly meetings every Tuesday night. These helped focus on success and tackle problem areas before they became problems.

Fortune continues, “The Tuesday night meetings are MANDATORY; Horowitz isn’t letting his managers slack off. ‘I have a lot less tolerance for manager incompetence than I do workers,’ says Horowitz. ‘If an employee is having trouble in his personal life and is not producing like they used to, I give them leeway. If a manager starts slipping, I remove him. He won’t be a manager for long. Not here.’”

Clearly, Horowitz understands the need to take an hour each week to grow management. And the top managers participate—this isn’t just for mid-level and frontline managers. Just taking that hour can be invaluable.

Fewer People Trained More

Fewer people, trained more with higher wages focused on sales and marketing and operational excellence, can make a huge difference. Great advice anytime, but particularly useful during a slowdown. Cherish this opportunity to reevaluate what you’re doing, keep and recruit only great people, get wages up and train, train, train while you have the time. Then get ready for a great second half of 2001.

Verne C. Harnish is the founder of Young Entrepreneurs Organization (YEO) and creator and chairman of the MIT/Inc./YEO “Birthing of Giants” executive program. He is also the founder and CEO of Gazelles, Inc., a corporate education company for fast-growth, mid-size firms.

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