Founder in Eleven

Many pundits have predicted 2023 to be a recession year.  Whether the recession comes or not, the threat of a recession will often scare many companies (including clients) to seek reductions in spending to prepare for a recession with employee layoffs.  The combination of clients reducing spending and client employee layoffs (it is hard to justify consultants while laying off employees) will lead to reduction or removal of external costs/consultants with the delay or cancelation of projects.  Technology Services Group (TSG) went through recessions in 2002 and 2008.  This post will share that experience along with thoughts for founders anticipating headwinds in 2023 and considering layoffs.

The 2002 Recession and TSG Layoffs

2002 was a difficult year for TSG, and the only year in TSG’s history where TSG lost money.  Whether from our inexperience or my own inflated ego, TSG incorrectly assumed we had missed the negative effects of the dot.com collapse since most of our work was in life sciences.  After September 11^th, TSG had our best months ever in October, November, and December of 2001.  Unfortunately, the headwinds of recession had many of our clients cancel projects starting in January, and we saw our revenues cut suddenly in half (at the time, TSG was about 50 employees).

In April, when I finally acknowledged that the trend of revenue reduction was going to continue throughout 2002 and we had lost a significant amount of money, we initiated layoffs of approximately 15 of the 50 employees.  Whenever I am asked “What was your worst day at TSG”, I would always say it was the Monday we laid off our employees.  Some of the lessons learned:

• Layoffs are brutal for company culture – With a small company like TSG, employees are not only co-workers, but friends. An employee watching his friend be laid off can bring hard feelings. Layoffs also reduce the trust between employees of the company and the management team.
• Growth is easy, shrinking is hard – During the TSG growth stage, we would hire many employees at once without considering sales forecasting or timing hiring decisions to meet the growing sales demands of the dot.com boom.  After the layoffs, when TSG and the market was shrinking, we had to work hard to convince employees to stay, fix our line of credit with the bank, and encourage clients to continue spending. The 2002 downturn forced TSG to make difficult decisions about sales forecasting, financial management, and hiring decisions going forward, all the while struggling to retain our employees and clients.
• Keeping the remaining employees is hard – Employees that are not laid off often start looking for jobs, since layoffs are often seen in “waves” where second round layoffs are coming.  I often tell the story of how, after the layoff, I would ask someone to stop in my office for a routine talk and could see in their eyes that they were scared that I was going to let them go. We did everything we could to convince our remaining staff that there were no more layoffs coming. Employees that are not laid off are also often recruited by former colleagues to their new companies. Ex-employees have a recruiting edge as they can highlight how their new job is better than working at TSG based on their experience.

For TSG, to avoid the second wave of layoffs, we initiated a salary reduction where we cut most by 50% to get through the downturn.  We also indefinitely delayed some new college hires that were scheduled to start in September.  In the first 6 months after the layoffs, we lost approximately 15 additional employees who left for other jobs.  By delaying college-hire employees, we had a more difficult time the following years with college recruiting.

TSG Recovery: 2003 – 2008

From 2003 to 2008, TSG (though smaller) was more profitable, and when celebrating our 10-year anniversary in 2006, could say that we had learned many lessons from 2002:

• Sales Forecasting: pre-2001 during the dot.com boom, with so much demand, we took new sales for granted.  We formalized our processes in 2002 and beyond to better forecast the future.
• Hiring and Staffing: we got much more formal in our hiring and staffing processes.  While we continued to “embrace the bench,” we didn’t overfocus on growth versus profitability.
• Hiring and Firing: TSG got better about quickly making hiring and firing decisions in a professional and methodical manner. TSG focused on respecting the individual when being let go and worked on helping the employee make a transition to their next job without having blowback on the culture of TSG (see our post on “how to fire employees respectfully”).

The 2008 Recession:  Avoiding Future Layoffs

Remembering our tough 2002 experience, TSG avoided layoffs and delaying September hires in 2008.  Given our less billable hours, rather than lay off 20% of our people and deal with the blowback we experienced in 2002, we decided to ripple a 20% reduction in salary and 20% reduction in work, opting for a 4-day work week for all staff.  We were surprised to see that:

• All of the employees rallied together to embrace the idea so as not to go through layoffs, particularly the employees that were with TSG in 2002.  During the process, we communicated how hours were trending to avoid the concern that the reduction of work was just a first step to layoffs.
• Many of the employees, particularly the new hires, embraced the 4-day work week and were somewhat disappointed when it ended.

 Summary

Layoffs are brutal for founders, company culture, and the retention of key employees.  In 2008, for TSG to avoid layoffs, we relied on better sales forecasting, a focus on profits, and smart hiring/firing decisions with some concessions on our current employees to work and get paid a little bit less.