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The New Normal

Local small businesses make the most of limited resources.

The New Normal

By many accounts, the economy is slowly rebounding. But some companies that made it through the last couple of years had such close calls that they will be rebuilding their reserves for years. Many are still experiencing the trickle-down effect of the beating their customers took.

“Our industry, RFID technology, took a big hit in general,” says Lynn Richardson, CEO of GateKeeper Systems, Inc., in Eagan. “In our case, our main customer base is airports, and governmental bodies have reacted more strongly to this recession than anything else I’ve seen. City governments just shut down. They cancelled contracts and stopped long-standing construction programs. One of my customers went through a 25 percent head-count reduction.”

So 2010 is a year in which many businesses will need to make do with fewer resources. In 2009, they might have laid off workers, clamped down on travel, put off buying equipment, or pursued invoices aggressively just to make payday. But many of the ways businesses are conserving resources will continue to benefit them going forward.

“We’re seeing an increase in business . . . which is great news,” says Darlene Miller, president of Burnsville-based precision machining company Permac Industries, Inc. “But we’ll continue to do what we’re doing to save money, even if [the economy] goes back to where it was in 2007. We’ve learned to be smarter.”

“I’ve learned a lot in this process,” agrees Kris Kowalski Christiansen, COO of St. Paul–based grocery chain Kowalski’s Markets. “We definitely want to be able to come out of this recession as soon as possible. But that’s just because we want a healthy company. It’s not necessarily because we want to go back to the way we were.”

We spoke with Twin Cities–based small businesses about the changes they have made in three key areas: finance and operations, human resources, and their online efforts. Tough times have tested the mettle of these firms. But in every case, the long-term benefits seem likely to be significant.

 

Mind Over Money

Small-businesspeople are laser-focused on cash flow and expenses.

With customers still skittish, it’s been tough for businesses to make enough money to cover expenses. Raising prices seems like a logical answer, but in reality, it’s not that simple.

“Actually, if anything, we’ve lowered our prices,” says Sonia St. Charles, CEO of Davenport Group, a storage area network purveyor in Shoreview. “That’s just where the market was going. Some of the larger supplies we compete against were using the opportunity [of the recession], because they had more cash, to gain market share. So if anything, our margins have been shrinking during this period of time.”

Instead, she says, the company has been examining its spending in detail. Anything not directly related to serving customers was a candidate for the chopping block: payroll processing, printing, accounting services.

Miller says her facility has learned to creatively reuse or make needed tooling rather than automatically ordering new parts. And it has renegotiated many of its contracts with suppliers.

“We’ve done a lot more partnerships,” she says. “You know, ‘You give us this price and we’ll guarantee that we’ll stay with you,’ that kind of thing. It’s kind of the same thing our customers have been negotiating with us. It has worked well for everybody, because our vendors are in the same situation we’re in. They want loyalty, too.”

Many companies make the mistake of thinking of utilities and other operating expenses as fixed costs, Christiansen says. But by meeting with industry experts, businesses might be able to cut those costs after all.

“For instance, we called in electricians and [representatives from] our local utility companies, and we had them walk through our stores with us and talk to us about areas where we might be losing energy,” she says. “We discussed different lighting scenarios, like turning the lights down at certain times of day. We’ve saved some costs like that. And we looked at cell phones for our management: Were we getting the best deals, were we using them effectively and efficiently, and what changes could we make? You end up saving dollars when everybody’s focusing on things like that.”

Leases aren’t a fixed cost either, as AirCorps, LLC, found in 2009. The heating and air conditioning contractor and metal fabricator moved from Plymouth to a new location in Roseville and got one-third more usable space for less rent.

“Our old space was class B+ space, which is nice, but we’re a mechanical contractor,” says president Maggy Kottman. “Plus, our manufacturing needed more room. So we looked around for really good-quality light industrial space. It’s silly to have office space you’re not using.”

Gatekeeper’s Richardson says that his company renegotiated its phone service and started cleaning its own office rather than paying a contractor. He cut out all travel that wasn’t related to sales. But when it came to cutting software purchases, he drew the line.

“We’re a software development company, so if we’re going to be down 20 percent in development capability [because of job cuts], we had to try to find ways for the existing developers to be more efficient,” he says. “I really tried to just do things that weren’t going to impact our long-term capabilities.”

Sometimes, no matter how many expenses you cut, it’s still a challenge to pay the bills. Kottman has kept her company’s cash flowing by watching work orders like a hawk. She meets with her CFO and office manager weekly to review everything that affects money coming in and going out.

“You’ve got to get out there and remind people that they do need to pay you,” she laughs. “The bottom line is, bad news or good news, we’d rather know it weekly, consistently, and with open communication, rather than hoping the check comes in next week.”

Perhaps most important is making sure customers have the ability to pay on time and in full, she says. “In the construction end of our business, which is the hardest hit, we look at the general contractors who have hired us and make sure they’re people that we’ve known for a long time and who have good credit,” Kottman says. “But we also look at who they’re doing the job for, because if they don’t get paid on time, we may not get paid on time, either. So before we accept a job, we look at who is paying our customer and find out if they are healthy.”

Many small businesses depend on lines of credit for their cash flow. Many, too, are paying back loans. Despite talk about credit being unavailable for small businesses, many local companies have found that their banks are friends, not enemies.

“I’ve had a good relationship with the bank,” Richardson says. “I’ve been able to work with them and get a different interpretation on our line of credit covenant. Instead of traditional receivables financing, my problem is more a problem of the length of time from when I get a contract until I start to meet milestones that are billable. The bank has been willing to work with me and allows me, if necessary, to document the contract that I’ve received. I tell them, ‘I’ve got a signed contract with this airport, and it’s for this amount of money, and here are the milestones, and here is what I think my cash flow needs are going to be.’”

Permac Industries changed banks in the last year. Miller says she’d been having problems with nervous lending officials at her old bank, so she found a smaller institution willing to extend extra lines of credit and renegotiate all of the company’s leases at a good rate. It made a world of difference, she says.

“The key is being communicative,” Kottman says. “We not only talk with our customers to make sure they and their customers are solid, but we also keep in touch with our vendors to let them know if payments are coming earlier or later. Then we talk to the banks to let them know how we’re doing and let them know the timing. If you do that, there won’t be a threat to your cash flow. I know that in these economic times, when people are tense and stressed, they tend to get a bunker mentality and not want to communicate as much—but it’s important to fight that instinct.”

 

People Power

Openess and flexibility make hard work-force choices more palatable.

Layoffs are felt acutely at small businesses, but many companies have had to make them all the same. “We’ve had to cut some payroll out,” Christiansen says. “Sometimes when sales go down a bit, you have to cut your overhead simultaneously.”

Richardson regretted having to let go two of his nine employees in 2009, but it was unavoidable. “We went an entire year without any new customers,” he says. “I saw it coming and had time to put a plan together, however ugly, to conserve cash and reduce expenses. The assumption was that we’d have to make it at least a year with only the income from supporting current customers. That turned out to be fairly accurate.”

It was obvious to employees that the company wasn’t getting new business, so Richardson was open with them from the start. He made the layoff decisions early so he could talk to the remaining employees and let them know he’d bought them a year.

“I had to get that message out, or I was just going to have a bunch of really stressed-out employees,” he says. “Wondering, you know, if tomorrow it would be their turn.”

Permac laid off two groups of workers last year, although it has been able to bring a few back. And the remaining employees also felt the pinch: The company has instituted a wage freeze, cut 401(k) benefits, and increased the deductible on employee health plans.

“You really need to communicate,” Miller says. “You have to tell them the good with the bad, but they need to hear it from you, not through the rumor mill. Our employees were grateful that they had jobs, and there never was any complaining. Their feeling was, ‘We’re all in this together, and we’ll make it better, and when it is, we know you’ll give it back to us.’”

Miller says she has stopped overtime unless customers are willing to pay extra for it, which has improved company finances significantly. “For a long time, I felt we had to do overtime just to keep [customers] happy,” she says. “But it really affected the bottom line. Now we give honest delivery dates, and if somebody wants something rushed, we’ll offer to do it, but we have to charge for it.”

Innovatech Labs, a materials testing company in Plymouth, didn’t have to lay off any of its six employees or cut back hours. But as a precaution, CEO Gary Smith froze wages, promising that if the economy started to pick up, he’d reimburse the employees through bonuses.

“People aren’t stupid,” Smith says. “They know if you’re busy or not busy. But what they don’t know is what your real expenses are. If you don’t communicate with them, they might wonder why they’re working like dogs and they don’t get a salary increase. But if you do tell them what the servicing of the debt is, what rent is, what the utilities are, I’ve found over the years that my employees are more cautious and more conservative about money than I am.”

To offset cutbacks, many companies are instituting “no-cost” benefits such as flexible work hours. “With gas prices high, we implemented a program where the software developers can work two days a week from home,” Richardson says. “We already had the [VPN technology] capability. They don’t have to drive so much, so it cuts their expenses.”

Everyone comes to the office on Wednesdays and Fridays in order to meet and collaborate. The company offers 24/7 support of its systems at airports, but the person on duty can be on call at home and dial in remotely if there is a problem.

Orbit Systems, an IT managed-service provider based in Eagan, lets most of its employees work from home. President Steve McFarland says he tries to assign employees to clients located near the employees’ homes, so that if they need to go on site, their commute is short.

Human resources is Orbit’s biggest expense, but McFarland has kept a lid on costs by maintaining a stringent hiring process, which reduces employee turnover. He has also renegotiated health care packages.

Richardson, too, rebid his company’s health insurance coverage and was able to get a 25 percent cost reduction, with similar coverage and only a slightly greater contribution on the employees’ part.

But businesses aren’t cutting programs that have a strong effect on morale or effectiveness. “We doubled our budget for our annual conference,” says Joe Keeley, president of College Nannies & Tutors, a Wayzata firm with a large number of franchisees that place childcare and tutoring staff. “We knew that it’s lonely out there. When you start a franchise, you don’t have the water cooler anymore. You want the brand and the training and the network that the conference offers.”

Conferences are one of the first things many companies axe during difficult times. But for Keeley’s firm, the conference was a “need to have” rather than a “nice to have.”

 

Laying It On the Line

Improving Web presence is key to small-business marketing efforts.

Doing more with less, companies, like AirCorps, often concentrate their efforts on their core competencies, farming out the rest. “Everything that we can outsource, we do, to reduce overhead,” Kottman says. “Everyone knows that when times are tough, stick to your knitting and outsource everything else. When times are good, you tend to bring things inside because you have a lot going on, and it makes it easier to have everything in one place.”

Innovatech works with an outside firm that does search engine optimization and Web site updating. The site brings in new customers every month, and has continued to even during the slump. Smith says it’s one of the few marketing efforts that results in an unequivocally excellent return on investment.

Even for companies that keep their Web efforts in house, the Internet is a good marketing value when resources are scarce. “We couldn’t cut back on hosting marketing events in 2009, because we had already signed contracts,” says Davenport Group’s St. Charles. “But now we’ve really cut back, and instead, we’re using a lot of social media to drive demand. We are monitoring blogs and responding, and driving people back to our Web site. We have a Twitter account and a Facebook account. We’re using LinkedIn to promote events and make referrals. We’re actively doing it as part of our job, whereas before it was just an afterthought.”

Miller says Permac Industries’ site is a significant part of its marketing plan. “We completely redid our Web site in 2007, and went with a system that we can update on a continual basis,” she says. “And I think that the site is really important as we recover from the recession, too, because it shows people that we’re stable and that we’re going to be here. Customers feel safer dealing with somebody that they can Google and find 20 hits on, than somebody that they don’t find anything on.”

At the same time, Miller says she hasn’t cut back expenditures on other types of sales efforts. She’s just hired a new salesperson, for example. But enthusiastic employees are helping keep marketing costs down by learning new software applications so they can create video sales presentations and DVDs.

“People are just willing to learn,” Miller says. “They may not have the experience to start with, but they’re ready to jump in and learn. They know it’ll help us all keep our jobs.”

Orbit Systems has had no need to outsource its online branding, Web design, and search engine optimization firm, since it brought in that expertise when it acquired St. Paul–based Voyageur IT last summer. “Internet marketing is a great way to stay in touch with existing clients, as well as reaching out and trying to find additional prospects,” McFarland says.

But not every company uses the Internet solely for marketing. College Nannies & Tutors has a proprietary Web-based tool that serves as a central nervous system for all its franchisees, containing all their scheduling, applications, and customer relationship management software. Keeley says that the system increases the equity of the company as a franchisor, since it increases efficiency and brings the firm’s brand identity to each new location.

“We continue to invest a great deal in technology,” he says. “Our system enables anyone with a Wi-fi connection to work, whether from their home office or from a Starbucks or a Caribou Coffee where they’re interviewing nanny or tutor applicants. Investing in that technology has helped make our strategy of keeping our overhead low a reality. “

Many of GateKeeper Systems’ sales meetings require costly travel because they are held on client sites. But in recent months, the company has started doing many of its initial sales presentations on line via software such as WebEx. It didn’t involve any new investment, Richardson says.

“We had already been using it; we just use it more frequently now,” he says. “We can demonstrate our product with a test system here, remotely. We also use it for training. Rather than go to a customer’s site, we’ll put together an online training presentation. And then we use that same technology for online support—instead of them sharing our screen, we share theirs so we can see what’s going on.”

Richardson has been trying to build an online library of white papers and case studies for potential clients. But these marketing-oriented efforts have been temporarily put on the back burner because of limited time and resources.

“Unfortunately, it is one of the decisions I might have made differently if I had the chance to do it over again,” he muses. “With a reduction in staff, the Web site has suffered, and I really regret that because I think I could have used it more effectively. I’m not sure exactly how I would have done it, but I know that we have not followed through with the things that we had planned to do this last year to improve our Web site. That just didn’t happen.”

In the end, hard choices like those are part of doing more with less. As the economy improves, these focused, streamlined small businesses will have their priorities clearly in mind, and will be ready to ramp up once again.

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