Managing in a Recession

Managing in a Recession

Small-business leaders discuss the strategies they're using to weather this economy.

Minor economic downturns sometimes inspire nostalgia: a wistful yearning among businesspeople for times when life was easier and more profitable. But what about full-on recessions like the one we’re in right now? Those can bring back memories of a completely different kind. Many executives are feeling a stomach-knotting sense of déjà vu.

In July 2001, former marketing manager Mary Leonard was concocting the first truffles for her new artisan-chocolate company Chocolat Celeste. The economy had already begun to go sour in March of that year. But like everyone, she was taken aback by the events of that autumn.

“The real downturn happened the day after I bought my equipment, on 9/11,” she recalls. “Before that, my chocolates were going to be in all the Marshall Fields stores. After that, they weren’t. So it became a different business than I originally wanted it to be.”

Christmas was fast approaching, and Leonard knew her business would depend heavily on gift purchases. At the time, she had a few corporate buyers lined up, but she didn’t yet have a storefront and she had to scramble to find an outlet for her wares. She placed her high-end confections in Kowalski’s, France 44 Liquors, and Whole Foods. Her quick thinking carried her through until she was able to open her St. Paul store just in time for Valentine’s Day 2002.

Anita Janssen, partner at Maxxum, Inc., a computer recycling and IT lifecycle management firm in Rush City, was also heading a new company in 2001. Unfortunately, she doesn’t feel she handled that recession very well.

“The challenges we faced at the time had a lot to do with the maturity of the company and the maturity of myself as a leader,” she says. “Quite frankly, I had not experienced anything like that in my new career, and I was just completely unprepared to deal with it. So in 2001, when things started slowing down, I had a wait-and-see attitude. Then 9/11 hit, and it was really a dramatic and instantaneous adjustment for the negative. I didn’t react quickly enough, and I didn’t make the cuts and hard decisions quickly enough.”

The company survived, but only just. So what about this new challenge?

More than seven years later, as the economy slumps again, these comp-anies are experiencing the crisis very differently—not just because their companies are at a different stage of development, but also because every recession has its own unique character. Different industries are affected, and there is not the outright freeze in purchasing, travel, and other business activities that happened after the September 11 attacks. The difference is especially palpable for companies like Triad, a Minnetonka business that specializes in corporate events and event marketing.

“When we started Triad, we were focusing on the high-tech industry, and shortly thereafter was the dot-com bust,” remembers President Jennifer Arends. “The following year was 9/11, which was challenging for everyone, but especially for those in the travel and hospitality industry who have air travel as large portions of their programs. We are approaching this recession similarly to how we approached the [2000-2001] challenges—by offering a strong partnership, strategic value, and a can-do attitude. Our clients knew then, and know now, that they can count on us when the chips are down.”

Experienced executives know that external factors are only part of the equation. To some extent, a company’s success or failure during a recession is always determined by management decisions.

That’s why Janssen sought help from a seasoned businessperson after her negative experience. “I was smart enough to hire Rich Woodward as my partner,” she says. “His savvy has really made the biggest difference in why we’re able to not only survive, but thrive, in 2008 and 2009.”

Not every company will choose to bring new blood on board, but all will make crucial decisions in operations, human resources, and marketing. Those management choices have the potential to buoy the company despite rough times.

Show Us the Money

• Smart banking, intelligent inventory, and lean practices.

One of the first areas that got Woodward’s attention was Maxxum’s relationship with its bankers. “We have two primary banking relationships, and we’re committed to communicating openly and candidly with them on a regular basis,” he says. “Certainly we’re sharing some of the success stories we’ve had, but also any hiccups along the way. They know exactly where we are, and they’ve been very supportive and talked about what they can do for us, rather than what they can’t do.” So far, the open channels of communication have kept the relationship positive instead of adversarial, and the company hasn’t had to go elsewhere to try to get additional funding.

Janssen contrasts this approach with her old modus operandi. “One of the things Rich has brought to Maxxum’s culture is being proactive,” she says. “We’re proactively communicating with our bank. We’re proactively communicating with our vendors and customers and staff.”

The same has held true for Minneapolis audio-visual and signage firm Tierney Brothers. Owner Tom Tierney says that the most important thing is keeping the bank up-to-date on the company’s status and strategies.

“We have a credit line, obviously, and they’re very concerned [about the potential effects of the downturn],” he says. “We’ve been banking with them for about five years, and we have a good relationship. At this point there aren’t any issues, but you never know—at a time like this, you could need additional funds.”

Woodward says one of the biggest concerns in a shaky marketplace is liquidity. “We’ve been profitable, but being profitable is different from having strong cash flow,” he says. “We’re making sure our credit terms are appropriate for our business. We’ve had to tighten up some of our credit policies.”

If a business involves the selling of goods, another important way to stay liquid in a recession is to carefully manage inventory. At Chocolat Celeste, the inventory is perishable, so to a certain extent, Mary Leonard strives for just-in-time fulfillment. But making artisan chocolates is labor-intensive, so not everything can be made the day before it’s needed.

“We like to have a maximum of two weeks’ inventory on the shelf,” she says. “We’ve always operated that way, but now I’m extra-attuned to it. And anything I’ve bought, I try to think of an alternative use for it. If I make [a filling for] a bonbon, it’s really the same recipe as a truffle, so I can repurpose it. I have specials. Any restaurant would do things like this, but it’s more rare for a chocolatier.”

Quality Bicycle Products in Bloomington is the largest parts and accessories distributor in the bicycle industry, serving more than 5,000 dealers. Part of its value proposition is importing parts from all over the world, absorbing long lead times, and taking care of complex purchasing requirements so that the dealers can buy in a just-in-time fashion. That’s great for the dealers—if sales slump, they aren’t stuck with a bunch of inventory. But Quality Bicycle has to order parts several months in advance, and is less able to turn on a dime.

President Steve Flagg explains that much of his company’s ordering is done using a predictive model by a software package and other market intelligence. The software estimates future needs based on past seasonal patterns and the company’s recent growth rate. That’s fine in normal times, but the fall of 2008 was a wrench in the works.

“In the last couple of years, we’ve had some really significant growth rates—20 percent or so,” he says. “But then November came along, and it actually showed a slight decrease in sales. I think it was the first time in 30 or 40 months that that had happened. So this downturn has provided some real learning opportunities for us. We learned what the limitations of our purchasing software really are, what it does and doesn’t do, and how to make manual changes.”

There’s still the question of how much inventory to order, though. “At this point in time, without a ton of knowledge about 2009 and without experience in this current market, we’re projecting flat [sales] or a slight decrease,” Flagg says.

Because no one can really predict the future, many companies try to prepare in advance for hard times by instituting lean business practices. Nearly two years ago, Eagan’s Big Ink Display Graphics started a concerted recycling and waste-reduction effort that has corresponded to a period of double-digit growth.

“Can I say it’s because of that?” asks President Tom Trutna. “Not unequivocally. But we’ve really helped the bottom line by just being more efficient with energy resources.”

The company’s newfound leanness and greenness is helpful from a marketing standpoint, too, he says. “Sustainability has been a real point of differentiation. I believe it has played a part in our increase in sales. We’re holding the line on profitability when, I think, a lot of other companies like ours are suffering right now.”

Woodward says a similarly lean culture is the norm at Maxxum. “We’ve tried to take a look at everything and question ourselves as to why we’re doing it,” he says. “If it doesn’t bring us additional clients and it doesn’t serve our current clients better, then we are not going to do it. This culture took probably about a year and a half to create.”

“We cut back anywhere and everywhere,” agrees William Dworsky, president of Consolidated Container Company, a container reconditioner and recycler in Minneapolis. “That was the basis of our management technique even before the recession. Companies should always be vigilant with expense controls, especially in good times, because they won’t have to make as many adjustments during down cycles such as these. Any smart businessperson knows there are cyclical economic periods.”

But even the leanest company may have to make some extraordinary cuts right now, if it happens to be in the wrong industry. Major purchases may have to be postponed. At the end of 2008, Leonard sliced $700 out of Chocolat Celeste’s monthly budget by giving up the lease on a separate event space in her building.

Meanwhile, Triad has reluctantly decreed that although it values employee training highly, most such training must take place at local seminars and conferences, or via webinars.

Tom Trutna writes a purchase plan for Big Ink every year, listing the equipment that should be upgraded or replaced. But this year the budget for equipment was cut in half: they bought a flatbed cutter, but not the new printer they needed.

“That was directly related to ‘Let’s just wait out this economy and see what happens,’ ” he says. “We also had a meeting in December where I laid it out to everybody. I said, ‘Look, this is not looking good, and it doesn’t look like it’s going to change anytime soon. We need all hands on deck right now to look at every way we spend money and make sure we are doing it in the most efficient way possible.’ ”

A Team Effort

• Work force maximization and the need for transparency.

The words “all hands on deck” may seem like strange ones at a time like this. After all, wages are a major expense, and for many companies, there’s a lot less work to do. But in companies with a strong culture of cooperation, employees are active participants in the effort to make the company more efficient.

Flagg says he’s holding steady at about 400 employees and hasn’t had to lay off any. “It’s hard to tell how things will go as we approach spring and summer [our busy season],” he says. “Are we overstaffed? Are we understaffed? I guess we’ll have to take it month by month. What we do know is that job security is of critical importance to staff. So we’ve taken the precaution of not doing our usual wage increases, in order to continue to offer employment for everybody who currently works for us.”

Hiring has been slashed. For the last six months, only top talent has been considered. And Flagg has kept the lines of communication open, talking with workers about inventory, cash flow, the company’s credit line, and future sales projections.

“I think everybody has the same questions regarding uncertainty in the economy,” he suggests. “I want, at the very least, for them to know exactly where we stand as a company. We have no secrets and we’re very candid. None of us [managers] take home outrageous salaries. It’s pretty transparent, and I think we are all working toward the same end.”

Big Ink had to let a couple of its employees go at the beginning of 2009. Tom Trutna says he hopes not to have to lay off any more. He’s frozen bonuses and raises, and hopes he won’t have to reduce benefits. But almost anything’s on the table, because he wants to keep the employees. A small company like his, he says, is almost more like a family.

Around Christmas, when business was slow, some Big Ink employees volunteered to reduce their hours. “What more can you ask for?” Trutna asks. “We’ve got folks who recognize that there isn’t much going on, and instead of us paying them, they volunteer to go home early—that’s really something. They always know what’s going on. Maybe I’m a little too transparent sometimes. But as opposed to having people worry and talk amongst themselves, I think it’s better to say, ‘Look, we’re all in this together, and we can all come out of it together if we do our part.’ ”

Mary Leonard has found that to some degree, her work force has adjusted itself automatically. A couple of workers got nervous about the economy and quit in fear of possible lay offs, although none were planned. One salesperson quit to take a higher-paying job because her husband had become unemployed.

That left Leonard wearing more hats than usual. Before the downturn, she had focused on growing the business and courting investors; now she is also cold-calling and making chocolates. That’s how things are going at many companies: not just management, but all employees are having to step into new roles.

Rich Woodward says Maxxum did cut a couple of staffers in late 2008. Those cuts were related to performance issues, he says, and the company took the opportunity to reassign and cross-train other current employees in those jobs. Recently, Maxxum has hired several people.

“We have the strongest personnel we’ve ever had, and particularly in our operations group and our administrative group, they are all cross-trained,” he says. “Our right-sizing last fall was a blessing in disguise, because we created some new thinking and some new ideas in those existing job responsibilities. I think we’ve really improved our procedures. So now we’re not only stronger in staff, but we’re better in our processes.”

Flagg hasn’t let employees go, but he is cross-training them as usual. He says it’s the best way to ensure they’ll have sufficient staffing when the economy picks back up. And until then, it makes the company more nimble.

“That will be one of our strategies,” he explains. “When one department is down, more staff can flow to the department that’s got more work for it.”

Like many companies, Triad regards its employees as family and has resisted cuts. Arends says as long as everyone’s productive, she’ll do what she can to keep the staff at its current size. However, the company has not filled positions that have become vacant in the last six months. Instead, it has cross-trained existing employees.

“We have been very open with our staff from the beginning,” Arends says. “If anyone has a question or concern, we strongly suggest they ask. Worrying doesn’t help anyone, and it hinders the work that can be done. If people know how the business is doing, feel confident that they have their job, know what needs to be done to keep the business moving forward, then we can all work together toward the common goal.”

Arends also has a strategy for ramping back up when the economy rebounds. In addition to its full time staff, Triad also has a handful of contractors. When business supports the additional headcount, the plan is to bring some of those already-experienced contractors on full-time.

The upshot is that every company must manage its human resources a little differently. Consolidated Container cut a few jobs recently as it walked away from some business models that didn’t work in the current economic situation. There may be additional cuts soon. But it still works to maintain a feeling of “all for one, one for all.”

“Pay freezes have not been established yet, and we have not had a need to cut benefits at this point in time,” Dworsky says. “With all the media coverage [of the recession], most people are cognizant of the situation, and everyone seems to be helping where they can. Everyone understands it’s a team effort for survival with no room for dead weight.”

The Medium and The Message

• Marketing more with less, and refining the targets.

When the economy takes a dive, it’s hard to know how much money to allocate to marketing. It’s not like operations or human resources, where certain bills simply have to be paid. It’s a balancing act: Should you spend less, because there is less money available and your clients don’t have the money to buy your wares anyway? Or should you spend more, because you need to find more clients and encourage the ones you have?

Sometimes there is little choice. Tierney Brothers usually does a significant amount of co-op advertising, in which it shares the cost of ads with the manufacturers of the equipment it installs. Lately, some of those manufacturers have cut their marketing programs and pulled co-op advertising—a fact that has implications for Tierney Brothers’ campaigns, too.

So the company is looking for efficient, low-cost ways to keep itself front-of-mind with its customer base. “We have a plan to do e-mail blasts to our customers, to be in touch with them at least every 90 days in some way, shape, or form,” Tierney says. “Also, we’ve got a business development group that’s continually calling new and existing customers, and talking to them about our services. Maybe for now, instead of doing $100,000 projects, they want to do $15,000 projects with us. That’s fine. And when the economy does turn around, we’ll still be here for them.”

The Internet is also playing an important role for Chocolat Celeste. Leonard says she has decreased her marketing expenditures, but she definitely can’t afford to “completely disappear.”

“I continue to believe that being externally focused is very important in a retail business,” she says. “A lot of what I’m doing is more relationship-building than actual advertising. I use social networking sites like Facebook and LinkedIn to continually let the people in my network know what’s going on in the business.”

Janssen says that Maxxum’s marketing strategy is Internet-based, too. “We’ve taken a real strong e-marketing approach,” she says. “Everything we’re doing is revolving around that, versus traditional print materials. We’re getting our Web site retooled and putting together e-newsletters. We did an extensive client survey last year, and one of the things our customers asked for was more information to educate their colleagues and help them sell the need for our services within their companies. So that’s one of the things we’re looking at—being able to arm them with more white papers and case studies.”

One thing that’s working right now is to focus marketing attention on the segments of the economy that are less affected by the downturn. “We’ve really tried to focus on the verticals we think are going to be stronger,” says Trissential’s Michael Vinje: health care, food, and feed and fertilizer. His Minnetonka-based company does management information technology consulting. “We’re trying to stay close to where the money is and where the businesses are healthy. We’re doing very little work in financial services right now.”

“We’re not in the automotive business,” Woodward says of Maxxum. “We’re not in construction or real estate. Our business is working with major corporations and helping them mitigate risk with IT or electronic equipment disposition. We provide a highly documented process to do that, to help prevent data or equipment getting into the wrong hands. So that’s why we’re confident we can maintain ourselves, if not actually grow this year.” For Maxxum, the massive layoffs and closing facilities around the country are sad, but they are also opportunities to help those companies get rid of equipment and make some fast cash.

Last fall, high gas prices may have buoyed Quality Bicycle Products when other companies were already starting to feel the strain of the sinking economy. If anything, people were buying more bicycles and accessories. But when gas got cheaper again, the company had to rethink its marketing message. Bringing in new customers wasn’t the answer, since Quality Bicycle already serves just about every bicycle shop in the country. So the firm branched out.

“We’re really focusing on marketing the value-adds of the company,” Flagg explains. “We have a new program where we are working with dealers in terms of outfitting their shop and giving them an opportunity to buy fixtures and do store remodeling. Since it’s new and since it’s potentially a great partnership tool, that would be the sort of thing we’d put marketing dollars into.”

Sometimes one company’s products can even help another company deal with the effects of the recession. Nearly a year ago, Tierney Brothers decided to invest more heavily in videoconferencing. The firm devoted a couple hundred thousand dollars to new personnel and demo equipment—money that Tierney expects they’ll earn back quickly.

“People are looking for means to cut costs and cut travel expenses, and this is a great way to do it,” he explains. “We recently put out an e-blast to some of our customer base, inviting them to a lunch-and-learn about videoconferencing. Within the first day, we had 70 people apply. It was quite amazing.”

William Dworsky says that Consolidated Container’s business of reconditioning used industrial containers is perfect for the times, too. He has kicked sales and marketing into high gear. “Our industry for decades has provided an alternative to the cost of new product,” he says. “It has sustained itself in good and bad times, and tends to rebound when budgets get squeezed. There are limited ways for companies to save money in the current environment, so that’s the cost savings we can provide. We just have to get the message out there.”

One thing is clear: Cutting marketing expenditures is a last resort for most of these companies. A surprising number are allocating more funds to the marketing department.

“The last thing in the world we should be doing right now is cutting there,” Tierney says. “We’re probably spending more in sales and marketing, in terms of developing our salespeople. I think there is actually great opportunity in these times. For strong companies like ours, that are relatively small, it’s easy to zig when everybody else is zagging. I think, or at least I hope, we can come out of this thing stronger than ever.”