Tuesday, 10 February 2009

Turnaround Tasks No. 2 - Letting People Go

Back in December I wrote this post Turnaround Tasks No.1 - Get The Cash In. My reasoning in putting this first was that experience tells me that small businesses have a tendency to manage cash rather poorly. It is of course an absence of ready cash that will kill any business.

Just fixing poorly managed cash flow will not in itself save your business however if demand is dramatically down, prices are collapsing or your market is in the process of going through a structural shift away from you. It will buy you some time and give the ability to structure the business for survival. Without cash being crisis managed and the whole enterprise run for cash you will have no time and no future, but attaining any future will require the next painful steps.

Once of the first Positive Churn posts I wrote was You Can't Grow Your Way Out Of A Hole. This sums up the approach I commend to you. If demand is down, dramatically, structurally, permanently (as far as you can see) you have to take the fixed costs of the business down to a level that leaves you cash positive and profitable on current demand. Accept it. Live with it. Get on with it. Shrink to survive.

Yes you will need to look at your portfolio, pricing policies, customer base, purchasing, cost engineering... and more and yes you WILL do all these things in due course but first and foremost you have to look at your people costs, and they will have to come down. Its not great. Its not pretty. But if you are a small business and the burden of the unemployment figures is not your problem. If you don't have the work you don't need the people.

The reason you need to look at this early in the Turnaround process is that (as I have written before) there is (here in the UK at least) a raft of statutory obligations that you must adhere to. Otherwise all your efforts will be in vain and you will go out of business for losing a wrongful dismissal case to a smart non win no fee outfit in an tribunal. Not clever and easily avoided.

This takes time.

I am not going to go into the statutory details here. There are good sources of information in these locations:

Business Link

I suggest reading all of them and if you are in any doubt about your obligations take legal advice. If you are a member of the FSB or other organisation that can offer help then it is worth seeking their advice.

The problem you have is understanding how deep to cut. I am deliberately writing about Turnaround situations. Businesses in a "do something very soon or die very soon" situation. My advice is structure for survival first in the short term (1-2 years) and a stable, workable structure that is affordable and gets the cutting done in one session. Companies that cut, cut, cut and cut again as they flounder about trying to get it right frequently suffer from an intellectual exodus. It frightens away the talent you need to keep. Think about this.

But also think about this:

The rule on these things is Cut Early and Cut Deep.

One CEO I know well said to me "It if doesn't hurt it isn't deep enough!"

And think about the big beasts around you. Do you need all those Directors? Do you need all those managers? Don't automatically cull the little guys and leave the expensive bodies standing. In a turnaround you need to shift the balance towards do-ers. Think like a Receiver. They look at a workforce on day one with a view to shedding every bone of resource that is not simply engaged in getting the goods out the door or the cash in. Be hard on yourself.

You should also look at your contract of employment and terms and conditions. Companies typically hire more people than they need when times are good and let the contracts fatten. You may well have scope to trim back the contract and the benefits, if only in the short term as a temporary measure. Decide this at the same time as formulating the restructuring and have one big bad dialogue with your people and get it all over with in one go.

Be straight, be open be honest. If it is do this and survive vs don't do it and die you will find that pragmatic realism kicks in.

Not nice. Not easy. But necessary.

Turnarounds are tough. That's why so many don't make it.